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Jeff Nielson is the writer/editor of Bullion Bulls Canada. He came to the precious metals sector as an investor in the middle of last decade, and quickly decided this was where he wanted to focus his career. Jeff's background includes four years of Economics at the University of British Columbia, before he went on to earn his law degree from that same institution.

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The Myth of China’s “Ghost Cities”

Contributed by Jeff Nielson
of BullionBullsCanada.com
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The American media has done a wonderful job of ignoring the growing urban blight of most big cities in the United States. In many of the larger urban populations, the “inner cities” are poverty-filled, crime-filled wastelands – nearly uninhabitable. These ghettos are used to warehouse vast numbers of the U.S.’s rapidly growing minority groups.

While the U.S. media brags about the “favorable demographics” of the U.S.’s growing population (compared to much of Europe and Japan), here is the reality: almost all of the “population growth” in the U.S. is occurring among these same “minorities”.

Not only does the vast majority of this ethnic population live near or below the poverty-line, but this segment of the population suffers from a 50% high school drop-out rate. And these “minority groups” are set to become the majority of the U.S. population some time over the next 20 to 30 years. This occurs at a time when all of the good “blue collar” jobs have disappeared in the U.S., meaning that much of if not most of this segment of the population has no realistic prospect of ever escaping the poverty-trap. Obviously, the U.S.’s inner-city ghettos can only continue to grow, and spread across its cities like a cancer.

Then there are the “ex-urbs”. During the made-in-Wall-Street housing bubble, clusters of “monster homes” mushroomed all around many U.S. urban centers. Too distant to be classified as “suburbs”, they were dubbed “exurbs”. These housing units were built based upon the premises of steadily rising wealth/income levels among middle-class Americans, and permanent, cheap gasoline – to fuel the 100+ mile round-trip daily commutes in their gas-guzzling vehicles.

In other words, these homes were obsolete before many of them were even built. Millions of these housing units will simply have to be bulldozed, to put a dent in the vast oversupply of housing in the U.S. Meanwhile, the infrastructure of American cities crumbles, while cash-strapped local governments would be hard-pressed to come up with 1% of the $100’s of billions urgently needed for repairs/renovations. And as homelessness soars across the U.S., we now see “the world’s only super-power” pock-marked with “tent cities”.

All of this is invisible to the U.S.’s myopic media. What is most peculiar, however, is that their visual deficiencies don’t prevent these same pundits from being able to spot “ghost cities” across the Pacific, in China.

An article which typifies such hypocrisy reported:

These pop-up metropolises include looping miles of highways, vast apartment blocks, sprawling cultural plazas, commercial districts, and shopping centers that are bigger than downtown Reno, Nevada. The only thing missing is people.”

The same article claimed that there are an “estimated 64 million” empty apartments in China. While that number sounds like a bit of an exaggeration, lets accept it as true. Now let’s look at the facts.

The vast majority of China’s 1.2 billion inhabitants are still rural “peasants”. As China assumes the role of the world’s manufacturing hub, it is seeking to “urbanize” (eventually) somewhere around ¾ of a billion people. This would be nearly equivalent to building (and populating) new cities for the entire populations of Europe and North America, combined. It is nothing less than the largest planned migration in human history.

Obviously there are only two scenarios to such growth. You can bring the people (first) to the sites of these new cities, and then try to build the cities around them; or you can build the cities first – and then bring the migrants to live in them. As for the “64 million empty apartments”, that’s enough housing for no more than a quarter of these migrants.

What is also missing from the vacuous writing of the American media concerning these “ghost cities” is that everything is being scrupulously maintained – unlike the 20+ million empty homes in the U.S., where many if not most of these homes have been vandalized and stripped of anything of value.

Not only is the proportion of empty homes in the U.S. greater than that of China, but there will never be buyers for millions of these units. Apart from the fact that millions of “monster homes” in the exurbs are totally obsolete, the American middle-class has been completely impoverished, while retiring baby-boomers are set to dump $trillions in real estate over the course of the next 20 years. There is no one to buy all these homes, while an essentially infinite supply swamps this market.

