Are China’s ghost cities getting worse?

By Leith van Onselen

China’s ghost cities, the most famous of which is Ordos in inner Mongolia, have regularly been cited as a prime example of China’s unsustainable construction-led economy.

In 2009, AlJazeera posted an explosive video showcasing Ordos’ ghost apartments and frenetic pace of construction, which exemplified the “build it and they will come” approach that has underpinned the Chinese economy. AlJazeera provided a follow-up in 2011, which was equally revealing.

Then Business Insider posted a slideshow of China’s empty cities, headlined by Ordos.

And in late 2011, a video from NTD Television showed how Ordos’ home prices were crashing, having fallen by almost one-third. Meanwhile, construction had finally ground to a halt, leaving many construction workers unemployed.

Then last year, a video from the Atlantic  followed a group of skaters through Ordos, showing a city that appeared almost completely empty three years after Aljazeera’s first ground-breaking report.

And who can forget 60 Minutes’ explosive video earlier this year showcasing China’s ghost cities.

These kind of malinvestments – projects that cost billions of dollars but provide little economic return – have the potential to become a millstone for China’s banks and economy going forward, subtracting from its growth potential.

With the real estate market accounting for around 10% of China’s GDP growth, and affecting many related industries, there remains the ever-present risk that construction and sales could ultimately grind to a halt, crimping local government land sale receipts and dragging China into a sharp recession.

Two years ago, SBS Dateline visited China’s ghost cities and towns, producing an eye-opening report highlighting the above concerns. Earlier this week, Dateline screened a follow-up to their earlier report (above), returning to China to see whether the situation had changed.

In the report, Dateline’s Adrian Brown tours Tianducheng – the Paris replica, the South China Mall, and Kangbashi in Ordos – China’s most famous ghost city – and shows that they are all still empty. And yet more new cities are under construction.

Tom Miller, a Chinese urbanisation expert, also notes in the video that Chinese officials “basically draw a circle on a map and they build it, and then they expect people to go and move in”, with officials effectively gambling that cities that are empty now will fill up later, as China’s urbanisation rolls on.

While watching the video, consider how much of Australia’s iron ore and coking coal has gone into the construction of such projects, and what would happen to commodity prices in the event that construction across China slowed.

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Comments

  1. “These kind of malinvestments – projects that cost billions of dollars but provide little economic return – have the potential to become a millstone for China’s banks and economy going forward, subtracting from its growth potential.”

    I agree unconventional. Much better to build car factories and solar panel factories and write the cost of construction off to some obscure government account.

  2. Mmmm… one must consider how the Chinese think about long term planning. The size of the medical districts in these ghost towns seems to indicate to me they are build to accommodate the ageing Chinese.

  3. “Tom Miller, a Chinese urbanisation expert, also notes in the video that Chinese officials “basically draw a circle on a map and they build it, and then they expect people to go and move in”, with officials effectively gambling that cities that are empty now will fill up later, as China’s urbanisation rolls on.”

    In the US buildings that are left vacant for any length of time are generally stripped of anything of value. Copper wiring and copper piping as something that can be easily melted down are usually some of the first items to go. But they are amongst the most expensive items to replace.

    • In China, the empty apartments is just an unpainted and unfurnished ‘shell’, so there is not much to steal. There are also security guards for every building, even if the apartments are empty. To make things even harder, the closest scrap metal shop is probably located in another city!!

  4. What I found chilling in that video was the way in which the home owner glanced nervously at the government minders as he smiled and said how happy he was to be moved out of his home and into a high rise apartment.

  5. Ghost cities form part of the reasons why I am bearish on the Australian dollar….not that Taper talk BS issue

  6. The whole idea of malinvestment is actually rather unhelpful.

    I have said it before, but it is worth repeating. If China had devoted the resources used to construct these ghost cities to building a military instead – ships, tanks, missiles, aircraft, airports, bases, etc – no one would say boo. Yet the outcome in terms of resources is the same, with a whole lot of concrete, steel, labour and expertise invested in something that gives no return.

    At least the buildings in these cities will have lives of a century of so, meaning that they won’t be a total waste. Come back in 10 years and thing will have changed a lot.

    FInally, this sort of waste (at least compared to some perfect world where all capital is perfectly utilised) is a small price to pay for the massive boost int welfare the Chinese have seen in the past two decades thanks to government supported capital investment programs.

    • But they are doing that ( the military stuff) …as well …not instead of….Returning in 10 years time is about as optimistic as most property speculators are; that things will be better; prices will be higher. That, is not a given….

    • I agree in general with what you are saying. China is not the only country that is misallocating investment.

      I argue that in Australia the knocking over of perfectly good family homes in well to do suburbs to build mansions has been a misallocation of capital. As have been the building of all those McMansions in suburbs far away from jobs, decent shops and suitable community centres.

      But I also say these misallocations of capital in China in some ways is much more of a disaster than in Australia because in China the people have so little to begin with. In China the opportunity cost of this malinvestment is potentially higher than it is in Australia. But then again it could be considered more of disaster in Australia because all this malinvestment has largely been done on money borrowed from overseas, which still needs to be paid back, where as China’s malinvestment can more easily be written off. The other unfavourable comparison for Australia is our malinvestment has crowded out the more productive parts of our economy, this has not been the case in China.

