The size of a problem matters

Dominique Fong at The Wall Street Journal has checked in on Ordos, Inner Mongolia, and found that China’s most famous ghost town–the new district of Kangbashi–is still, well, pretty ghostly:

Local officials had hoped to attract a million people to the new area, nearly matching the size of the old city 20 miles away. Architectural showpieces—a museum in the form of a giant metallic bean bag, a library resembling a shelf of books, a sports stadium reminiscent of a modern Coliseum—were built as attractions. Officials have since reduced their population goal to 300,000, and they are just halfway there. An early resident, Hu Richa, has been waiting seven years for more neighbors. Still, he says, “There’s barely anyone living here.”

The city has spent 14 years planning, erecting and maintaining Kangbashi, which has the distinction of being one of China’s best-known “ghost towns”—gleaming but sparsely populated new urban centers adjacent to older metropolises. Built by the dozen across the country, the new areas reflect—and were meant to accelerate—China’s economic boom. As the country’s growth has slowed, many of them have become serious liabilities, deep in debt, with little prospect of full occupancy anytime soon. …

According to a study by Lu Ming, a professor at Shanghai Jiao Tong University, 272 new districts across China have been built with borrowed funds near existing cities. Other researchers, using different definitions for ghost towns, find smaller numbers, but all agree that there is a serious problem.

While I don’t really disagree with anything in this piece (in which one of my colleagues is quoted), I have to say that I find the limited analysis a little frustrating. The ghost town phenomenon has been extensively reported for several years now, and yet the Chinese property market strangely refuses to collapse in the way that these reports always suggest it should. Construction starts have been growing pretty consistently for the past two and half years, and have actually accelerated some this year.

At this point in the China story I feel like saying “there is a serious problem” and stopping there is not really sufficient. It is of course not wrong to point out that China has lots of capital misallocation and has been heavily reliant on expanding debt to drive growth. But many people have correctly identified problems in the Chinese economy, and yet they have not been correct about the trajectory the economy would take.

In my view, outside observers of China have not been so good about understanding 1) the actual size of problems, 2) the constraints on policymakers’ ability to address problems. It is easy to suggest that problems are extremely large or cannot be easily solved, but it would be better to put more effort into identifying just how big problems are and how they might be addressed.

The ghost town phenomenon is a good example where the relative size matters a lot. Both anecdotal and statistical evidence suggests these huge clumps of unused housing are concentrated in northern China, in areas more reliant on resoure extraction and heavy industry. The property markets in these areas are certainly troubled, but they are also a relatively small part of the national total. The construction and sales recovery of the last few years has been driven mostly by southern and central China, where populations are growing and inventories are in fact quite low.

 

One Comment

  1. “yet the Chinese property market strangely refuses to collapse in the way that these reports always suggest it should.”

    Probably because the property market is both severely delineated and still subject to a lot of net migration — everyone wants to live in a Tier One city.

    China can survive a lot of misallocation as long as they keep NGDP growing quickly. They can keep NGDP growing quickly as long as the dollar peg holds up (look how much they’ve managed to inflate M2 relative to the US, and that’s despite not being a major reserve/trading currency). They can hold up the peg as long as capital outflows don’t completely trample inflows, as they did 2014-6 before the more stringent capital controls. That’s why they’re having the tariff fight even though we all know China is a relatively unfree trader — with reserves flat to falling, they really need that US surplus to offset the remaining capital flight, because a yuan collapse is an existential threat to the regime, maybe the most serious they face.

    Reply

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