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An Inside Look At China’s Ghost Cities.

Posted in China Business

We seldom write about China’s “ghost cities” because in our view they show little more than pockets of inefficiency from which every economy necessarily must suffer, particularly one as big and as centralized as China’s. So it was nice to receive the following guest post from Dirk Chilcote giving us additional reasons not to worry about China’s ghost cities.

Dirk is a second-year law student at Washington and Lee University.  Before that, (from 2008 to 2011) he worked as an English and international studies teacher in Zhengzhou, China and in 2012 he was a Kathryn Davis Peace Fellow at Middlebury College where he studied advanced Mandarin. He currently focuses on international law, specifically US-China policy.

The following is Dirk’s take on China’s ghost cities:

Though I am not as altogether unworried about the Chinese real estate bubble as some, including China Law Blog (see China’s Ghost Cities. No Worry, No Cry), I am less worried than many in the media would apparently like me to be.  After seeing the recently aired 60 Minutes “scare story” on the subject, however, I am leaning more toward unworried than I was before.  Why?  Let me explain.

In another 60 Minutes piece, entitled “Zhang Xin: China’s Real Estate Mogul,” [link no longer exists] ostensibly about Zhang Xin’s unlikely rise from poverty to becoming one of China’s wealthiest women, Leslie Stahl decided to segue into a story about the impending catastrophe in China’s residential housing sector.  As I watched, I could not help but wonder how much of Stahl’s own leftover angst from the US housing crisis was tainting the report.  I am not an economist, but it seems to me that comparing the US and Chinese housing markets is like comparing apples and dragon fruit.

Just as I was starting to get a little bored, however, something interesting happened.  The scene suddenly changed from the interior of one of Ms. Zhang’s Beijing office buildings to a familiar looking high-rise.  As I watched, it suddenly hit me: “That looks exactly like the building next to my old apartment.” I continued to watch intently as the camera panned an empty street when Stahl’s voice came in and confirmed my suspicion.  I was being shown footage of my old neighborhood in Zhengzhou.

Now, the previously bland story about China’s imminent real estate market collapse became interesting on a whole new level.  Stahl and the Hong Kong based real estate expert (British) she was interviewing went from shockingly abandoned building to shockingly abandoned building, reinforcing the idea of a Chinese residential housing market self-evidently on the brink of collapse.

My own experience on the mean streets of Zhengzhou tells a slightly different story.  In my three years living and working in the neighborhood 60 Minutes decided to use for its doomsday exemplar, the most enduring memory I have is not of desolation, but rather of lightening fast development followed shortly thereafter by burgeoning numbers of new residents.  Though the buildings that Stahl and her news crew visited might well be empty today, I myself recall remarking at an empty mall similar to the one highlighted in the 60 Minutes story and located in the same area, only to discover a few months later that the formerly desolate shopping center had become a well used retail attraction.  To be sure, my Chinese friends and co-workers frequently complained about rising housing prices in Zhengzhou and how no one could afford them.  At the same time, however, the population of the part of the New District in which I lived and which is located not far from the area featured by 60 minutes has witnessed a remarkable increase in population over a relatively short time.

Again, I am no economist.  But after watching 60 Minutes’ coverage of China’s real estate market, it seems more apparent than ever that much of what Western news has to report on China should be received with a healthy dose of skepticism.

  • SophieEd

    I would really like people to reread this author’s last comment, “I am no economist.” I worked in a law firm in China and my supervisor was an ex-stock broker turned lawyer from China and all he talked about was the impending housing market crisis. This guy is just giving his viewpoint from his limited scope and I don’t even believe that his Chinese level is “advanced.” If it was, he would be reading the newspapers that cover this issue frequently. More likely, he was just an English teacher that “might” know beginner to intermediate Chinese. I just want to tell everyone that is not that experienced with China and is not that knowledgeable about the status quo of the Chinese economy to not believe this guy. Investing in China’s real-estate is a bad bad move.

    • http://www.facebook.com/ruben.evensen.1 Ruben Evensen

      What the funk is your problem? If you would’ve taken care to read a little bit more than just the “I’m not an economist” bit, perhaps clicking on the author’s name, you woud’ve noticed he is NOT an english teacher, but one of the most prolific writers on business and law in the english online sino-community. And his points are valid too. I’d recommend you some reading from Tom Miller of GK Dragonomics but I imagine you being more of dragon slayer type of person.

      Fold your Jim Chanos-inspired ideas five times and put em where the moon don’t shine.

