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.

I have always thought China’s ghost cities were overrated in terms of their economic importance/significance.  The anti-China crowd loves to point at them as proof of China’s inefficiencies and evidence of an eventual and certain economic downfall.  Yes, they do evidence inefficiencies, but so what?  Go to even the most well functioning economy and you will see pockets of inefficiencies and abandonment.  I went to Toledo Ohio during economic boom times (was it 2006) and was shocked at its downtown, which felt at least half vacant.  Would it have been fair for me to use that as proof of America’s downfall?  Of course not.

Isolated instances of inefficiencies do not an economy make.  Yes, ghost cities make for good symbols, but unless you can quantify their numbers and their impacts, I just don’t care.

I now have even more reason for not caring.  The Wall Street Journal’s always excellent Real Time Report just came out with a story, entitled, Analyst: I Ain’t Afraid of No ‘Ghost Cities.’  The Real Time story is on an article [no link given nor found] by “economist and veteran China-watcher Jonathan Anderson” entitled “Hurray for China’s Ghost Cities.”  In that article, Anderson writes on how China’s investing in “’ghost cities’” to underpin growth, China saved itself from even more unwise overinvestment in areas that could have done lasting damage to the economy, such as manufacturing.”:

Even though China has been investing almost 50% of GDP for the past few years, Mr. Anderson doesn’t see much evidence that it’s resulted in widespread industrial overcapacity. He notes that industrial profits have been picking up along with sales, suggesting that manufacturers still have plenty of pricing power. And, in contrast to the situation a decade ago when the last credit bubble burst, China isn’t saddled with a massive glut of industrial commodities that it’s trying to dump on the rest of the world. Steel exports, for example, have increased only modestly this time around.

Mr. Anderson defines “ghost cities” as a relatively narrow slice of investment, conducted mainly by local governments, in urban infrastructure and certain types of construction, notably subsidized “social housing” units rather than commercial housing. They’ve certainly been a black hole, he says, but a hole that has emptied largely into the equally dark vaults of China’s state-owned banks, where bad debts can remain buried for a long time.

“Lesson learned: If you’re going to waste capital best to waste it completely, where it will do the least damage to everyone else,” writes Mr. Anderson.

Makes sense to me.

Is China heading for economic failure or success.  Me, I have no clue, but I am pretty confident that looking at ghost cities for the answer is looking at the wrong tea leaves.

What do you think?