The sudden expansion of Chinese shanty towns

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Cross-posted from Investing in Chinese Stocks.

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Following the government’s announcement that it would Spend More Than $162 Billion on Shantytowns, the number of shantytowns in China has exploded. Anhui had 800,000 households living in shantytowns, but now finds that 1.5 million people live in shantytowns. There are now 2.7 times more shantytowns than the government planned for with the policy. One reason is the definition of a shantytown has been widened to fit more local development initiatives under the project’s banner in the hopes of qualifying them for low interest loans.

In Systematic Fraud and Corruption in Land Sales Threatens Economy, I covered the recent land audit and the uncovering of various methods used by local governments and developers to misuse or abuse the land sale process. With regards to the shantytown project, one developer said:

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“When the shantytown reform policy came out, developers are quite happy that this is a government bailout in disguise, just need to detour around the bend, the funds first go to local governments, and then be transferred to the developer.”

Shantytown renovation, along with the affordable housing policy, has its risks. These two policies add supply into the market and simultaneously reduce market demand, since a homeowner who loses a home to a tear down is given a replacement by the developer and a homeowner waiting for the affordable housing lottery exits the housing market. These policies will put money in the pockets of developers, but also destroy the private housing market and add more supply into an overburdened market. From the developer’s perspective it is far better to get paid by the government up front than risk losses in the private market. The net result will be even more massive oversupply and housing that is built in response to central planning directives, not market demand.

All of this goes to show why China must rebalance. The property market isn’t going to disappear and there’s still work to be done on those shantytowns, but its role as a driver of economic growth is played out. Local governments and developers see the policy as more of the same, the exact opposite of what the leadership wants. Since the ¥1 trillion in government funds are loans, the total amount of investment in real estate will be multiples of that number. To use Michael Pettis’ phrasing, this is not what a“good” Chinese adjustment looks like.

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About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.