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Faces of China: Ghost Cities – Part II
I wrote a long post earlier this week in which I explained that even though China had unleashed private incentives in the late seventies, its reforms were incomplete as the country largely remains a command economy. With no incentives and no market pricing mechanisms, you end up with no growth at all. It is what happened in Russia and other communist countries in the second half of the 20th Century and which eventually lead to their demise. However, if you unleashed private incentives without establishing proper pricing mechanisms, you may get growth, even fast growth for a while, but inefficient resource allocation will inevitable occur.
As I argued on that earlier post, this resource allocation is easier to coordinate if a country is starting from scratch. In other words, with nothing in terms of infrastructure and industry, like it was the case in China in the mid-seventies, central planners had a blank sheet of paper to work with. In this case, state planners can probably accelerate economic development and perform much better than the markets would. Starting from a blank slate, it appears relatively easy to determine roughly what a country may need for its future and make decisions to get there.
However, once this initial allocation has been identified and engineered, it is much more difficult to adjust to the subtle changes that occur in the environment as the prices of resources and goods change and as tastes and technologies evolve. It is easily to identify a forest from a plane but much more difficult to kill the dear which is constantly moving in it. See my post, The Two Faces of China - Part I, for more of my thinking and a historical perspective on the issue. In the post, I also present the case in favour of planning the process of resources allocation through the eyes of a former Microsoft executive.
However, as I promised, today, I am presenting the darker side of a centrally planned economy: The building of total chaos. Watch this video (thanks to Sébastien Lavoie for sending it to me) and let me know if you think China will or won’t be experiencing a crisis in the coming years.
I know: China is huge and this video is only showing us a tiny portion of the problem. Is the problem much more generalised? Is this an exception accounting for almost nothing in proportion of the size of the country? To answer these questions would require more due diligence that I am not able to provide. However, it is a warning sign of a potential crack in the system. It is also sufficient to illustrate my point that without proper functioning pricing mechanisms, the resources allocation process can easily get out of control and plant the seeds of an eventual crisis.
And I know, something similar happened in the U.S. with residential real estate ... just recently. And it probably would be easy to make a video of empty residential areas of Los Angeles full of foreclosure signs and tell a similar scary story. But this is precisely my point: We had a crisis! And a big one!
See also this link to some aerial pictures of ghosts cities.
Finally, watch Bloomberg's series of videos entitled Behing the Wall. It provides some pros and cons of this overbuilding. I find the the "pro" arguments similar to the typical "this time it is different" type of arguments. But you can be your own judge. Here is a link to the first in the series. Just follow the links to the rest of the Bloomberg series.
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Wasn't there a chinese general who said they expect the coast to be wiped out by tsunami so they have built emergency cities in advance. tsunami's suck so these cities are like realestate gold.
China like many other countries is using smoke and mirrors to hide what's really going on. They use endless construction, creative accounting, and highways lined with wide greenbelts to hide the real China. Armies of low paid $1-2 a day workers clean the streets inside the belts, but a careful look through them one can see acres upon acres of rubble, debris and trash. I just got back from my 4th trip to China this year after spending 5 of the last 6 weeks in Shanghai, Quangzhou, Weifang and places in between which has done nothing but reaffirm including a ghost city called Lingang New City, go figure.
My theory on China is that we have yet to see a truly beligerent and assertive China. Now imagine for a moment a generation of children who grew up as an only child. Everyone knows, and this is especially true in China, that only children are generally more spoiled and used to getting their way than those with siblings. Now, 30 years after China instituted their one-child policy, we are beginning to see the fruit of this policy. These spoiled only children who believe that the world revolves around them are just now beginning to enter the halls of academia, business and politics and when their numbers outnumber those of the old way. Watch out.
I honestly don't see a problem unless you are an investor. Once the bubble pops have the government interveins, take over the units at virtually zero cost and get some of the 500 million pesants without adequate housing a place to live. Now if your conception is that the "market" will fill these units then you are badly mistaken. But once the units are built (which is why they allow the bubble to continue) and the population exists solve the problem. That's one of the good things about command economies. I expect all that to take place after the leadership change next year. So by 2014 those places will be full and the investors - prior owners will have lost their investment. Real easy. All this "free market" crap is just that and is only useful so long as it continues to attract capital to build more buildings.
