Infrastructure 'Stimulus' - Chinese Ghost Cities & The Big Money Drain

Tyler Durden's picture

As President Trump's "Infrastructure Week" comes to an ignominious end, NIRP Umbrella's Alex Deluce reminds us that spending money on bridges to nowhere and cities of the future is anything but the stimulating panacea it is talked up to be...

Is a Chinese credit bubble in the cards? Well, it will be interesting to see if China’s authorities can get through the unwind of US $3 trillion worth of excess credit and the distressed debt on banks’ balance sheets.

From 2009 to 2016, more than 10 trillion of Chinese investment was thrown at infrastructure, ghost cities, and corruption thanks to a helping hand from the Chinese banks and foreign lenders eager to participate in the Chinese growth story.

In fact, hundreds of new cities in China are essentially empty. The hope is that rural population someday move in.

Roughly 40% of the 300 million Chinese expected to move into a town by 2030 will mostly be moving to smaller cities in the “chengzhenhua” system.

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As OfTwoMinds' Charles Hugh Smith recently explained, building bridges to nowhere isn't just a waste of money in the present; it saddles the economy with productivity-draining costs for decades to come.

If there is anything the political left, right and center can agree upon, it's the lasting benefits of spending more (borrowed) money on infrastructure: roadways, rail lines, airports, seaports, pipelines, dams, electrical lines and so on: the physical networks of advanced civilization.

That Roman roadways constructed 2,000 years ago are still visible illustrates the longstanding value of reliable infrastructure: Roman political control and trade depended on roadways and sea transport to tie the sprawling empire together.

This is the basic assumption behind the notion that virtually any and all infrastructure spending will create value far into the future.

But is this really true? Does rebuilding and/or adding infrastructure create economic value?

To answer, we need to look at two issues: productivity and cost-benefit.

Infrastructure creates new value when it boosts productivity, generally by lowering costs of moving goods, energy, etc.

The value created by increased productivity must far outweigh the cost.

Consider the classic "bridge to nowhere" infrastructure project: a bridge is constructed between a sparsely populated island and the mainland. The payoff is a handful of residents are spared the time and inconvenience required to ship their vehicles between the island and mainland on a ferry.

Does this time savings translate into increased productivity, or merely extra leisure? And what was the cost to gain this very modest increase in leisure/productivity? Spending tens of millions of dollars on the bridge actually reduces the productivity of the entire economy due to the opportunity cost: the millions of dollars could have been more productively invested elsewhere, and spending the money on a low-value-creating bridge deprived the economy of the capital, labor etc. that could have been better invested in productivity-generating projects.

As correspondent Bart D. explains, opportunities to boost productivity via new infrastructure are scarce:

Why anyone believes that building 'infrastructure' somehow promotes economic growth in this day and age (as though it were 1950’s) is delusional. The reason 'infrastructure' worked back then to build economic activity was simply because it lagged behind the burgeoning private industry. These days there is no ‘hard industry’ left to 'lag behind.' Building a bigger road between the suburbs and the Mall won’t create prosperity for anyone except the owners of the road building company. Unlike a 1950’s road linking a steelworks to a port or a Beef farm to a meatworks."

In other words, when commerce already exists but is cumbersome, infrastructure that smooths the flow yields enormous productivity gains.

One example of this from history is the construction of the first stone bridge across the Seine River in Paris. This single structure changed commerce, tourism and social relations in the city, as it enabled two carts to pass side by side and enable pedestrians to cross the river safely.

For more on this impact of a single durable, commerce-enabling bridge in Paris, read this book: How Paris Became Paris: The Invention of the Modern City.

Replacing existing infrastructure is also problematic. It may well be necessary, but since it won't boost regional productivity (since it's merely replacing existing structures), it acts as a tax on the regional economy: if the replacement costs $1 billion and generates no real gains in productivity, it is in essence a tax that bleeds capital from the economy that could have been productively invested elsewhere.

Rebuilding a bridge generates higher spending on materials and wages, but if it doesn't generate additional productive capacity equal to its cost, this additional spending (in our world, always paid for with borrowed money that accrues interest for decades to come) runs out once the project is complete, but the costs of paying for the replacement continue on for decades.

