If You Build It, They Won't Come... And In China They Are Now Leaving

When it comes to the programmed, centrally-planned Chinese economy, the academics who pre-determine the daily lives of over one billion citizens and report randomly generated gibberish when they have to validate to the world the success of their macro experiment, go straight and by the textbook. The same theoretical textbook taught in every Keynesian class which says "if you build it, they will come." Alas, as even the WSJ has discovered, when it comes to China, if you build it, they are no longer coming... and are in fact leaving.

Here is where central-planners everywhere should learn a valuable lesson: what makes sense on paper theoretically, almost never works out as predicted in the real world.

From the WSJ:

In theory, urbanization stimulates growth because city dwellers typically earn more than their rural counterparts, allowing them to spend more on consumer goods and services. For the government to realize that payoff, though, it must create jobs that will draw people into the cities. Tieling underscores the difficulty.


Among the few business owners lured to a development park in Tieling New City is Bo Yuquan, the middle-aged owner of a flooring store.


"Where are the people? There's no one here," said Mr. Bo. "I'll be out of business soon. My staff and I are discussing moving to Beijing to find work."

But all that was needed for jobs to flows, thriving businesses to flourish, and the urbanization myth to be perpetuated was even more empty cities: after all not only the Politburo but the Stephen Roaches said precisely this time and time again. Could so many well-respected people pardon academics, have been wrong?

Why, absolutely. Presenting Tieling New City:

When this small city in northeastern China launched a plan to build a satellite city six miles down the road, it got off to a promising start.


Urban planners spent millions of yuan to clean up surrounding marshland that had become a dumping ground for the city's untreated sewage. A pristine environment, they hoped, would help attract the businesses that would raise incomes and swell the population.


Four years later, Tieling New City is virtually a ghost town.


Clean waterways weave among deserted residential and government buildings. Housing blocks that won recognition from the United Nations for providing good affordable homes are almost empty. The businesses that were supposed to create local employment haven't materialized. Without jobs, there is little incentive for anybody to move here.


Tieling symbolizes the enormous challenges Chinese Premier Li Keqiang faces as he touts urbanization—a process analysts expect will see 250 million people move from rural areas to cities over 20 years—as the force that will ensure his country's economy keeps growing well into the future.


"Urbanization will not only drive tremendous consumption and investment demand, and create employment opportunities, but directly affect the well-being of the people," Mr. Li said in March during his first news conference as Chinese premier.


Mr. Li has yet to present a detailed vision of how to achieve his economic goals.

That's ok though, at least the algos were duped into BTFDing over and over on what was reported to be better Chinese data. All of it fake, manipulated and artificial of course, but data supposedly nonetheless.

In the meantime, the sad irony is that not only is the theoretical result not being achieved, but what is going on in practice is the opposite of what the central-planners wanted: deurbanization!

"With more and better job opportunities in higher-tier cities, many lower-tier cities have actually been experiencing a net outflow of population, while land sales [to home builders] there increased rapidly, exacerbating the housing oversupply," wrote Credit Suisse property analyst Du Jinsong in a recent note.


According to population data collected by Mr. Du on 287 Chinese cities, about two-thirds, mostly smaller urban centers, had fewer residents than people who were registered to live there, suggesting people have been leaving their home cities.

But the piece de resistance is that, as expected and as seen in the US and in all other "developed" nations, when faced with complete strategic failure, what are the authorities to do? Why double down of course.

Against all this, Tieling is choosing to keep building. The municipal government has rolled out plans to spend a further $1.3 billion on projects in the new city this year, including an art gallery, gymnasium and indoor swimming pool.


That is despite municipal finances coming under increasing stress.


"Financing costs are rising all the time, and raising capital has become even more difficult," the Tieling city government said in its budget forecast for 2013. "Some long-term problems and imbalances have accumulated in the management of the city's finances." It didn't say how it planned to fund the new buildings.


Cui Xinzi runs a stall selling leather jackets at the only shopping center in the new city. Despite having bought an apartment there three years ago, she still lives in the old city and commutes. Ms. Cui likes the idea of retiring to the new city but isn't optimistic its population will increase. "It still needs more time, but it's really hard to say," she said with a sigh. "They're building a new shopping center, so I hope so."

Sadly, the above story is a metaphor for the entire modern world: the "empty-city" economic paradigm has failed. And despite plouging countless liquidity to revitalize it, unsuccessfully, and instead of realizing the errors and letting an equilibrium form at a great loss to those who have benefitted the most over the past 5 years, the authorities do just one thing: keep kicking the can, hoping that this time it will finally be different.

And when the ability to kick is finally no longer there, the collapse that will shake the entire world: from Tieling New City, to the nearly $1 quadrillion in derivatives that frame the house of cards that is modern finance, will make the near apocalypse from September 2008 seem like a walk in the park.

Until then, and as we showed first in November 2009, this is what the hollow ghost core looks like behind the pretty faced from China to the US and back.



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