Well the Chinese citizens were sold on the idea of real estate as a form of retirement income. Many Chinese own property in these ghost cities but live in tiny 200sq ft apartments in the industrial sectors. They put all their savings into property because the values kept skyrocketing and they were told the values would continue to rise forever. Greedy corporations with globalist ties from Europe and the USA were all too willing to build these ghost cities with Chinese government money. Then the speculators in Europe and the USA and quite a few middle east sheiks were all too happy to run the prices up to ungodly amounts while selling them back and forth to different Chinese who bought the government's line of housing for retirement hook line and sinker.
Eventually to realize their paper wealth gains the Chinese citizens will need to sell the property to someone. The upcoming generations of Chinese will be far smaller than the current generation and will lose jobs to other asian countries willing to work for less. They will find out the hard way that the practice of western ponzism is a total bitch when property in the ghost city will be going for one percent of what they paid when it is time for them to retire and sell. All of a sudden those great foreign brokers who were paying handsome sums will be nowhere to be found.
It's nice to see that the money American Taxpayers are sending over to China via US bond payments is going to something useful like housing and malls than to their military complex....
wait a sec
oh, crap.
The true enemy for China is the collapse of its environment . Take a look at water issues in China, land erosion issues and weather change. The ruling elite and their friends are buying upscale apartments ($30 mil and up price range) in NYC as their hedge as we speak. The whole will end up in blood and tears.
Rank conjecture based on derivative nonsense.
China will discontinue buying treasuries, so how the fuck will the USA finance it's deficit spending going forward?
The USA is fucked. Jim Chanos is full of shit.
China will finance itself internally while the USA becomes a third world shit house.
Thanks to all the shit eating corrupt USA politicians.
China owns the 21st Century.
If you look, you will see ghost cities everywhere, and this is just the beginning.
For those seeking a simplified version of the algorithm:
The computers do not care about wealth. They wipe out remaining participants with algebraic reduction, clear the wealth they “win” as the transaction counter-party with each iteration, and begin the process again, seeking market share in executable trades, increasing pressure on decreasing volume as the humans flee the market. The result is like an imbalanced wheel tearing the hub apart, as total real returns on investment deflate, costs inflate, and the reward to the dwindling population serving the computers’ purpose goes up.
And the proprietors can no more prevent the collapse than they could prevent the collapse of the mortgage market. If they don’t shut off the computers, the financial system collapses. If they do shut off the computers, the infrastructure system collapses. How could the quants or their masters know that Skynet is the virtual code, not written, in remainder, when they do not even understand the effect of their code on the hardware?
COMPUTERS ARE THE GUNS NOW and they have been left in the hands of emotionally unstable humans, who naturally seek more control as their insecurity grows with each iteration, in a positive feedback loop, which is the timer-detonator. Left to his own devices, Caesar (Socialism/Fascism) hangs himself every time.
China, working hard to be the biggest piece of shit in the world
http://news.asiaone.com/News/Latest%2BNews/Asia/Story/A1Story20110805-29...
Fuck those Chinks. They deserve to be wiped out from this planet.
you are a sorry excuse for a human.
I think you should take a moral stand right now, gather up all the Chinese made stuff you have at home, take it outside on to a street and burn it in a huge pile.
Let us know how it goes once you get a new made in the USA PC and restore your internet connection.
I can't find anything that ISN'T made in China. Oh...except this pu pu platter I just charged, of course...
China has its problems but there is one HUGE difference between China, the EU and the USA.
A large portion of their stimulus was actually spent on Infrastructure.
Almost none, zero, zilch of the stimulus in the USA and the EU was devoted to infrastructure. Most of it was handed to the Wall Street.
The nation-state as a viable entity is doomed.
What happens to mahjong?
they turned it into a solitare game.
Please folk - stop mentioning population.
Like any other market you need people with decent incomes to purchase property.
I say it again, 1.1 billion sounds cool, but very few even have the incomes to support these markets.
Dont get sucked in by 'china statistics'....lots of people does not mean lots of people can afford to purchase expesnsive products
Property prices are depend upon cheap credit and a decent income to have achance of paying it back.
Remeber NINJA's - no income no assets no job?
The same applies everywhere. Also finally remmebr the maintenance costs of these assets. There simply no way this can last for ever, because even if the owners are rich, who wants to pay maintenance fees on flat with no tenant?
Still if you get the chance to travel, get other there and take alook - it truely is impressivly surreal.