As a rule of thumb, if a replacement bridge costs $1 billion, it will cost users and taxpayers $3 billion over the life of the loan/bond that funded the project.

Borrowing immense sums to spend on infrastructure that doesn't boost productivity actually cripples an economy by channeling scarce capital and tax revenues into projects that only boost spending for a few years at best, while the costs of borrowing the money pile up for decades to come.

In other words, building bridges to nowhere isn't just a waste of money in the present; it saddles the economy with productivity-draining costs for decades to come.

This high future cost for no-productivity gain infrastructure effectively bleeds the economy of income and capital for decades, for the temporary sugar-high of infrastucture spending today.

A rigorous cost-benefit analysis might conclude that some aging, marginal infrastructure should be torn down rather than replaced. If self-driving vehicles will reduce vehicles on the roads significantly-- and some estimates range as high as an 80% reduction in traffic--perhaps we should wait for this technology to mature before spending trillions of dollars on infrastructure that is about to be under-utilized.

We should instead ask: where are the big gains in productivity going to come from going forward? The answers to that question should guide our public and private investment decisions.

In the meantime, we should question whether proposed infrastructure spending is actually an "investment in our future" or just another bureaucratic boondoggle designed to enrich crony-cartels and justify rising bureaucratic budgets:

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Bigly's picture

Omega Man

But no classic cars seen there....

knukles's picture

Say ...  all them folks keep demanding equality, there're a whole buncha empty cities over there in which they can luxuriate at the Chinese Common Man's Expense.
Communist Utopia, Worker's Dreamland
That, fried chicken, double cheeseburgers, watermelon and Mao

Perimetr's picture

There is another way to look at this.

When the global financial system implodes, China will be left with infrastructure.

We will be left with mortgages, empty malls, rental cars, no industrial base, land ots of hungry people.

Do you think China might have enough people to fill up these cities one of these days?

 

Twee Surgeon's picture

How old is that video now ? 5. 6. 7. 8 years old ? The Chinese construction companies got huge Loans and subsidies for building "Housing" all over China, not just Ghost cities. There are House shells in Concrete in every Chinese village.

Where did the money go ? Vancouver, Arcadia and Cali west. Ghost cities in their own right soon.

open calender's picture

I'm making over $7k a month working part time. I kept hearing other people tell me how much money they can make online so I decided to look into it. Well, it was all true and has totally changed my life. This is what I do... http://bit.ly/2jdTzrM

fx's picture

The article is full of crap. If the author had bothered to look at the real world he would have found that in the developed world investment opportunities to put real capital to really practical use get ever scarcer. Me thinks wasting trillions on fighter aircraft, desert wars and aircraft carriers are by far a more important issue and cist to society.

We could discuss, of course, if the invention of the smart phone and the expansion of the wirless internet has really enhanced productivity or whether it has decreased it and made society dumber and addicted to digital garbage and ever more dependent on technology.

That being said, in many cases business starts to come in and expand in places where proper infrastructure has been put in place. Not every bridge in China is bulid into nowhere. As for the ghost cities - how many ghost appartments are really out there? Shówing the same old vids year after year speaks of echo chamber rather than an informed view of reality. enough said.

Antifaschistische's picture

your point is a good one...but the question for China will be....will the operating/maintenance cost of poorly built infrastructure exceed it's marginal value?  From what I've seen in China the answer is no.  They will not pay to maintain this infrastructure.  When systems sit empty and ununsed they will still deteriorate...sometimes even faster...and that's even assuming the scavengers don't move in and start ripping out metal.  Once that happens...it's done.

fattail's picture

Are you implying the application of capitalism to a former communist collectiveist state might have been corrupted by the layers and layers of bureaucracy in which any cog could be bribed and the lack of respect for the rule of law.

Maybe those concrete apartments remain unoccupied because the illiterate farmers saw how they were built.

 

MarkD's picture

And what would US look like without EBT and subsidized housing, cars, corporations ......etc.. 

How many folks in a grocery store are buying food without some sort of gov subsidies..... whether it be via farm or foodstamp subsidies.

We are a welfare state.

China will go that route sooner or later.

daveO's picture

The Chinese don't live in those cities because they farm for themselves. A near total waste of money driven by corrupt bureaucrats.

Saucy-Jack's picture

The Chinese were smart to do this.

