China's "Illusion Of Prosperity" Exposed: Forget Ghost Cities, Meet Ghost Factories

Tyler Durden's picture

Having exposed the 20+1 charts of China's demise previously, we move to Exhibit (a) in the "illusion of prosperity" that keeps the dream (looking) alive to the outside (mostly Western get-rich-quick fast-money) world - China's Zombie Factories...

“There are large numbers of companies across China that should go bankrupt but haven’t done so,” says Han Chuanhua, a bankruptcy lawyer at Zhongzi Law Office, a Beijing legal practice.


“The government doesn’t want to see bankruptcy because as soon as companies go bust, unemployment spikes and tax revenues disappear. By stopping companies from going bankrupt, officials are able to maintain the illusion of local prosperity, economic growth and stable taxes.”

Here's Reuters from earlier last year...


This 'pretense' is occurring everywhere across the vast expanse of China, as The FT reports, similar experiences are playing out, with thousands of companies in heavy industrial sectors plagued by chronic overcapacity that should be going bust instead being propped up by local governments.

In the shadow of a group of enormous smokestacks and abandoned foundries, a peeling sign welcomes visitors to the Wenxi Steel Industrial Park.


But in the nearby village, the working-age men and many of the women have gone, leaving only the elderly and the very young.


“If you cut down the big tree, all the small trees around it will die,” says 69-year-old Wang Peiqing, referring to the collapse of Highsee Iron and Steel Group, which operated the foundries before its recent closure devastated the economy of a once-prosperous corner of Shanxi province in central China. “The entire region relied on the steel mill; now the young people have to go and look for work across China.”


Highsee stopped paying its 10,000 employees six months ago. Local officials estimate the plant supported indirectly the livelihood of about a quarter of Wenxi county’s population of 400,000. Highsee was the biggest privately owned steel mill in Shanxi, accounting for 60 per cent of Wenxi’s tax revenues. For those reasons, the local government was reluctant to allow the company to go out of business, even though it had been in serious financial difficulties for several years.


“By 2011 Highsee was already like a dead centipede that hadn’t yet frozen stiff with rigor mortis,” says one official who asks not to be named because he was not authorised to speak to foreign reporters.


“More than half the plant shut down, but it was still producing steel even though its suppliers wouldn’t deliver anything without cash up front and it was drowning in debt.”

It was only last month, four years after Highsee began to flounder, that the company was finally allowed by the government to initiate bankruptcy-­proceedings.

“The government’s plan is to sell off the plant quickly and restart production just like before, even though the steel market is in such bad shape,” says an official who asks not to be named.


“The problem is that it owes at least Rmb10bn [$1.6bn] and probably much more than that. We don’t know where we’ll find someone who can pay all that off.”

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Some of the zombie factories... (Source: Reuters)


In the past month alone Chinese media have reported on at least nine large steel mills that appeared to be suspended in limbo after halting production but which are forbidden from going formally bankrupt.

The outstanding volume of non-performing loans in the Chinese banking sector has increased 50 per cent since the beginning of 2013, according to estimates from ANZ, the Australian bank, but the sector-wide NPL ratio remains extremely low, at just over 1.2 per cent.


In private, however, senior Chinese financial officials admit the real ratio is almost certainly much higher, obscured by local governments trying to prop up companies.

Read more here...

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But apart from that... sure buy Chinese stocks, because well, they are going up...

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Philo Beddoe's picture

Once you have left town does one really worry that much about going tits up? 

JLee2027's picture

"which are forbidden from going formally bankrupt."

Yeah that will work. Like COMEX controlling demand by lowering prices. 

Publicus's picture

Yeah, it's the old plants, they just didn't bother to demolish it. Could always start it up again for World War 3 productions.

cnmcdee's picture

The rich Chinese Government has it's peasants building whole cities that no one in their country can afford to live in, and using debt to do it.

America just pays it's citizens directly to stay home and uses debt to do it.

Neither side will let it's peasant population get out from under it's fiat thumb.

Cancel all world debt just cancel it now.

TheFourthStooge-ing's picture

US citizenism is spreading in China so yes, it has consequences.

Chineses are turning to US citizenism and adopting it. The Chinese are copying a country like the US of A, the mecca of US citizenism, where very few things are real. They are going to display imagination.

Going to be hard for US 'americans' to admit they no longer face different people in chineses but fellow 'americans'...

Zero-risk bias's picture

That's pretty accurate IMO. I no longer see adifference in the ideals of either population. The peoples' of both republics have effectively become almost identical in their lifestyles and their limited ability to think out of a myopic global vision.

Work, buy, consume, die.

Incubus's picture

"Work, buy, consume, die."


You're on the welfare program? You know you're supposed to still be contributing after you die, like everyone else.

jbvtme's picture

the industrial revolution was a flawed business model.  making shit in factories stole the soul from humanity.  creation is the breath of living on this planet.  within two years all that surrounds me will be hand made.

