Phantom Growth of Ghost Cities in China

Bloomberg has a new video series called “China’s Ghost Cities”.

The reporter, Adam Johnson, describes how the Chinese government is building huge cities where no one still lives. The expectation is that China is going to “grow” in these cities.

A great idea, really. In Beijing or wherever authoritarian planners decide, it would be better if, say, a million or more people could relocate to a pre-planned area.

Then they build the infrastructure – or rather the whole metropolis, skyscrapers, stoplights and all – and wait.

Pause for a moment and think about how bad it is. The last time your editor checked, the central plan was not a huge success. According to history, bureaucrats run long distances, they allocate resources poorly.

But is the ghost town a bust recipe? Some say no. The Bloomberg reporter, for example, assures us that China’s economy is different – that is, “this time it’s different.” (Where have we heard before …)

It is presumably true that these ghost towns, created for millions of inhabitants, are inhabited by only a few thousand people – because all the secluded square footage will eventually be put to good use.

As a bonus, creating ghost towns is great for economic growth.

By running superhighways somewhere in the middle, installing steel and glass towers in Bundox, China creates new jobs in construction, civil engineering, city planning and the like. All this construction looks gorgeous on paper. Physical infrastructure is calculated as productive output, and the super-aggressive GDP target is maintained.

But what’s wrong with that film?

For one, there are central planning problems. Growth and development is the power of the free market, where there are signatures of trial and error. Successful cities are built from clay, not determined by bureaucratic stamps. So how does the government know where a new metropolis should go, or what its optimal size should be?

Then you have an accounting problem. Should tomorrow’s promise be so easily reflected on the balance sheet today?

Imagine if a public corporation says, “We’re going to grow 20% every year by building inactive factories somewhere in the middle, which no one is going to use for quite some time. Don’t worry though, the demand for these factories will show up. I’ll get it. Just don’t ask when. “

Such a plan would be cruel by the market, as public companies are responsible for profits and returns on investment (ROI). (At least most of the time – investors will gladly suspend their logical faculty during the bubble.)

The Chinese government must not seek profit in its actions. Or it could measure results in some completely unconventional way by “how many jobs we’ve created” or “how GDP numbers look”.

At the end of the day, the “ghost town” mandate runs directly to John Maynard Keynes, who once suggested digging holes, then replenishing them as a way for men to work.

China is becoming more sophisticated. Building buildings without digging holes. The effect is the same though. “Someday” empty skyscrapers will have value – unless they are first condemned as dilapidated structures – but until then they are just holes.

Chinese bulls do not bother ghost towns for at least three reasons.

First, they have convinced themselves (with some confidence) that the empty metropolis will one day (not soon) be full.

Second, they think that even if the ghost towns don’t work, China has a lot of money to burn.

And third, as the old proverb goes, “a revolving loan does not collect any losses.” Property developers can dance as long as speculative music is playing.

The problem, as always, comes when the music stops. If China is seen to build 20 years of additional capacity, within which time it will happen, hundreds of billions of dollars worth of stagnant projects will have to be scrapped.

Even more difficult is the notion that China’s “economic miracle” is in fact a heavily leveraged bet on commercialism … induced by fugitive construction … a recklessly drawn boom tail end rise from the pie-in-the-sky speculation for the future

This is another favorite strategy of the investment frenzy: in addition to embracing the perpetual skyrocketing growth curve, mortgaging (and borrowing against) tomorrow in today’s interests.

Even if China could write checks to cover the write-off costs of all those cities, a big multiple has been created in the world economy at the moment on the assumption that China’s growth is the real deal. When it sinks into that growth, the actual “ghost” or “ghostly” growth – leaving these empty monuments nowhere – can hit the fall of that one.