They built infrastructure and cities with US dollars that are going to be useless in the next ten years.

What else were they supposed to do with their trade surplus?

daveO's picture

They invested their surplus into foreign bonds to manipulate currencies. Those cities were built w/ borrowed fiat predicated on a continuous and growing trade imbalance. The trade situation is unbalanced. Most of those buildings will fall into disrepair.

Benito_Camela's picture

Nobody is talking about building fake cities or bridges to nowhere in the U.S. 

Justin Case's picture

The Gov't built roads and towns to nowhere here in Canada during the depression. I bought a book called ghost towns in Ontaio and went to visit some of them. One place I saw a 15 inch maple tree growing through the frame of an abandoned dump truck with the box missing. Saw mills and delaptated houses, Roads with grass growing through the cracks.

itstippy's picture

High speed passenger rail where it makes no economic sense FTW!

In my area we're spending multi-millions to widen and improve the Interstate so city folks can get to the Indian casino more quickly.  The Indian casino is considered a vital part of the critical "Gaming Industry".  What the Hell is "industry" about a gambling casino?

Benito_Camela's picture

Unfortunately that kind of "industry" is all we have left (or almost anyway). You don't have to look past Wall Street to see the big brother "financial services" gaming industry at work. Taxpayer insured casino gaming and MIC jobs programs are probably 80% of the U.S. economy. Shit, as far as passenger rail goes, I'd love to have the option both within my city and to get elsewhere. The wife and I took an 18 hour AamTrak train trip a few years ago to get across the state (would have been an 8 hour drive) and it was pretty miserable. The NIMBY types in my city keep voting down light rail (granted, all the proposals have been flawed). 

giorgioorwell's picture

Except for the fact that the bridges and infrastructure we actually use in the US is falling apart, and not "Ghost City" infrastructure. Some parts of this Murica have worse infrastructure than Kazahkstan or Honduras.

BorisTheBlade's picture

Kazakhstan and Honduras aren't exactly close in their infrastructure development. Borat and all, but Kazakhstan built new capital from scratch, called Astana.

SunRise's picture

Millions of empty Flats in the cities where the large industry buildings are located.  Gee,  if there's a war,  just use the high speed rail and instantly move the workers into the empty cities and factories.  Whatever else China is doing, they are prepared for war-time production.

screw face's picture

...hmm those cities may come in handy, soon!

koan's picture

What a bunch of bullshit, you have to maintain your existing infrastructure in order to maintain position or go forward.
Quit using Chinas scams to illustrate US problems, fix our roads and bridges.

DEMIZEN's picture

those cities would definetly come in handy in US there is countless of homeless roaming the streets and infrastructure desperately need an upgrade. Ill soon need a humvee to commute to other areas of the city. LA kinda looks like kabul without army outposts, central and san gabriel valley are some heavy duty postapocalyptic shitholes.

Some people tell me there are places that look much worse than that.. I dont even want to know. If I drive into the desert past palmdale there are encampments that look just like johannesburg soweto And I thought Johannesburg was bad. looks just the same, except no naked kids running around.

Antifaschistische's picture

The problem in American isn't homelessness...it's Parasite Nation.   None of the parasites would move to these places unless you include a bunch of freebie stuff and a 3 meal a day soup kitchen.

DEMIZEN's picture

it is the society that creates parasites. they want them to depend and keep them separated.

factorypreset's picture

By parasites do you mean bankers, the MIC, politicians and the others who defraud the govt in order to get free money?  Or do you just mean the poor people?

Farqued Up's picture

Could someone please educate us why the Chinese dumped US Treasuries and now are restocking them. Why?

Eventually the bridge to nowhere will offer a prime location for expansion due to easy access to the "other" side. It will turn out OK. We Americans cannot critique one bit a country for any seemingly worthless investment in the present when our lowlifes are spending trillions on explosives and killing millions over the life of the bridge to nowhere. Eliminate the Department of Offense and Destruction. Digging and refilling holes would be much more productive, at least we wouldn't be destroying other people's infrastructure and wasting our valuable minerals required to build fast shit.

Pacman7293's picture

Easy. Cuz they sold them to make a statement.

daveO's picture

Then the aircraft carriers and THAADs showed up!