Gaius Frakkin' Baltar's picture

I'm not sure what these pictures prove. Nine out of ten things I pick up have "Made in China" stamped on them, so they can't be doing that bad in manufacturing. How much American decay has Reuters covered? That's definitely real. I can feel that.

EasterBunny's picture

And I don't trust FT as an unbiased source either. Some of these pictures seem to show derelict factories; of which you can find examples in most countries

Anusocracy's picture

Those aren't ghost factories.

That is China's attempt at making a Detroitworld Amusement Park.

The9thDoctor's picture

It reminds me of those doom articles of commercial real estate where it shows an abandoned 80,000 sq foot Walmart, because a brand new 160,000 sq ft Walmart Supercenter opened up a quarter mile down the road.

Yellow Journalism at its finest.

"You furnish the pictures and I'll furnish the War." William Randolph Hearst

TruthHunter's picture

9 out of 10 things made in China are crap and 

break in a week or so. Made in China is as bad as

made in Japan was in the 50's and 60's.

I always look for something made elsewhere. Its usually

worth the extra.

McCormick No. 9's picture

I don't disagree in spirit, just in practicality. I make a lot of my own stuff. I have the skills to fix a lot of things most people would just throw away. But it is almost impossible to make everything by hand.

My wife is a weaver and a spinner. She can take raw wool directly from a sheep, wash it, card it, spin it, and weave it into cloth for clothing. It sounds easy, but it is an incredible amount of work, and takes an incredibl long time to do it al from raw material to finished product.

Here are two salient facts: Before the advent of the industrial revolution, all manufactures were incrediby expensive. Before the industrial revolution, or more specifically, before the advent of petroleum fuel, slavery was a global institution.

Some things can't be built by hand. How are your microchip making skills?

Gaius Frakkin' Baltar's picture

Robot hands are the future I think.

PT's picture

I was just outside watering my crop of Quad-2-Input NAND gates.  Should be a bumper harvest of 64-bit processors by spring ...

Matt's picture

If society can just keep going a little longer, we may be able to just print whole computers on a sheet of paper soon. Not as fancy as an industrial mass produced unit, but maybe compareable to a commodore 64. May have to use lite brites for a display, though.

ersatz007's picture

What do you use for fertilizer? Are these organically certified?

PT's picture

Fertilizer?  I talk to my plants.  That seems to help!




Not sure if that was too subtle.

shovelhead's picture

Substitute organic buffalo chips.

"iSmell inside."

PT's picture

A couple of months ago I threw some engine mounting bolts on my compost heap.  Came back a few weeks later and noticed it had sprouted a few model aeroplane engines, and blow me down!  One of them had already flowered into a fully grown, ripe V8!

new game's picture

as long as majority believes their money is worth something the illusion goes on.

by keeping is scarce to the majority it lives another day.

and there is no alternative, for now...

faith, baby faith, ha...

PT's picture

The real tragedy is that people who can't afford to buy stuff are still expected to work so hard.  If you can't have much stuff then you should have most of the week off.  Don't tell me there is no better way.

shovelhead's picture


All week off and you have more disposable income than most poor working chumps.

And gubbmint cheeze.

Binko's picture

It's just a Fox News talking point that you can go down and say "Gimme Welfare" and then go live for free. 

Unless you are a single mom with kids it's actually really hard to qualify for much of anything beyond food stamps. 

People almost universally want to work. It's just that they want a job that treats you like a human and pays you a livable wage. 

Trouble is our rich masters have been shredding these kind of jobs as they pile up their additional billions. 

ebworthen's picture

Yup.  Some of those pictures remind me of Detroit.

Againstthelie's picture

With the difference that four of the six pics show the same factory, the fifth shows a broken window and the sixth also shows nothing.

So in fact they show one abandoned factory in China. Now I ask myself, if there are so many, many, many, why do they spread four pics of the same factory as being four different factories? Could there be an agenda behind it? I am shocked: since when do Western news agencies not report the truth?

Oldwood's picture

Once the Chinese saw their exports declining, their only choice was to go American and "stimulate" domestic consumption, as per Bernays. Creating demand from desires, not actual needs. The problem is that the Chinese are too close to their origins that understand the difference between true needs and the "created" desires of emotional needs.  America has been transitioned over a period of a hundred years or more. The Chinese are in a much more compressed timeline and it may just not work so easily. We are all corruptible, but some more than others. Our faith in the better side of man is under assault. Lets see how the Chinese people do.

Bob's picture

I'm guessing that, as was true in much of the collapse of US industry, if the Chinese govt allows these businesses to go belly up, one would find that much of their debt was taken to fill the pockets of those glorious "one million new millionaires" that are buying up high end real estate worldwide.  

Call it human nature, if you want to represent the most base instincts of the most greedy and corruptable among us as the measure of us all.  There is a reason, however, that it is so predictable that those are the very type that make it to the top and successfully screw the common man most of the time . . . and I don't buy the proposition that it's because they are "winners" in any positive sense of the word.  

