Dateline: China's Ghost Cities

[K. A. Pital]

China does not have a command economy. The prices are not controlled by the Gosplan, they are set by the market. They have a mixed economy now, and have had it for quite a while.

Japan did build their share of useless shit during the "lost decade" (which can now be called "lost twenty years with no sight of future improvement").

[Vympel]

China does not have a command economy. The prices are not controlled by the Gosplan, they are set by the market. They have a mixed economy now, and have had it for quite a while.

Its a command economy only in the sense that they dicate "8% GDP growth!" and then regional governments set about manufacturing this meaningless growth with the modern equivalent of pyramid building, worried that they won't meet the target - hence the comment by the lecturer at that Beijing university that:-

“Who wants to be the mayor who reports that he didn’t get 8 percent GDP growth this year? Nobody wants to come forward with that. So the incentives in the system are to build. And if that’s the easiest way to achieve growth, then you build.”

Japan did build their share of useless shit during the "lost decade" (which can now be called "lost twenty years with no sight of future improvement").

Such as? Also:-

http://www.project-syndicate.org/commen ... 18/English

In any event, merely building useless shit isn't the problem - combine the housing crisis (which all these ghost buildings aren't helping) with growing social polarisation, you have some concerns.

[K. A. Pital]

Aside from housing, which is a bubble that Chinese government admits to existing (and even tries to lower prices in a command fashion, but that does not work too well), the incentive to "BUILD" is not harmful par se; they build high-speed rail, lots and lots of industrial plants and otherwise necessary and useful infrastructure.

[Fingolfin_Noldor]

Aside from housing, which is a bubble that Chinese government admits to existing (and even tries to lower prices in a command fashion, but that does not work too well), the incentive to "BUILD" is not harmful par se; they build high-speed rail, lots and lots of industrial plants and otherwise necessary and useful infrastructure.

I wouldn't say that, considering the ongoing investigation in the railroad ministry.

[montypython]

Issues with the railway ministry doesn't mean that the rail construction was an issue in itself, as it is something that will only grow in utility over time.

[Vympel]

Aside from housing, which is a bubble that Chinese government admits to existing (and even tries to lower prices in a command fashion, but that does not work too well), the incentive to "BUILD" is not harmful par se; they build high-speed rail, lots and lots of industrial plants and otherwise necessary and useful infrastructure.

Oh most definitely they build useful stuff, and that will stand them in good stead for the future. I'm thinking about more short to medium term problems.

[Pelranius]

Here's something from Daniel W. Dreizer.

China's hard landing
Posted By Daniel W. Drezner Friday, April 15, 2011 - 1:22 PM Share

In my last post I mentioned how China was encountering resistance to its rising power. Now, via Kindred Winecoff, I see a whole mess of reportage about China's mounting internal difficulties. In no particular order:

1) Nouriel Roubini has focused his Dr. Doom-O-Vision on the Middle Kingdom, and doesn't like what he sees:

China’s economy is overheating now, but, over time, its current overinvestment will prove deflationary both domestically and globally. Once increasing fixed investment becomes impossible – most likely after 2013 – China is poised for a sharp slowdown. Instead of focusing on securing a soft landing today, Chinese policymakers should be worrying about the brick wall that economic growth may hit in the second half of the quinquennium....

[N]o country can be productive enough to reinvest 50% of GDP in new capital stock without eventually facing immense overcapacity and a staggering non-performing loan problem. China is rife with overinvestment in physical capital, infrastructure, and property. To a visitor, this is evident in sleek but empty airports and bullet trains (which will reduce the need for the 45 planned airports), highways to nowhere, thousands of colossal new central and provincial government buildings, ghost towns, and brand-new aluminum smelters kept closed to prevent global prices from plunging.

Commercial and high-end residential investment has been excessive, automobile capacity has outstripped even the recent surge in sales, and overcapacity in steel, cement, and other manufacturing sectors is increasing further. In the short run, the investment boom will fuel inflation, owing to the highly resource-intensive character of growth. But overcapacity will lead inevitably to serious deflationary pressures, starting with the manufacturing and real-estate sectors.

Eventually, most likely after 2013, China will suffer a hard landing. All historical episodes of excessive investment – including East Asia in the 1990’s – have ended with a financial crisis and/or a long period of slow growth. To avoid this fate, China needs to save less, reduce fixed investment, cut net exports as a share of GDP, and boost the share of consumption.