    • “At least the buildings in these cities will have lives of a century of so, meaning that they won’t be a total waste. Come back in 10 years and thing will have changed a lot.”

      Watch the video and check-out the degradation of the South China Mall. It is falling to bits. These unwanted buildings also require ongoing maintenance, which is costly, and the debt still needs to be repaid.

      Malinvestment in all its forms – be it military or ghost cities – is undesirable. In China’s case, it is being paid for via financial repression: maintaining negative RAT interest rates, so that households (via their savings) are effectively bearing the cost of the malinvestment. I’m sure they’d prefer higher disposable income instead. I also doubt China can escape the “middle income trap” while these sorts of shenanigans continue.

      • dumb_non_economist

        Building something to leave it idle for a decade or more, which will also need to be maintained doesn’t make much sense, plumbing, wiring, lifts etc. The build quality reputation is great let alone having a decade sitting around unused.

      • Dne a recent engineering study of Chinese construction projects indicated thirty percent would require rebuild in twenty to thirty years vastly lower than global norms. And so the cycle continues ;). Can’t complain.

    • I tend to agree. This type of investment and other nation building investments have played a major role in the China growth story and led commensurate rise in living standards for millions. The idea is well explained by James White’s post capital theory.

      Hasn’t been too bad for Oz either.

  7. Hugh PavletichMEMBER

    Residential Land Ground Lease Sale Hits $US12,000 Per Square Metre In Beijing China … Bonnie Cao … Bloomberg

    http://www.bloomberg.com/news/2013-09-18/china-august-home-prices-rise-as-major-cities-post-record-gains.html – disqus_thread

    … earlier excellent articles by Bonnie Cao of Bloomberg in Shanghai …

    http://www.businessweek.com/authors/3289-bonnie-cao

    In Communist China, freehold land is not available. Instead residential ground lessee interests are sold for a term of 70 years (commercial / industrial 35 years) by way of capitalised up front rent.

    It appears the capitalised upfront rent for a parcel of residential land in Beijing has hit $U S12,000 per square metre or (x 10,000) about $US 120,000,000 per hectare or (x 4046) $US 48,552,000 per acre.

    It is not known how the capitalised up front ground rental is treated in accounting terms through the term of the ground leases.

    It appears there is a “hope” in China, that at the end of the term of the ground leases, the Authorities will be benevolent and simply transfer for nothing the freehold to the ground lessees.

    However, it does not appear the occupiers of land required for development in China, are currently being treated with benevolence.

    At the height of the 1980’s Japanese housing bubble, the grounds of the Imperial Palace in Tokyo was reputed to be worth more than the real estate in California at the time …

    http://en.wikipedia.org/wiki/Tokyo_Imperial_Palace

    Again … the land in China is not freehold. Just capitalised up front rental lessee interest, which should properly diminish in value during the 70 year term of the residential ground leases.

    The 2013 9th Annual Demographia International Housing Affordability Survey ( http://www.demographia.com ) rates the Median Multiple of Hong Kong at 13.5 … the highest of the 337 urban markets of what is loosely termed the Anglo world.

    Regrettably, Shanghai and Beijing cannot be incorporated at this stage within these Annual Surveys, because the data is not sufficiently robust.

    Singapore is included within this year’s Survey text as a “supplemental” (Page 19), as its data is not sufficiently robust for incorporation within the Survey proper. Its provisional Median Multiple is 5.9 (less than most of the major metros of New Zealand and Australia).

    Other estimates are that the Median Multiples of Shanghai and Beijing are currently in the order of 15 and 20 respectively… likely the highest in history.

    Hugh Pavletich

  8. Hugh PavletichMEMBER

    I am extremely surprised there has not been more competent analysis by skilled property operators of the structural issues surrounding the Chinese property market.

    It is not a pretty sight. The mother of all bubbles.

    Hugh Pavletich

    • What everyone seems to be missing is that the Chinese hierarchy is terrified of what can loosely be termed ‘chaos’. When you have 1.4 billion people earning a pittance you have to ensure that everyone gets at least enough to eat. And the most practical way to do that is to keep them employed. A hungry man is an angry man, and the privileged people at the top want to keep their fat salaries and entitlements. Don’t forget that corruption is endemic at all levels of Chinese society. There is a very real fear of riots and disorder, even another revolution. Keeping people busy building things is the easiest way to prevent mayhem.

  9. Cognitive Dissonance

    “Asset bubbles are like a Ponzi scheme – everything is fine until the cash dries up and asset prices stop rising. Like it or not we are exposed to the Chinese property bubble. The iron ore China buys from Australia is turned into steel, and most of that goes into building apartments and infrastructure. Our bauxite and alumina exports are turned into aluminium, of which about 40 per cent goes into construction in China.

    So at the same time as we congratulate ourselves on escaping from the consequences of the property bust in the United States, the resources boom that underpinned our strong economic performance is itself based on another debt-fuelled property boom in China.”

    Malcolm Turnbull (2010)

    http://www.smh.com.au/federal-politics/political-opinion/chinese-debt-binge-is-fuelling-a-dangerous-property-bubble-20100615-yd1a.html