House_Wife's picture

But perchance the Petrodollar must be protected with threats of violence from said department. 

chiswickcat's picture

That video of empty Chinese cities is about 5 years old.

roddy6667's picture

Common to articles of this type is a link to a Time Magazine article about the Ordos Kangbashi "New City". The video is from 2010, but it's hard to see any date-most people assume that it is current. The video claims that the "city" was built for one million and only has 30,000--a ghost city, a testament to the failure of China's infrastructure building. Actually, the project is not a city, it is a district, a neighborhood. Yes, it was originally planned for one million, but with the worldwide collapse of coal prices and then China cut back on coal to clean up the air, it was eventually built to house 300,000 (by Chinese standards). This is never nmentioned in these hit pieces. Almost 100% of the homes are sold, most for cash to local buyers, and most before they were finished. The builder paid back his government loan and moved on. It is a a 20 year project that is only 7 years old. It is a financial success.

50% occupancy by Chinese standards is more like 60% Western style. It is a functioning, alive community. Yet, writers continue to flog it as a "ghost city".

You have to wonder what is the rationale of these writers. Is it merely Yellow Journalism where Bad News Sells, or do they have a larger motive?

DEMIZEN's picture

it is the old people, anything more than a bowl of soup is excessive spending.  it is their old mindset and age that forces them into these defensive financial strategies. they usually have what they need and dont care if others dont. That how they see the world and will always bend the reality to fit their narrative.

When my granpa died we found money everywhere, in the jars, behind the firewood, fireplace, under the bed mattress in the pillows. there was probably some the walls too but couldnt find it. he never bought me even the cheapest icecream motherfucker, just give me some pointless, absolutely useless and disconnected advice.By the time we found the money, we didnt need it anymore an inflation destroyed most of its value. it would be a great help to my parents when we were growing up. I remember we had some tough times, when shit collapsed. When my father went and ask him for money he said: you made these babies, you raise them up. 

Now if he bought some gold that would be better as many here would argue, but we didnt need the money anymore, at the time we found it. we were grown ups packing plenty with parents retired. I dont even know where his grave is. I could find out i guess, but I figure he enjoys being alone lol.

83_vf_1100_c's picture

You are whining about g-pa not giving you money? You do realize he earned it and probably did not have money thrown at him when young.  I don't know the deatails, maybe he was a selfish old prick, maybe you were a lazy young prick. You did not starve and hopefully learned how to survive without so he gave you that. Give a kid a car, they will wreck it. Make them work hard for the car and they will take good care of it, unless they are stupid.

DEMIZEN's picture

these are just facts. there is always at least two sides to every story. was not trying to tell a fable,  what it doesnt kill you doesnt always make you stronger.  

i hope you get my point here: the money was wasted and was essentially allocated to someone else outside of our family. screw that kind of family, charachter treats aside. 

Stinkytofu's picture

these are often silly articles written by "helicopter" journalists with no experience with china

aside from the panda express buffett.  they fly in to beijing, spend three nights gathering

background info (drinking in hotel bar), then take express train to view city for an hour or

two (with paid to be negative tour guide!) before returning to complete consumption of

copious amounts of background info.

 

you see the same thing with the "horror stories" from undercover reporters sneaking into

foxconn plants.  oh my gawd!  squat toilets!  the horror! the horror!

 

they fail to realize china is still centrally-planned.  the gub'mint can decide to build a city,

they can build a city, and only THEN move in a couple million peasants.  these are not

organically-grown cities that have grown from a tiny fishing village from ancient times.

they are instant megalopolises plopped down in the middle of a great big empty.

Ghost who Walks's picture

Hi Roddy,

I recall that you are resident in the PRC.

This article is incomplete in the sense that it talks about the empty cities but does not describe the provinces where they are located.

I enjoy reading Professor Michael Pettis and his quest for working out if there is the correct level of investment or if the construction is ineffective because it is in the heavily built up eastern river delta regions.

As a few commentators note that this might be a good investment and others note that without ongoing maintenance this investment may be sub-optimal. You will be aware that while the buildings are complete and the apartments are sold there is no current occupancy because the apartments are shells awaiting fitout from newly married couples.

The empty city syndrome exists because it is much easier to construct new buildings in a green-fields setting. Yes, I saw lots of urban renewal in Chinese cities but it is less efficient and more expensive to do this because of the sizing of the existing utilites within current cities. It is very hard to convert from the 7 to 9 story apartments to the 34 floor units without completely changing the buried services in existing cities.