The trouble is that the reasons the Chinese save so much and consume so little are structural. It will take two decades of reforms to change the incentive to overinvest.

Now, Roubini is enough of a persistent doomsayer that it would be easy to discount this argument -- if it wasn't for the fact that this jibes with the opinion of other China economy-watchers. This coming-bust prophesizing comes on top of arguments made by Barry Eichengreen, Donghyun Park and Kwanho Shin that as China hits middle-income status, it will hit a "middle income trap" of slower growth. (One interesting question is whether, as China encounters rampant inflation, its eventual decision to let the RMB appreciate will help ease some of these pressures).

2) Meanwhile, China's political leadership appears to be engaged in a full-fledged freakout over the Arab revolutions and any whisper of a similar phenomenon happening in China. Rising food prices are leading to price controls and an anxious government monitoring if/when more expensive staple goods lead to political unrest. That said, Chinese authorities seem to be on top of the whole crushing dissent thing:

According to Chinese Human Rights Defenders, an NGO, by April 4th some 30 people had been detained and faced criminal charges relating to the so-called “jasmine revolution”—an inchoate internet campaign to emulate in China recent upheavals in the Middle East and north Africa. Human Rights Watch, another NGO, reports that a further 100-200 people have suffered repressive measures, from police summonses to house arrest. This has been accompanied by tighter censorship of the internet, the ousting of some liberal newspaper editors, and new curbs on foreign reporters in China, some of whom have been roughed up....

Even more worrying, however, is the increasing resort to informal detentions, punishments and disappearances. These are outside the law, offering the victim no protection at all. The government now dismisses the idea that one function of the law is to defend people against the arbitrary exercise of state power. On March 3rd a Chinese foreign-ministry spokeswoman told foreign journalists: “Don’t use the law as a shield.” Some people, she said, want to make trouble in China and “for people with these kinds of motives, I think no law can protect them.”

3) As for China's assessment of its external security situation, the State Council released its 2010 White Paper on defense last month. As this East Asia Forum summary suggests, there's a slight change in tone from the 2008 white paper:

The introductory assessment of the ‘security situation’ section notes that the ‘international balance of power is changing,’ that ‘international strategic competition centring on international order, comprehensive national strength and geopolitics has intensified,’ and that ‘international military competition remains fierce.’ Despite this sense of turbulence, and as was the case in 2008, the 2010 paper assesses that ‘the Asia Pacific security situation is generally stable.’ But the additional observation in the 2008 paper, namely, ‘that China’s security situation has improved steadily’ does not appear in 2010. One possible reason is that the 2010 paper reports that ‘suspicion about China, interference and countering moves against China from the outside are on the increase.’

In light of all these developments, yesterday's Economist editorial should come as no surprise:

The view from Beijing, thus, is different to the view from abroad. Whereas the outside world regards China’s rulers as all-powerful, the rulers themselves detect threats at every turn. The roots of this repression lie not in the leaders’ overweening confidence but in their nervousness. Their response to threats is to threaten others.

Now, as someone who's pointed out these problems on occasion on this blog, you might think I'm pleased as punch about these developments. Nope. First, from an economic standpoint, a recessionary China eliminates a vital engine of global economic growth. Second, as I wrote back in January:

Exaggerating Chinese power has consequences. Inside the Beltway, attitudes about American hegemony have shifted from complacency to panic. Fearful politicians representing scared voters have an incentive to scapegoat or lash out against a rising power -- to the detriment of all. Hysteria about Chinese power also provokes confusion and anger in China as Beijing is being asked to accept a burden it is not yet prepared to shoulder. China, after all, ranks 89th in the 2010 U.N. Human Development Index, just behind Turkmenistan and the Dominican Republic (the United States is fourth). Treating Beijing as more powerful than it is feeds Chinese bravado and insecurity at the same time. That is almost as dangerous a political cocktail as fear and panic.

Developing.... in very disturbing ways.

http://drezner.foreignpolicy.com/posts/ ... rd_landing

The most apparent flaws is that Dreizner 1) In order for China to hit the "BRIC" wall, consumption will need to stop rising 2), assumes that the CCP will keep price controls for any meaningful time and 3) expresses a very simplistic view of China's Asian foreign and security policy in this piece.