"Like any other market you need people with decent incomes to purchase property." Who said anything about purchase? Just get the buidings built then when the time is right bankrupt the complexes and move the people in at low or no cost. Their only problem is to not start a socail revolt by doing that they have to have about 200,000,000 uits to give away. If they try it with only 100 million units then some get and some don;t and that would cause strife.
I think you're right about the lack of disposable income and cheap credit for the vast majority (The latter probably a good idea), and I also think there is a housing bubble that's either going to pop spectacularly or deflate slowly - either one not good news for the investors sitting on these empty properties hoping to flip them.
But with all the exaggeration and, quite frankly, deluded wishful thinking about China, one should revisit the so-called "ghost cities" or megapoli, and take a good hard look at the real occupancy rate. The most popular images doing the rounds on the msm are:
Ordos City in Mongolia http://www.time.com/time/photogallery/0,29307,1975397_2094492,00.html
Zhengzhou New District (Suburb of Zhengzhou)
Beijing Olympic Village
Are they being occupied or are they completely empty? The truth is somewhere in between.
China's Ghost City’s will be filled with Americans escaping Obama's Utopia.
Don't worry about China just yet as big western companies are dumping shitloads of money in China hopeing that they'll get rich out of if.
So China will only crash when those moneyflows stop.
I guess there isn't 1.1 billion people in China. Never really did believe the whole 6 billion people BS anyway.
That sounds like it poured straight out of the mouths of one of those Jehovah's Witness freaks. Talked to one of them once and he informed me that only 200k people would be "saved". I mentioned that the world had about 4 or 5 billion people in it (at the time) and that those were pretty piss poor odds. He didn't buy it, told me that population figures were a scam by the government to trick us all. I thought to myself, well, fuck it, there's not a snowballs chance in hell that I'm gonna make that tight a cut. So I didn't join.
With their huge Forex reserves, no foreign debt and good fiscal balances, China will have a real estate crisis and will just write off bad loans and no American or European will suffer!
You're forgetting about their trillions in non-performing loans that are off-balance sheet. I guess that doesn't count as "fiscal imabalance"?
This is the one of the most curious urban legends I keep coming across about China. Off balance sheet debts in trillions (I've heard some ridiculous numbers: $700-900 trillion). Any links? I'm not disparaging you, I'm curious.
Of the top of my head, I believe the archtypical examples are social security, and un/under-funded liabilities like FDIC.
These are set up to pay for themselves, but in the long run can't, and everyone knows it. But the costs to fund them, being driven by demographic trends, are staggering, so they are kept off balance sheet, by the consent of all parties, with a wink and a nod.
Once the Japanese realize they are being radiated to death from Fukashima, they will move to the China ghost cities, as well as to the American ghost cities, and the European ghost cities.
There are other alternatives as well...
This was 2 years ago but still relevant:
http://willanystand.blogspot.com/2008/12/dragon-on-winters-eve.html
My Chinese friend whom I still interact with regularly predicts their crisis is still a year off or so. I trust her observation and reasoning skills implicitly. She is a keen observer.
I've been saying this for years and everyone thought I was crazy. Measuring growth in an emerging economy and projecting that growth out into the future ad infinitum is ridiculous. The Century of China makes as much sense to me as the notion back in the 80s that the Japanese were going to take over the world. How well did that work out?
China is a bubble based on the global trade scam that convinced the West that it was in their best interests to drop all their trade barriers and give up their manufacturing economies for service based economies. Unfortunately, a service based economy in the modern world is often transacted over the internet, and those service cannot compete with the low wages in China.
That little scam is coming to an end. Trade barriers are going up, and even if they didn't, China can't bail out its customers. It is circling the drain too. With the number of languages, religions, and sects in China, they will be lucky if there is a China in ten years. That's why they kicked out Google, to hold everything together, not to "protect their culture."
++... Well said Smiddy..
Does this mean we can have ten wives in china when it collapses? One from each region speaking a different language and making a different cooking? What a cultural revolution for lonely males sick of being blamed with harassement at home and finding nirvana in orient.
Go long ghost towns full of chinese women...
I am being toungue in cheek and metaphorically unzippered down deep. Whatever that means!
No women in China. They drowned them all at birth. Just a country full of angry frustrated men. And the ability to make half a million AK74s a day.
sounds like they copy cat the USA down to a T..except for the women drowning bit.
+1
James Chanos also did a very good presentation which was video'ed. It was at Columbia U, I think. He is an intelligent and thoughtful guy. I wish I could find the presentation again.
I think India has a better shot but they have lots of problems too.