Conversely, in China the current number of empty units is only a small portion of what is needed for this housing market over the next 20 years. Obviously with hundreds of millions of people migrating to urban centers, China needs a substantial number of vacant units to prevent housing “bottlenecks” from occurring.

The reply of the U.S. propagandists is that the Chinese people will (also) never be able to “afford” housing in China. The example given was:

“…the 50 percent down payment (on $350,000) required to own a few rooms in a ghost complex.”

Let’s examine all of the inherent dishonesty in that short statement. First of all, the example used was for a high-end luxury unit, as obviously $350,000 is nowhere near an “average price” for an apartment in a Chinese city. And unlike the average American worker (for those who still have jobs), the average Chinese worker is seeing their wages rise rapidly, while their innate thriftiness means most already have large pools of savings.

The Chinese population (and economy) will clearly be able to “grow into” these (well-maintained) vacant units, while the 20-million unit glut in the U.S. housing market can only grow larger over time, while vandalism and oversupply causes their property values to plummet ever lower.

There was another aspect to the dishonesty in the above quotation, however. Note the reference to the “50 percent down payment” in China’s housing market (indeed, many units are still purchased with 100% cash). And yet despite how well-capitalized the average Chinese property owner is (relative to a U.S. homeowner), we see the same U.S. media shills writing again and again about China’s “housing bubble”.

As I have explained in many previous commentaries, any/all asset bubbles require two ingredients: grossly excessive prices and too much leveraged debt. It is defaulting debt which always causes the subsequent “crash” associated with all bubbles (since well-capitalized asset holders can ‘weather’ any correction), thus where there is little/no leverage, it is impossible for a “bubble” to exist.

In the U.S., nearly 30% of all mortgages are “under-water” today – meaning that even after the (first) “crash” which took place in this bubble-market, the U.S. housing market remains the most over-leveraged housing market in the history of humanity. As I just wrote in my last commentary, it will require decades for this bubble-market to ever reach a (real) “bottom”.

What we have here is simply “A Tale of Two Countries”. On the one hand we have the U.S.: a banker-ravaged, hollowed-out economy. Its own “ghost cities” contain the largest housing glut (in proportionate terms) in the history of humanity. Vandalism and lack of maintenance is not only costing $billions per year in lost property values on these homes, but is dragging-down the property values of the (larger number of) homes surrounding them by $10’s of billions. Meanwhile, the neglected infrastructure of these bankrupt cities crumbles around these residents, and there is no prospect of these dynamics ever improving.

Then we have China: a prosperous, growing economy – with rapidly rising incomes and vast pools of savings. Its (gleaming) “ghost cities” are being immaculately maintained in anticipation of the 100’s of millions of (employed) migrants who will want (and need) to live in them.

Which “ghost cities” would you rather live in?

There Are 9 Responses So Far. »

  1. “…..the average Chinese worker is seeing their wages rise rapidly, while their innate thriftiness means most already have large pools of savings.”

    Something is very wrong with your analysis. Are the 300-400,000 robo-workers slaving away at the gigantic Foxconn complex in Shenzhen & committing suicide daily one of these average chinese workers? Clearly not. This article is so slanted its absurd. The Chinese government demanded GDP, so contractors complied by building ghost cities, its as simple as that. However I do concur that the media, NPR and all of them are ignoring growing urban blight, ghettos used to warehouse, etc. Very scary

  2. I agree with Matt’s comments. According to George Friedman of Stratfor, China will implode from its own internal conflicts between the upwardly mobile near the coast and the peasantry of the interior. When Mao conducted his 1000 mile march, it was the result of failing to garner support along the more prosperous coastal communities and he had to tap into the impoverished and disgruntled interior villagers ire. This will become a dominant issue in the future. The wonder is why this isn’t happening in the US. Is there a real Tea Party in the land of tea?

  3. People are perenially predicting China’s implosion, and it isn’t clear to me it’s quite so inevitable (I’m really on the fence). But it is clear that there are major countervailing factors that have been holding it together:

    1) Totalitarian structure, with mettle proven by putting down the 1989 rebellion

    2) Willingness and ability to spend actual surpluses on stimulus (as opposed to the West, where stimulus requires more borrowing, simply exacerbating our problems)

    3) High rate of savings by the people

    4) Expanding middle class, mass conversion from rural to urban

    The latter 3 of these serve as a fundamental driver of the real economy in China, while the first item (and #2 to some extent) stabilizes localized chaotic outcomes, preventing them from spreading to a general instability.

