China’s ghost cities

Markets can remain irrational longer than you can remain solvent.

–John Maynard Keynes

Note:  I’m very busy right now but should have a more substantial/on topic post up later in the week.  In the meantime, I thought this was an interesting topic which fits with my post on China last week.

Mannerheim’s comment in response to my post on why China has to buy US debt reminded me of the at times bizarre overbuilding which has been documented in China:

You allude several times to China’s fear of letting their currency rise so trade with the US will balance; this is because they’ve designed their economy entirely around low-wage manufactured exports to the West and therefore need to keep their currency artificially weak to keep their products cheap for Americans. If the yuan rose against the dollar Americans would switch to buying goods manufactured in Southeast Asia or Mexico, and millions of Chinese would lose their jobs and have a serious bone to pick with their ruling elites (off topic, but these are the same frustrated young men who will never find wives due to the one-child policy and the penchant for aborting daughters). I often see the figure cited that China’s leadership feels it must grow its economy by 8% annually just to maintain social stability (and even so riots are not uncommon in major Chinese cities), so a sharp revaluation of the yuan could very possibly lead to economic collapse and all-out insurrection.

This need to continuously post spectacular growth figures has been speculated as the cause of what are known as China’s ghost cities.  These are entire cities or developments within cities which are wholly or mostly vacant.  The Daily Mail ran an article back in December with satellite photos.  The Atlantic ran a piece back in June titled Why China’s Ghost Towns Matter for Our Economy.  There is also a popular video on Youtube by the Australian program Dateline on this:

I’m personally not sure what to make of all of this.  At one level given the size of China and its economy, these monstrous vacant developments are probably exactly what a tiny error in planning would look like.  On the other hand, my experience is that any visible corporate or government absurdity tends to be just the tip of the iceberg.  Inefficient systems tend to do a better job of keeping up the facade of efficiency than they do at actual efficiency.  So glaring visible failures like this make me suspect that there is far more of this kind of waste which no one on the outside can see.   I also am skeptical that any country can keep up China’s level of growth long term.  If one is looking for symptoms of cracks in the system, these would seem to fit.  However, bubbles (assuming this is one) have a tendency to make fools of us all.  My personal long term bet is that China eventually runs into a wall very similar to the one Japan ran into in the late 80s and early 90s.  But as the Keynes quote mentions, this could be a long way off.

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18 Responses to China’s ghost cities

  1. Cole says:

    Eerie.

    It kinda of reminds of some of the towns where I live when the town’s major industry shuts down and everyone moves away. You can see an entire mall be completely empty, where just five years before stores were competing for premium space and entire neighborhoods abandoned.

  2. Fourmyle of Ceres says:

    China has its problems, but I don’t think this is one of them. They are urbanizing tens of millions of peasants every year as farms are consolidated and typical urban jobs (manufacturing and services, mostly) take their place. Another name for Ghost Cities might be “built a year too soon.”

  3. Anonymous Reader says:

    Cole, it is not quite the same. It is more like the housing developments and malls that were built in some parts of Florida, California, etc. during the housing bubble; buildings that have never been put to any use, will slowly deteriorate. In a dry climate it can be slow. In a humid climate, apartments / condominiums can become full of mold in a year or two.

    Fourmyle, do not be so sure of that. The ghost cities are built according to the plans of some regional autocrat, not according to any market force or any true central planning. Unlike the market towns built in England during the 11th – 13th centuries, these cities are not necessarily in any useful location in terms of transportation, agriculture, natural resources. They are just plopped down somewhere that will make a lot of money for a few key players. In that respect they are more like the Inland Empire developments in the Southern California desert, or any number of other such developments.

    Do not forget that the one-child policy will turn Chinese population growth around in the next generation or sooner. The Chinese work force (18 to 65) will peak in the next 10 years and then go into decline as their “baby boom” ages. China may well look like Japan in 30 years demographically, but the country will not be nearly as rich as Japan…

  4. Looking Glass says:

    China has way over built. The central government is already taking steps to, it hopes, avoid the massive crash. While credit is exploding there, it’s also extremely tight. It’s going to be a glorious mess when it finally crashes. But that could be another 2-3 years.

  5. Aurini says:

    @Looking Glass

    2 – 3 years? Try 20 – minimum. The comment from the first guy “The government needs to step in and do something!” just broke my heart.

    Haven’t they done *enough* already?