      • SophieEd

        Ruben, I would like for you to reread this part in the article: “Dirk is a second-year law student at Washington and Lee University,” and “The following is Dirk’s take on China’s ghost cities.” Thanks for the dragon slayer comment too. In my experience, there has been so many people who went to China for a short while and came back thinking that they know the world. This has lead to many many MANY people being deceived and losing a lot of money (and when I mean a lot, I really mean a lot). It is not my mission, but my duty to be honest and tell an experienced truth, not one based solely on perceptions. It really takes a dragon slayer or a person of courage to be honest and tell a straight-forward truth. Again, thank you for recognizing this characteristic of mine.

  • lpc1998

    The 60 Minute “scare story” is based on the assumption that there is a real estate
    bubble in China, similar to that in the US resulting in the 2008 Great Financial Crisis. For such a crisis to happen, it is crucial that there are enormous bank loans and financial derivatives tied to these loans that would decimate the economy when the bubble bursts. The report only makes passing references to huge developers’ bank loans and loss of household savings (not massive household’s debts as Chinese buyers are known to pay for the properties in cash or largely in cash) when the property prices plunge quickly and sharply.

    So the assumption is false. The phenomenon is more a manifestation of wealth than a housing bubble waiting to burst:


    • Chip

      A bubble does not require leverage to exist, bubbles have been formed on savings (i.e. equity or assets) before. This isn’t to say there is a bubble in China (I believe there is), but just to say your idea that there can’t be one because of lack of a similar layer of leverage similar to America is false.

      There is a huge bubble in China. I live near Fort Collins Colorado, where prices are $120/sq foot. Meaning about 670,000 RMB for a 90 sq house. A similar house in Shijiazhuang is also about 670,000. However the income in Fort Collins is 470,000 RMB per year, Shijiazhuang is about 40,000. There is most definitely a bubble in China’s real estate. The very head of the government of China acknowledges this.

      • lpc1998

        “60 Minutes” is not referring to just any bubble. It is talking about a class of bubbles that could result in crises like the 2008 Great Financial Crisis when they burst. Such bubbles which could devastate banks and even the entire financial system must have leverage to exist.

        In your Shijiazhuang example, it is obvious that those with income of CNY40,000 a year could not afford to buy an apartment costing CNY670,000. They are not in the game. In China, there is a small minority, but in absolute number quite many, who could effortlessly buy in cash or mainly in cash 5 such apartments or 10 or even more. Since they could only effectively occupy 1 apartment at a time, the rest are left unoccupied as the rental market for such apartments is also not commercially meaningful. These people are collecting apartments like
        they are collecting pieces of art for long term investments and are often not concerned with the near-term fluctuations of the market prices.

        Moreover, the apartment prices recover quickly when the effects
        of the government cooling measures wear off as amongst the buyers there is a huge reservoir of cash that keeps rising. The two issues that concern the Chinese government most here are (1) that the phenomenon remains mainly free of financial leverage and (2) the apartment prices should not keep rising above the affordability of genuine home buyers whose increasing income may catch up
        with the current prices or thereabout.

        For most of the Chinese people, the housing market is not here.
        It is in the affordable or mass housing sector. That is the true housing market in China.

        My apologies. The link in my previous post is not working as its website has been down for number of days. My post there is very long. It has been re-posted here:


        The links below are also relevant to our discussion:



    • Another Observer

      Actually, based on recent reports of rising local government debt in
      China, the price bubble on real estate values may still be connected to
      bad debt. I hear story after story of local government workers who are
      disproportionally rich. It is astonishing to see how much money
      government connected companies are making. The truth may be that they
      are not actually profitable but merely successful at obtaining bank loan
      after bank loan. The management at these companies are being paid very
      well and thus have “cash” to invest in the real estate market. Thus,
      two problems seem to have been created. First, more and more bad
      government debt is being created at the local level. Second, this bad
      government debt has created very wealthy individuals who feel buying
      property is the safest way to invest/hide their wealth, thus creating a
      price bubble for real estate. I see the the bad loans crashing first,
      and then causing real estate prices to come back down when loans to
      local governments start drying up. Of course this can be happen in a gradual way or in a panic. That’s yet to be seen.

  • quesrty

    60 Minutes is following this story from 2011 by the Australian SBS channel:


    On the other hand here is a current short story that seems more upbeat about Zhengzhou:though of course it has no commentary on the housing market


    So what’s going on? This is very confusing.