    That doesn’t mean China doesn’t have massive malinvestment; it most certainly does. But its not clear the problem is anywhere near as bad as the West (a point the author makes by looking at the vacant housing RELATIVE to the size of the overall housing stock and population) — plus China has growth and a better monetary situation (savings and capital expenditure from savings) which puts it on the right track.

    Also interestingly, the people are still not sheepish, despite the brutal totalitarianism of the central government. They still seem to push hard for economic reforms (and usually get them), both in coordinated (strikes, demonstrations) and uncoordinated ways (demanding higher pay and better conditions en masse, as indicated by the information trickling out of China we have seen lately indicating that even despite higher pay across the board workers are still holding out; see: http://www.nytimes.com/2011/06/01/business/global/01wages.html?_r=1&emc=eta1)

  4. I’m frankly a little disappointed in the comments rejecting this analysis – since they didn’t address either of two key points:

    1) 100’s of MILLIONS of migrating Chinese will NEED (urban) housing in upcoming years.
    2) These so-called “ghost cities” are obviously on care-and-maintenance.

    IF China’s government had just been AIMLESSLY building millions of structures which would NEVER be used (like the U.S. housing sector) then they would NOT waste additional resources in PROTECTING those assets.

    Unless/until any rebuttal addresses those arguments it cannot be valid.

  5. Jeff, very good points, but here are my takes.
    1. The same could be said of the millions ‘needing’ housing in the USA. (As an architect, we are in dire straits in our profession as there are no projects being funded, except jails and courthouses by and for taxpayers.) Also, the urban migration in China is reversing back to the country as factory and service jobs disappear in the urban cores, though it has been said this could never happen.
    2. The central gov’t sets a gdp goal every year and meets it, even if it has to fabricate jobs such as care and maintenance of ghost cities. This too is a way to suppress dissidence or a Jasmine revolution.
    Remember when there were hundreds of subsidized tours of China being promoted through local Chambers of Commerce a few years ago? I haven’t heard of a single one recently. That is not a sign of a vibrant and growing economy. This is: http://tinyurl.com/3zcdqnf

  6. Ghpacific, good rebuttal.

    First dealing with the U.S., the critically different dynamic is FALLING wages in the U.S. (and rising unemployment) versus RISING wages in China. So yes, you’re absolutely right that there is a pent-up DESIRE for housing building in the U.S. – but not the incomes to meet that desire.

    Returning to China, obviously neither of us can PROVE who is right today. However, as I observed in the paper, if China was just building for the sake of building, then why make sure everything was maintained? Instead, they could build it, “recycle it”, and build it again – less raw materials needed.

    You’re quite right that local governments have “targets” to meet for various economic criteria. Where we differ is that I would argue that this building is merely premature, rather than “unnecessary” – and I think the numbers are in my favor here.

  7. Jeff, thought you might find this interesting. http://tinyurl.com/4yeg8a9

  8. Very interesting, indeed, Gh!

    Puts a whole new “spin” on the “Chinatowns” which already exist WITHIN many North American cities (lol).

    Relating it back to this topic, if China is seriously thinking of expanding its city-building to the U.S., then that certainly rebuts much of the talk of “unnecessary construction”.

    While the argument COULD be made that China might choose to over-build WITHIN its own nation (with all the benefits from such construction being kept within the domestic economy), there could be no rational argument that China’s government would engage in such “gratuitous” construction inside the U.S.

  9. Rural to Urban shift is understandable. Its beyond doubt that incomes rise for many people in china along with savings to conceive investment in a home. Critical information missing is how much funding is from banks and what percentage is owner’s money into these homes. If the titles are still in the name of financing instituition or a bank, are the owners or would be owners able to bear the interest costs for this till they move in? Hope and greed are essential for human survival but either of two do not sort out financial issues. Can somebody enlighten us how these homes and for that matter their maintenance are funded.

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