It looks much like what has happened here, with vultures of the Mitt Romney mold who have made untold millions by gutting not only companies but worker pension plans before discarding the bankrupt carcasses of the enterprises and moving on in some profoundly twisted perversion of the notion of "creative destruction." 

I'm missing the critical distinction between the Chinese govt directly supporting the companies prior to formal BK and American govt's handing out unjustified tax abatements like candy on halloween, fraudulant capital markets that support massive unecessary and unfounded debt fed by the Fed "liquidity" spigots,  mark to myth accounting, wage squeezes that--in this country's cost of living structure--leave the govt to pick up the costs for basic living expenses like food and medical care, massive tax exemptions that leave the govt issuing "refunds" to major corps that make them tax recipients rather than payers, govt picking up the tabs for pension funds that go unfunded while managers fill their pockets and stock holders celebrate the return of the roaring twenties markets, etc, etc, etc.  

Oldwood's picture

Its all redistribution. There is no greater power than one gets from the backing of a mob demanding justice. They create the rules that incentivize corruption and then use this blatant corruption as an excuse to steal, and seldom do they steal from the actual thieves, but from those of us who cannot fight back.

DipshitMiddleClassWhiteKid's picture



he's Mitt Romney to us


He has a asian cousin named Ming Wongly



Took Red Pill's picture

China wants to emulate the US. But times have changed and that prosperity opportunity is gone.

ufos8mycow's picture

A good majority of the ghost cities are being built by investment firms for the average Chinese worker. The Chinese save a large portion of their salaries and they wanted to invest in real property. So they built these empty housing blocks as investments. So even though the government is allowing this to happen it is really average Chinese who stand to lose billions in savings when the bubble bursts.

They are propping up these ghosts to temporarily prevent a huge crash when the savings account of millions collapse and unrest begins.

new game's picture

empty units worth ??? vs shares of s and p worth ???, or head in sand w/cash , home, and gold on sidelines, hmmm...

847328_3527's picture

The local Chinese officials have all that central gubmint loan money tied up in their California RE; no way they're gonna spend it on ghost factories and their workers.

oklaboy's picture

and GM and Chrylsre any different?

Smegley Wanxalot's picture

I love asian titties.

But back on topic, I see a great opportunity here.  These empty factories are located right next to Japan, which is in dire need of Depends and caskets.

Print yen, buy shit from China.  That's the global economy in 6 words ... currency may change but the theory is the same.

Majestic12's picture

Agree, Smegley, my good man.

These miscreants here will be left holding thier willies, when all captial moves to the only gold-backed reserve currency on the planet....

Then there will be thoese who snap up "ready-made" factories and office HQs...then those who laughed in 2014....and now.....

Dorks are classic....they never change era after era....

zorba THE GREEK's picture

Chinks lie...everybody knows that.

noben's picture

Americans never lie or bullshit.

And their military never starts a war, never invades and on the extremely rare occasion when they have to, they always withdraw and decommission their overseas bases. The US does not have hundreds of oversea bases and installations. They only have a few, and at the adamant insistence of the host country.

Everybody knows that. Happy?

cynicalskeptic's picture

In contrast to an ever present world-wide US military, china has taken all those $US earned making cap for us and bought tangible assets (mining companies, famland, oil supplies and more), bought 'friends' and influence all over the place.  Hell they damn near own half of Africa (the resource rich part) and Australia is something of an economic colony for them.......

They saved a fortune NOT deploying their military all over.


Keep in mind that the Chines have VERY long memories - they view the usurpation of China's role as the center of civilization as a temporary and short lived one.  The barbarians had their fun but their time is ending...... and you can bet they plan on payback for the Opium Wars and failure to return all that was looted from China during WWII.  They did play it brilliantly in managing to industrialize without borrowing - the West GAVE them an industrial base - and loads of technology - in exchange for cheap labor.  They killed a few birds with one stone - putting millions of surplus ex-peasants to work as well - raising their standard of living (even at the lousy level it's at for factory workers it's better than the starving peasant's lot) while earning trillions for the state.


But sooner or later - after the collapse of the US Empire, you can bet they'll fall into the same old pattern - but by then there may not be anything worth ruling.



Bob's picture

Anything left worth ruling indeed.  Paul Craig Roberts is not the only guy saying that a Chinese and Russian "First Strike" financial war is the the only hope the world has to escape the otherwise inevitable dystopia America will impose upon the entire planet's population (except for a few oligarchs):

The viral scuttlebut is, however, that China and Russia have pretty much consumated a shotgun wedding and are aggressively moving forward with their own plan . . .

Payne's picture

Sounds like a Chinese copy out of the FED playbook regarding housing, CDS etc.

A Nanny Moose's picture

Those factories look like something out of Detroit.

junction's picture

If you want dead centipedes, you can have dead centipedes.

TeamDepends's picture

Confucius say: Don't fuck with eagle unless you know how to fly.

Incubus's picture

Um... how do I put this?


The dragon has wings.