China's Ghost Cities

The ghosts that haunt China’s economic landscape

MSNBC,

26 April, 2012

SHANGHAI, China -- It can take two or three hours to drive from bustling Shanghai to the sleepy streets of Thames Town, a new housing development built in the style of an English village complete with quaint pubs, red telephone boxes and statues of Harry Potter and James Bond. There's even an Anglican Church, though not a functioning one.

All that's missing are the people.

Thames Town was completed in 2006, cost a billion dollars to build, and was designed as home for 10,000 people. But shops and restaurants are boarded up, their doors chained.

Thames Town is one of the more bizarre examples of the madness of a construction frenzy and real estate bubble that has left the country with an estimated sixty four million empty homes. It was fuelled by easy money and rapidly rising prices.

Some economists see it as the biggest property bubble of all time - entire ghost cities built on speculation.

China reports slowest growth rate in 3 years

"Empty roads, empty buildings, empty neighborhoods, empty cities - all over China," says Gillem Tulloch, Managing Director of Forensic Asia, who has traced the spread of the ghosts using Google Earth.

When I last visited his Hong Kong office, we sat in front of a big computer screen on which he zoomed in on city after city, row upon row of empty apartment blocks, lining deserted roads. All have what look like government buildings, museums and universities - the amenities of modern cities, but few cars or people to be seen.

By China's own estimate, there are twenty new cities being built each year. One recent housing development was designed to look like a village in Austria.

And it isn't just homes that lie empty: In the southern city of Dongguan, the New South China Mall, once touted as the world's largest, has been ninety nine per cent empty since it opened in in 2005 – although gondolas are still at hand to offer visitors a cruise down its Venetian-style canals.

More recently, property prices have started to fall after the government took belated measures to end speculation. In some places, construction has slowed or ground to a halt. Construction equipment companies are struggling and there are reports of construction workers being laid off.

The problem for the Chinese government is that construction is a major component of GDP. Wasteful and mad though it may seem to outsiders, it has helped pump up growth figures, particularly after the 2008 financial crises, when the Chinese government injected into the economy a stimulus worth nearly US$700 billion. Much of that money went straight to those ghost towns.

Local government has come to rely on rising land prices for its funding, and local authorities have run up huge property-related debts. Nobody quite knows how exposed China's banks might be.

This is the background against which today's GDP figures should be seen. A lot of economists think the figures are pretty dodgy, and don't properly reflect the reality on the ground, but it’s still a significant slowdown by Chinese standards. And it poses a big dilemma for the government.

More savvy ministers know that property represents a dangerous bubble, and wants prices to fall further. They also know that the Chinese economy needs changing - re-balancing in economist-speak - away from wasteful construction projects and exports and today's domestic demand. That will also do a big favor to the world economy.

But with growth dipping below the psychologically important eight per cent level, and the communist party credibility on the line, there'll be a real temptation to open the financial taps again to boost the growth figures. The main impact of that will be to keep Gillen Tulloch busy as he looks at yet more ghost towns, delaying the day of reckoning for China’s economy