[Chirios]

The most apparent flaws is that Dreizner 1) In order for China to hit the "BRIC" wall, consumption will need to stop rising 2), assumes that the CCP will keep price controls for any meaningful time and 3) expresses a very simplistic view of China's Asian foreign and security policy in this piece.

Don't forget that this has historical backing. China has historically had problems with overproduction, because the coastal regions always develop much faster than the interior, leading to low demand from the rural regions and ridiculously high production on the coast. It's been this way since the Song dynasty. All that needs to happen for China to hit the BRIC wall is for consumption to rise too slowly.

[Pelranius]

The most apparent flaws is that Dreizner 1) In order for China to hit the "BRIC" wall, consumption will need to stop rising 2), assumes that the CCP will keep price controls for any meaningful time and 3) expresses a very simplistic view of China's Asian foreign and security policy in this piece.

Don't forget that this has historical backing. China has historically had problems with overproduction, because the coastal regions always develop much faster than the interior, leading to low demand from the rural regions and ridiculously high production on the coast. It's been this way since the Song dynasty. All that needs to happen for China to hit the BRIC wall is for consumption to rise too slowly.

I was not aware that the coastal areas in the Dynastic times were able to produce such large surpluses whose inability to be exported affect their political economy. Do you have any sources on that?

[Chirios]

The most apparent flaws is that Dreizner 1) In order for China to hit the "BRIC" wall, consumption will need to stop rising 2), assumes that the CCP will keep price controls for any meaningful time and 3) expresses a very simplistic view of China's Asian foreign and security policy in this piece.

Don't forget that this has historical backing. China has historically had problems with overproduction, because the coastal regions always develop much faster than the interior, leading to low demand from the rural regions and ridiculously high production on the coast. It's been this way since the Song dynasty. All that needs to happen for China to hit the BRIC wall is for consumption to rise too slowly.

I was not aware that the coastal areas in the Dynastic times were able to produce such large surpluses whose inability to be exported affect their political economy. Do you have any sources on that?

can't remember where I read it, sorry.

[fgalkin]

http://www.newgeography.com/content/002 ... city-alive

Zhengzhou, Henan, China (March 28, 2011): In December, London’s Daily Mail reported that the Zhengzhou New Area was China’s largest “Ghost City.” A visit to the Zhengzhou New Area indicates exactly the opposite. Chinese “Ghost Cities” are large areas of new development that are virtually unoccupied. The most famous example is Ordos, a new and reportedly empty city, built to replace an older city in Inner Mongolia.

Zhenghou is an urban area of approximately 2.5 million population and is the capital of Henan province. The Zhengzhou New Area is located in the northeastern quadrant of Zhengzhou. It is circular in design, with two parallel roads, high-rise condominium buildings on the inner ring and commercial buildings on the outer ring. The interior of the circle includes the Henan Arts Center and a skyscraper that is under construction. A new high speed rail station is under construction to serve the new Guangzhou to Beijing line. The station is to be one of the largest in Asia.

Our visit revealed anything but a Ghost City. Granted, no-one would mistake the traffic for Beijing Third Ring Road volumes, but virtually all of the parking spaces were taken and there was traffic on the streets (Figure 1). That ultimate indicator of Chinese urbanization, the availability of frequent taxicab service was well in evidence. Two of the city’s bus rapid transit lines serve the interior circle road, again indicating a substantial threshold of non-ghost urbanization.

There were people on the sidewalks, though not the numbers typical of an older, more dense section of a Chinese urban area (Figure 2). It was clear from the laundry hanging in glass enclosed patios that many of the condominiums were occupied, though it is to be expected that many would not be, given the Chinese propensity to invest in multiple residential properties (a tendency the central government seeks to curb). Many of the commercial skyscrapers were occupied, and some were still under construction. There are also shopping centers, small stores and fast food restaurants.

Zhengzhou New Area is intended by the developers to become the new central business district for Zhengzhou. There is much more planned than this first phase. Eventually, the Zhengzhou New Area is intended to cover 105 square kilometers (41 square miles), generally further to the northeast. City maps already show the planned street pattern, not unlike 19th century maps of some US cities.

In short, the Zhengzhou New Area is alive and not a Ghost City. It may well be that it took longer than expected for the place to come alive. But it is clear that the life of the Zhengzhou New Area began more than four months ago.

Have a very nice day.
-fgalkin