China’s Ghost Cities – a bubble waiting to burst.

From Journeyman Pictures

In the world’s most populated country there are dozens of empty cities and more are being built every year. Is China’s ‘build-mentality’ good urban forward planning or an economic bubble that’s about to burst?

Tianduchenga, a near deserted replica of Paris complete with its own Eiffel Tower, was meant to attract new residents and businesses. But the new businesses are struggling to survive. “There aren’t many people here; our business is volume-based”, says the owner of a takeaway lunch shop. Meanwhile, in the Lanzhou New Area a range of 700 mountains has been leveled and demolition of houses and forced relocation is underway to make space for a new 130,000 hectare metropolis. According to Li Tie, who heads the country’s top economic planning agency, the federal government “must stop any fanatical actions by local authorities who blindly and hastily implement unreasonable urbanisation measures”. But urbanisation expert Tom Miller rejects the claim that China is on the brink of a property crisis. “Imagine China as bubble wrap. Some of those bubbles within it might burst. But in places like Shanghai there is massive demand for housing.”

China’s Ghost Towns – 50 million homes empty.

Following on from a previous post on the Chinese Property Market. Property is the principle source of investment for most Chinese, who do not trust their banks or the stock market. But fears of a serious real estate slump are growing as about 50 million homes are empty. Chinese investors are therefore looking to invest in property markets overseas – Australia, New Zealand, USA to name a few. See video below from Al Jazeera.

Is China going down the Keynes or Hayek route?

You will no doubt have seen the Keynes v Hayek Rap which was produced by econ stories. Now the debate turns to the Chinese economy – which of these economist’s policies is more prevalent? The Economist Free exchange column addressed this issue recently.

In order to maintain the level of economic activity in an economy Keynes believed in investment spending to maintain aggregate demand and employment. However, Hayek believed that investment spending might be directed in the wrong areas and would leave the economy poorly coordinated and workers stranded in the wrong jobs. Economist Andrew Batson has argued that Hayek seems to be gaining the upper hand in the battle of ideas as China is now keen to avoid the Hayek malinvestment even if there is less aggregate demand and growth which Keynes favoured. As mentioned in previous posts there has been huge investment in China in areas that normally stimulate growth in downturns – eg. creation of new cities or infrastructure projects.

There are others that say the Chinese economy has areas of its infrastructure that need to be developed. Cities like Beijing and Shenzen are congested and need investment spending on them. Although Hayek believed that malinvestment would result in a worse downturn what is different in China is that their high investment is backed by even higher savings. This means that investment projects don’t need to generate high returns in order pay back external creditors. According to The Economist the real cost of malinvestment is with the empty shopping malls, vacant apartments etc when there are poor medical facilities and overcrowding in housing. Might a more market approach be a better driver of the economy rather than that of central planning?

China’s Ghost Cities

There has been much mention in economic news of a potential housing bubble in the Chinese economy and ultimately a hard landing. This for China would be a GDP figure of around 6%. The worry is that sales of new residential buildings, measured by floor space sold in the chart, have fallen significantly over the last several months, although it may not be going into free fall with March delivering some improvement. Rodney Dickens of Rodney’s Ravings talks about the sheer scale of the numbers is staggering (e.g. at the peak over 150,000,000 sqm of floor area started per month). The charts show how much higher the floor area of building started has been relative to the floor area sold since 2009. On average since January 2009 11,470,000 sqm has started construction each month while 8,569,000 sqm has sold per month. We assume these data are on a comparable basis. This means starts have been running 34% ahead of sales each month on average for over three years, which fits with there being reported to be something like 64m vacant new apartments.

According to Patrick Chovanec (Associate Professor of Practice at Tsinghua University’s School of Economics and Management in Beijing) China’s developers are playing out a kind of prisoner’s dilemma:  rush to complete, in hopes of cashing out.  But while supply keeps going up, demand is going down.  In late March 2012, a central bank (PBOC) survey reported that only 14.1% of Chinese consumers were looking to buy a house in Q2, the lowest level since 1999.  Only 17.7% expected home prices to rise in Q2, and 62.9% said they still consider prices to be too high.  So all those rushed completions only add to the glut already on the market, driving prices down further and giving buyers — investors and aspiring residents alike — all the more reason to hold off for a better deal.