Why China's Ghost Towns Matter for Our Economy | Hacker News Reader

Why China's Ghost Towns Matter for Our Economy

theatlantic.com

23 pointsmvs21 comments

The symptom of empty residential developments was one of the first signs of the collapsing housing bubble in Ireland and in Spain.

http://www.vanityfair.com/business/features/2011/03/michael-...

http://www.nzherald.co.nz/markets/news/article.cfm?c_id=62&#...

http://www.guardian.co.uk/commentisfree/cifamerica/2010/mar/...

If China shows the same symptom, but on the scale of empty cities rather than just empty developments, the bursting of the bubble could be calamitous. Plenty of economically astute observers are concerned about this.

http://www.economist.com/node/18836400?story_id=18836400&...

There are already signs of new unrest in China

http://www.ft.com/cms/s/0/e0696f2c-98f9-11e0-acd2-00144feab4...

http://www.google.com/hostednews/afp/article/ALeqM5ht3xQPsLO...

in some of the most prosperous regions, and many social scientists in China are worried by the example of Yugoslavia, a country that split apart when regional economic disparities were less than they now are in China.

In my opinion, this article is worthless. Does it mention how much cities or houses don't succeed to get sold? No. Does it mention the percentage? No. Actually, it gives no numbers.

In any country of the world, you'll find cities, houses, building that are not acquired, for a reason or another. China has got more than 1 bn inhabitant, it's not unusual to find whole cities that are not alive yet. But this doesn't mean that there is a crisis or a problem; even a tiny one. A crisis when all the economy is heading toward that direction, and only numbers can prove that.

Also, for an article whose title has the form "Why Xes matter for Y," the article mentions only the most superficial causal relationships -- far short of what'd be needed for worthwhile economic insight.

http://news.ycombinator.com/item?id=2554833

That was my reaction too. Bit of a fluff piece. Here's an interesting link with some opinions from a commodities investor regarding China, and whether the ghost cities are a significant problem or not:

http://www.moneymorning.com.au/20110616/why-im-flying-the-fl...

He points out that China is urbanizing like mad (1 per cent a year) on top of 0.5 per cent population growth. At those rates, 50 million empty houses doesn't look so big. Whether there are other factors that prevent people taking up those apartments isn't clear though. Also I guess it depends on the financial situation of the developers. If there is a lot of leverage on those assets that are sitting idle and not being sold or generating income that must be hurting someone. Or perhaps the state owns them directly or indirectly, so ROI doesn't matter so much in the short term? I don't know.

Retail apartment buyers in China only borrow half the capital from the banks, but the developers who build them borrow all of the money from the bank, interest-free, based on their "guanxi" relationships with bankers. So instead of reducing prices on unsold apartments, popping a bubble, they and the banks collude to just let the empty apartment buildings sit there empty for years, until they sell. The property bubble might not burst for a long time.

Of course there's also social pressure on young unmarried males to buy apartments, because the girls won't marry them if they don't. I predict the banks will slowly lower the capital requirements, down to 30%, then 20%, then 5%, eventually to 0%. After that will come a Chinese version of CDO's, then, perhaps decades later, the bubble will burst.

Very interesting, thanks!

"In any country of the world, you'll find cities, houses, building that are not acquired, for a reason or another. "

Quite bold statement. I wasn't aware that western European countries would have whole cities, brand new, laying empty somewhere. Could you point some examples?

In any country of the world, you'll find cities, houses, building that are not acquired, for a reason or another.

Yes, the US had quite a few unoccupied suburban developments in the sand states around 2005-2008 (and they are still vacant today). I believe Ireland had similar phenomena.

I've been thinking about these empty cities, and it strikes me as an indication that the planners of the Chinese economy are expecting continued increase in the value of commodities relative to other capital. If they expect to need more urban housing and infrastructure in the future and also expect the price of commodities (and also labor for construction, perhaps) to increase significantly, it makes sense to build them now. Since China already keeps a lot of capital in the form of US treasuries, it makes sense that they would want to diversify their investments by also building up a surplus of physical capital such as housing and other infrastructure.

I thought part of why US housing speculators are so screwed is that each unoccupied and unmaintained building they own is rapidly deteriorating from mold and infestation and vandalism and shoddy boom-year construction quality without repairs. Could anyone build an entire ghost town that would last until it's needed, at a reasonable cost?

I was assuming the cities would become occupied within a few years, not left empty for a decade or more. The shift from rural to urban has been happening very fast in China. I think China is expecting almost 100 million additional city dwellers within the next five years.

And yet one of the images was captioned "Dantu has been mostly empty for over a decade"

I admit I know approximately nothing about how rapidly infrastructure deteriorates, detailed demographic trends in China, or the decision making process that allocates these resources. It still seems to me that there must be some rational justification for the excess construction, even if it is a misconceived idea. Someone in the system thinks the use of resources in building these cities has a purpose, and since the purpose does not seem to be immediate use, the idea of an investment or hedge is the explanation that makes sense to me. It's just an attempt to understand why these cities exist. Is there a simple explanation I don't know about?

The justification is economic growth. People are employed, new apparently valuable infrastructure is created, and GDP continues to grow. Why exactly China want's GDP to grow, I don't know, but maybe it hopes to get foreign investments that way.

The "allocation of resources" is driven by builders, investors, and home buyers, not "planners". The housing flats were built because someone thought they could sell them.

The story I've heard is that builders are selling the flats mostly to small real estate investors who are hoping to flip them or rent them out without necessarily understanding the market or the prevailing rental vancancy rate (which in any sane rental market will never get above about 6% or 7%). Think of your aunt and uncle who buy a condo for rental income and as a retirement property.

None of this is a problem until lenders start handing out free money and foolish mortgages. Or perhaps investors are choosing the least-worst investment - real estate in a flooded market might still be seen as safer than any other options that small investors in China would have.

Most of those units you see have been sold and are being sat on by speculators expecting them to go up in value since real estate is still appreciating like mad. Sitting in front of the news here in Shanghai this morning it posted a message that in 67 out of 70 cities home prices went up in May. That's even after government curbs and more restrictions being put in place on who can buy property, especially in the cities.

Most educated folks I've talked with here acknowledge they're sitting in the middle of a property bubble. They assume that the large down payment options will protect the banks and just hope that they got in early enough to protect their initial investment.

China should open their doors to Hollywood production companies. These places look perfect for zombie apocalypse movies.

I have a distant relative who is a developer in southern china and told me that he has been so busy he has no time for himself; He bids on land sold by the government, hire people to build an apartment on the land and the apartment gets sold out before it even finishes building! So, he then has to keep moving on to building new apartments.

Those ghost towns will keep springing up if there is nowhere for investors to put their money. Where else can they put it? There is basically negative interest rate with inflation being so high. If you were given a million yuan you wouldn't know what to do with it except to a. spend it or b. buy a house or stocks with it.

Seven months ago, analysts were predicting 2011 would be the Year of America.

That would be news to me. Which analysts were predicting that?

A documentary on the ghost cities/malls - http://www.youtube.com/watch?v=rPILhiTJv7E

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