What other reasons do you see for completely new cities?

roddy6667's picture

China is a few years into a 20 year plan to move 300 million rural residents to the cities. They will all need new homes. The farms are much too small and inefficient. A lot of the farmers are using hand tools like 10,000 years ago. This subsistence farming does not provide food for anybody except the farmers themselves. It is a formula for grinding poverty. When suitable manufacturing and service jobs are made for these people, thye will be moved. Their increase in standard of living will cause a huge increase in demand for consumer goods. This is part of China's plan to be less dependent on exports and more on domestic demand.

Also, most of these people, even the poor in the cities, heat with coal in very inefficient individual stoves. This is a large part of the air pollution, especially in the Beiing area. A large community heating plant, even though powered by coal, is a much cleaner option. The only practical way to do this is complete urban renewal. At the same time, the roads, electrical grid, gas, telephone, cable TV and all that can be modernized in one fell swoop.

Some outsiders doubt that this big of a move can happen, that it is massive overreach. Not true. Already 200 million of these people are in the cities as construction and factory workers, living in barracks style temporary housing. These are the two story buildings with red or blue roofs you see surrounding every construction project. These people  are separated from their families and send money back to the village. They would love to have a permanent job and have their families join them. The government is not forcing them, they are very willing to live in a modern home, have a decent job, and have education and medical care available to their families.

China is building the homes before they are needed. They don't want to have tent cities and people living under highway overpasses when the time comes to move. The housing is made of steel-reinforced concrete. It doesn't need any more maintenance than a bridge abutment. It can sit empty for decades if necessary without degrading. There is no property tax in China, so the holding cost of en empty unit is nil. 

These are two of the reasons for new home construiction.

trueFacts's picture

...crap, we should have sold the chinese our own ghost city ...Detroit

DaveA's picture

Looks like a dystopian sci-fi flick -- as their city collapses into ruins, protesters demand windmills.

When Europe was being ravaged by the bubonic plague, bands of shirtless men marched through the streets scourging themselves to atone for whatever sins God was punishing the people for.

In either case, it's the "Don't just stand there, do something!" mentality.

Megaton Jim's picture

The nigger muzzies are already there!

RichardParker's picture

Screw infrastructure!  They should build millions of Jaguars! 

The end result will be the same. Besdes a Jag is portable wealth. LOL

https://mises.org/library/jaguar-inflation

http://www.elliottwave.com/Articles/2016/03/28/23/44/is-deflation-still-...

 

Peterman333's picture

Jags are persnickety but I have always liked them, well not sure the Ford years did anything for them but that's in the past.

Lost in translation's picture

Forgive the hyperbole, I realize I'm stretching things, but...

Seeing the American media (60 Minutes, et al) mock and ridicule the Chinese for building empty cities increasingly reminds me of the scoffers who mocked Noah as he was building the ark.

If the self-righteous, self-absorbed purveyors of fake news in the US had a gram of wisdom in their pea-brains, they would ask, "what are the Chinese (and the Russians) getting ready for - why are they building these things?"

The Washington/New York/San Francisco clique ruling America is like unto a luxury penthouse of partying grasshoppers, too drunk and too high to notice the snow beginning to fall outside their window.

(hat tip to Aesop)

Posa's picture

Libertarian twaddle... If the water system of a major US city goes the way of Flint... it WILL affect productivity and output...  replacing aging infrastructure is justified as avoiding a massive opportunity cost...

As for the Chinese, they stupidly unleashed an orgy of speculative asset inflation to sate the cupidity of their Party kleptocrats... since the Chinese population is wretchedly housed...certainly there should be no empty structures in large urban centers... if they are empty, then loans should be called in, the towers put into receivership and opened up for social housing. The population will be grateful.

Banks with bad mortgages can either be euthanized or recapitalized. Gambling speculators will take a hair cut but maybe debt gets converted into equity... Problem solved.

daveO's picture

They were directed from on high to build, build, build. If they call in loans, that will show up as economic contraction. The fraudulent bureaucrats won't have it.

Posa's picture

By eliminating debt, economic activity can resume and not be constrained by debt limits