  • http://twitter.com/phlegminglib Phlegming Liberal

    Even tier-2 cities like Suzhou and Hangzhou are scary expensive. I lived in SIP where I lived in a 190sq. meter apartment that rented out for less than $2K (USD) a month yet would’ve cost almost a million to buy. The occupancy rate in the 2 years I was there went from about 15% to about 35%, but it was still a nice, new, and empty, building when I left late last year. I had a Chinese staff who could barely afford an 80sq. meter flat half an hour away and that’s with parents’ help on both sides (husband/wife) PLUS their combined salary, and these folks are considered nuveau middle class with (relatively) good income.
    I still think the bubble exists and wouldn’t touch that housing market with a 500′ pole.

  • kimc

    This is an interesting, almost refreshing take on China’s ghost city phenomenon. It points to how complicated the the phenomenon is and offers a different way of looking at the issue. I saw the 60 Minute coverage that the author is referring to and was
    also left with sentiments that it was relating just one side of the story. What often gets left out is how the local residents of these ghost cities – or those living/working near one – understand and occupy these spaces which I think should be part of the discussion.

  • Guest

    This is an interesting, almost refreshing take on China’s ghost city phenomenon. It points to how complicated the phenomenon is and offers a different way of looking at the issue. I saw the 60 minute that the author is referring to and was also left with sentiments that it was relating just one side of the story. What often gets left out is how the local residents of these ghost cities – or those living/working near one – understand and occupy these spaces which I think should be part of the discussion.

  • lpc1998

    You are right that the “ghost cities” phenomenon in China may be seen as a bubble, but not the kind that could devastate the banking system as the purchases are mainly in cash.

  • lpc1998

    China’s Real Estate Bubble or Manifestation of Wealth?

    On March 3, 2013, CBS News released a 60 Minutes Overtime video news report, (http://www.cbsnews.com/video/watch/?id=50142079nChina's real estate bubble), by Lesley Stahl on what she termed as “the largest housing bubble in history” that may have been created by China’s rapid economic growth. The highly dramatized report unsurprisingly created immense excitement in the foreign media. Sinophobes and China bears everywhere seize on it as solid, irrefutable evidence of China’s impending economic, perhaps even national, disaster when the bubble bursts. There are visions of massive social upheaval and rebellion as a consequence of a ruptured Chinese housing bubble.

    The following, amongst others, were reported:

    1) Troubles come in three. Market melt-down in China would come after the US and
    2) Real estate and construction have been a main driver of China’s planned
    economic development, accounting for between 20% to 30% of the economy;
    3) Almost empty ghost cities, with miles and miles and …. miles of empty apartments and commercial spaces. Houses, districts and cities with no one
    living in them;
    4) 15 years ago, the government changed policy allowing people to buy home and the floodgate opened as the rising middle class has few investment opportunities, especially foreign ones;
    5) All properties have been sold with many buyers buying 5 or even 10 apartments
    6) Property values keep going up well above inflation, doubled, tripled and more;
    7) A building bonanza, so much so fast, unprecedented anywhere in the world;
    8) The government has spent US$2 trillion in real estate development to keep the
    economy going. (The US$2 trillion are most probably spent by the government on
    building affordable or mass housing, and not on luxury condos and should be
    extraneous to this report)
    9) The construction happens all over china;
    10) Unaffordable US$100,000 apartments;
    11) China is building the wrong sort of apartments, even those costing US$50,000 –
    US$60,000 are not affordable to the hundreds of millions of migrant workers who
    earn less than $2 a day;
    12) When the bubble bursts, multiple classes of buyers will be wiped out. In
    addition, 50m construction workers will be out of job;
    13) The homes are too expensive even in Shanghai, over 45 times the average
    resident’s annual salary;
    14) They are too expensive for the vast majority of the Chinese people; a dangerous
    growing bubble has been formed;
    15) The government has been trying to cool the real estate market, but its policies
    like the one apartment policy are widely violated;
    16) Recent government policies have cooled the market. Many developers with massive bank loans are suffering with uncompleted projects where no work has been done for weeks, for months;
    17) The debt crisis is starting. The whole economy would seize up when the
    developers fail to repay their huge loans;
    18) Demonstrations at the developers’ offices are happening so often now;
    19) The problems are too big even for the Chinese government to control; and
    20) There are still buyers in the big cities who do not believe that good times
    will ever end.

    This news report on real estate bubble lacks more details on the following matters:

    a) The profiles of the developers and the total amount they owe the banks;
    b) The profile of the buyers and the total amount they owe the banks;
    c)The market share of foreign buyers;
    d) The nature of the real estate market in China; and
    e)The number and the total value of the projects under construction.