  6. Aurini says:

    Gah – somehow I read ‘crash’ as ‘correction’ – It’ll crash alright, and then keep getting worse…

  7. mjay says:

    I’ve been to one of the ghost cities, Zhengzhou in Henan Province. Think “bridges to nowhere” on an impossibly grand scale. It will take many decades before there are enough peasants earning enough to buy one quarter the residential overhang in China, and a lot of those units are growing moldy and filling with dust and spiderwebs.

    The official government number is 90,000 “mass incidents” annually in China (http://www.economist.com/node/17308123?fsrc=scn/fb/wl/ar/nextemperor), but the State Department guesstimate is 120,000 riots/year. Gotta keep those peasants employed building buildings, laying asphalt, etc….

  8. Legion says:

    If China goes bust, after Europe goes under and Japan never recovers, who will liberals use as an example of why American ca[italism is so bad?

    This comment is funny because if we do take ourselves down, we will make China drop faster than you can spit. As noted by another, China is not as rich as a lond time develo[ed country. It will be harsh there.

  9. Legion says:

    My apologies people. It’s the bourbon typing.

  10. david foster says:

    Foxconn, the Chinese contract manufacturer which makes products for Apple (among other companies) has announced its intent to acquire a large number of robots to reduce labor requirements. Foxconn employees are not generally a happy lot; they will probably be even less happy if unemployed. I doubt that Foxconn is the only Chinese company looking at enhanced automation in the face of labor cost increases.

    At the same time, some US companies are already realizing that offshoring is not the panacea it was sold as by consultants and b-school professors, and that problems with logistics, inventory management, and human communication can sometimes outweigh the savings.

    If these factors lead to widespread unemployment among the Chinese, things could get interesting…

  11. Dan in Philly says:

    It’s hard to make predictions, especially about the future. Who can truly say what will happen with China 10, 20, or 30 years from now? I suspect that 50 years from now people will still be wondering what happened with China circa 2010 – 2050, so why should we pretend to understand stuff which hasn’t happened yet?

    The only thing which I can predict with 100% confidence is that whatever we agree will happen is certain to be wrong. The world is too complex for any real understanding of what makes it go around. Pretending otherwise is sheer hubris.

  12. Dalrock says:

    @David Foster

    Foxconn, the Chinese contract manufacturer which makes products for Apple (among other companies) has announced its intent to acquire a large number of robots to reduce labor requirements. Foxconn employees are not generally a happy lot; they will probably be even less happy if unemployed. I doubt that Foxconn is the only Chinese company looking at enhanced automation in the face of labor cost increases.

    I saw a headline on that, but didn’t know the significance of the firm. The justification for moving manufacturing to China has always been lower labor costs. If it is cheaper to use robots than Chinese labor, then why not use robots to do the manufacturing here. Part of this is regulatory, but this is something we could fix if we chose to.

    At the same time, some US companies are already realizing that offshoring is not the panacea it was sold as by consultants and b-school professors, and that problems with logistics, inventory management, and human communication can sometimes outweigh the savings.

    I think a couple of factors are becoming glaringly obvious regarding off-shoring. The first is that key to the cost savings involved with moving any given activity overseas was an assumption that quality could be reduced. While managers always claim that quality won’t suffer when an operation is moved to a low cost location, I’ve never seen this. If you compare the cost of this lower quality operation overseas with what it would take to achieve the same low quality in the US, much if not all of the justification for moving operations goes away. This is why for example so many call center positions have come back to the US. Now that we know that for many companies (but not my employer) the person answering the phone doesn’t have to speak English well, the hiring manager in the US has a whole new labor pool available to them; maybe they don’t really need to show a college degree just to get an interview after all. Also, while there are very qualified, talented, hard working people working for western corporations in these low cost countries, there is a limited pool and they tend to move firms and/or positions fairly regularly. This makes them forever the new guy with a built in excuse (and lowered expectations).

  13. Kane says:

    China is approaching a crash, the only question is, how can I make money from this?

  14. Cole says:

    @Anonymous August 2, 2011 at 5:46 pm

    I said it reminds me of that, not it was the same as.

  15. mjay says:

    Re: a “large number” of robots. That “large number” = 1,000,000.

    http://news.xinhuanet.com/english2010/china/2011-07/30/c_131018764.htm

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  17. Höllenhund says:

    “buildings that have never been put to any use, will slowly deteriorate. In a dry climate it can be slow. In a humid climate, apartments / condominiums can become full of mold in a year or two.”

    Indeed. I know some people in the construction business. They told me any uninhabitated apartment becomes decrepit rather quickly unless it’s heated in the winter. I doubt the tens of millions of empty Chinese apartments are heated.

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