    The report is based on the assumption that there is a real estate bubble in China,
    similar to that in the US resulting in the 2008 Great Financial Crisis. For such a crisis to happen, it is crucial that there are enormous bank loans and financial derivatives tied to these loans that would decimate the economy when the bubble bursts. The report only makes passing references to huge developers’ bank loans and loss of household savings (not massive household’s debts as Chinese buyers are known to pay for the properties in cash or largely in cash) when the property prices plunge quickly and sharply.

    Since most of the properties are already sold over the last 15 years, the ones that are being built and hold by the developers would probably be marginal when compared to the total stock of the properties in this sector of the real estate in China. So comparatively speaking, the huge developers’ loans are not that huge that would decimate China’s financial system when the bubble bursts.

    The report mainly focuses on the “ghost cities” and other vacant properties. Since
    these properties have already been sold, some for years, it is quite clear that they are not bought for occupation. They were bought for investments by people who are rich in cash and in no hurry to rent them out. In the investment community, they are referred to as the “strong holders” who could ignore the fluctuations of the property prices. So there will be no massive foreclosure by the financial institutions and bad loans and no gigantic bubble bursting. Moreover, because of the huge rising reservoir of cash available, property prices would recover quickly when the effects of policy restraints wear off.

    As these investment properties are deliberately left vacant, they in fact do not form part of the housing markets where properties are bought or rented to be used as homes. Therefore, it is inaccurate to refer to the escalating prices in this sector of the real estate in China as a “housing bubble” as it is not about housing.

    These properties are actually the physical manifestation of the wealth of a relatively small group of people in China. There are beyond the reach of the vast majority of the Chinese people. If there are people in this group who buy the properties for speculative gains, they are in essence no different from the stock market or currency speculators who sometimes have to learn very painful lessons at first hand from the market about the brutality of capitalist excesses.

    When the speculation becomes extreme, these properties may, from a distance, begin to look like piles of chips on a casino table. The whole phenomenon may be
    referred to as China’s real estate casino.

    However, this is a gigantic casino. When it goes bust, tens of millions of construction workers could lose their jobs and banks could suffer bad developer loans in billions of yuan, though not big enough to decimate China’s economy. To be prepared for these two events:

    (1) The government has to have affordable or mass housing (the actual housing market relevant to the vast majority of the people in China), infrastructure and other projects ready for implementation when the need arises. This would give time to the government to consolidate the construction industry and downsize it if it is bloated; and

    (2) A scheme to phase out bank and other institutional financing for this real
    estate sector within, say, 5 years. This would insulate the financial
    institutions from potential bad loans.

    The government has to warn genuine home buyers who could not afford to buy expensive apartments for occupation to keep away from this real estate casino and institute an affordable or mass housing balloting scheme that would assure every household that needs a home an no frill, but comfortable, apartment of its choice with good facilities, say, within ten years. (Singapore’s public housing schemes prior to 1980 could be adapted for this purpose).

    The root causes of this manifestation of wealth in real estate in China are that many people in China become wealthy very quickly and that Chinese people have a cultural preference to own real estate for financial security, investments and social status.

    There are good things about this phenomenon. Thanks to China’s monetary and currency controls, it had contributed significantly to China’s economy, providing business to Chinese companies and jobs to tens of millions of people in China. Had this money been used to purchase foreign properties or for investment in foreign real estate, the economic benefits would gone to the foreigners and incurring local anger in foreign countries over the high home prices.

    Local governments in China have been deriving huge amount of needed revenues from land auction sales with ever rising prices to finance infrastructure and other
    developments, with a serious side effect. With increasing land prices, the sales prices of the apartment also become higher and higher. As the result, most people in China, although needing housing badly, could not afford to own these apartments for residential purposes leading to the formation of “ghost cities”. Sinophobes and China bears see these “ghost cities” as solid, irrefutable evidence of a gigantic expanding housing bubble that could blast China’s economy into pieces. They are delighted with this view and contrary evidence has become inadmissible.

    These “ghost cities” are actually manifestation of wealth in China, but they are like
    breathtaking sculptures without utilitarian values since they are not affordable those who need them. However, they are residential and commercial properties. So there is a sense of waste and ridicule in a country where there are hundreds of millions of people needing proper housing, even though the owners of these properties can afford to hold them as such.

    There are things the government can consider doing to rectify the situation:

    1) Discontinue with the land auction schemes of selling land to the highest bidders for private property development so as to put a stop to ever increasing land prices. The winning bid should be not less than the reserve price and has the best economic and social values for the nation;
    2) The reserve price should be one that is sensible and help to cool the real estate market without causing a market crash;
    3) Do not participate in luxury housing projects. Any existing projects are to be phased out orderly;
    4) Step up the construction of affordable or mass housing to address the urgent
    housing needs of citizens so long as there is no excessive demand on or in the
    construction industry;
    5) Notification of the government’s intention to increase the capital gains tax
    beyond 20%, if it is needed;
    6) Introduce a progressive tax on the excessive profits of real estate developers;
    7) Local government’s needs for additional funds for approved infrastructure and
    development projects are to be funded by the issue of Central Government bonds;
    8) The Central Government issues enough bonds at appropriate rates to provide
    investment opportunities for those with cash to invest and for development
    projects by local and central governments. Excess funds raised could be lent to
    the banks at the bond rates plus the issue and management costs, if the economy
    needs more liquidity;
    9) The government could develop new businesses and enterprises and those which are not or no longer in essential or strategic services or production could be open
    to investment by the public or be privatized eventually;
    10) To have a more practical and realistic view of China’s residential property
    market, statistics and reports on the affordable or mass housing and luxury
    sectors should be presented separately. This is because the affordable or mass
    housing sector is real home market whereas the luxury sector has become
    primarily an investment market not intended for residential purposes; and
    11) Enforce and upgrade regulations on currency and capital control diligently to
    prevent an exodus of funds overseas or the inflows of speculative funds from

    The above points are meant to freeze real estate prices from rising further and may
    even cause them to drop and then slowly ease downwards so that more people with
    increasing income could afford them as homes sometime in the future.

    There is no necessity to halt the construction of luxury and commercial property, the
    construction of which should be subject to market forces so long as it does not
    violate other national policies such the preservation of agricultural land.

    Asset bubbles are dangerous to an economy because when they burst they may cause bank failure which in turn may wipe out the funds and savings of bank customers. In other words, they may cause a chain reaction of corporate and individual insolvencies through no fault of the latter.

    As an illustration of asset bubble and bank failure, consider this situation of a
    CNY300,000 asset the price of which doubles and doubles again in a couple of
    years with the bank providing a loan of 80% of the asset market value at the
    time of purchase and then the asset bubble bursts and the price of the asset
    drops to 30% of its market value.

    CNY300,000 (loan CNY240,000), CNY600,000 (loan CNY480,000), CNY900,000 (loan CNY720,000) CNY1,200,000 (960,000)

    When the bubble bursts, the buyer either fails to pay his mortgage installments or
    unable to provide additional security for his loan of CNY960,000, the bank has no choice but to foreclose the mortgage and auction off the asset for CNY360,000 (30% of CNY1,200,000) and incur a loss of CNY600,000 when this amount could not be recover from buyer. Multiply this loss by a million times, the bank would incur a loss of CNY600,000,000,000 and goes bust. When the bank fails, the innocent bank customers would also lose their money as the bank would not be able to repay them resulting in a chain reaction of insolvencies dragging down other banks too and the country’s economy with it.

    From the above, it is clear that China’s “housing bubble” is not as serious or
    gigantic as the sinophobes and the China bears want to believe. Chinese property buyers pay in cash or mainly in cash.

    If indeed there is a crash in the prices of the luxury properties, thousands of
    people may demonstrate at the developers’ offices, but over a billion people
    would be celebrating. It would be the celebration of the masses.

    If the 80% bank loan were calculated based on a figure published by a relevant
    authority derived from an average price of similar assets for the previous 10 years or market value of the asset whichever the lesser, instead just on the market value of the asset, then asset bubble would not be able to form through bank financing and bank stability would be ensured. In this scenario, in a rising market, asset prices could only rise slowly as bank financing is being held down by the lower prices of similar assets of the previous ten years, a situation that is most probably unacceptable to the banksters and other vested interests who reap enormous profits from growing asset bubbles.

  • China Newz

    The people that are buying multiple condos in China are speculators and causing the prices to increase throughout China. Read that people were filing fake divorces to circumvent Chinese laws on limits placed on married couples purchasing apartments they will never use. Also, the gov’t has made lending practices more stringent for loan underwriters. There may be a bubble but think that this issue is being closely monitored and speculators will be reduced if not eliminated from the real estate market.

  • Another Observer

    Very informative. Thank you!

  • bizbird6

    There is a BIG difference between China Government controlled market and in the World’s Free Market System. The Government can choose where to put the Industry and Jobs. This totally different between China and the rest of the World.

    As the Chinese Economy grows, these cities and the people will increase their income and these EXPENSIVE units will become AFFORDABLE. This is HOW the Chinese Economy grows so fast. They BUILD AHEAD of Demand.