China ghost cities: when will the bubble burst?

Google Earth reveals China’s ghost cities: last night we watched a short video China’s Ghost Cities and Malls by SBS Dateline. I don’t think we want to be buying shares of China real estate developers like Evergrande Real Estate Group (Hong Kong exchange).

A gondola ride through the mall lasts 20 minutes and takes you past an unsettling and almost unending vista of emptiness. For the few workers kept on to maintain this vast and now eerie complex, it is boring and lonely work and already, there are signs of creeping neglect. Even filming an empty shopping mall is a sensitive issue in China – police arrived and ordered us out but the mall is so vast, it was easy to slip back in unnoticed and just like in the city of Zhengzhou, building goes on.

SBS provided the Google Maps links for some of the ghost cities mentioned in the report (Zhengzhou New District, Henan, South China Mall, Dongguan, Ordos, Inner Mongolia, Erenhot, Xilin Gol, Inner Mongolia, Dantu, Zhenjiang, Jiangsu, Yunan University Campus, Yunnan, Changgong – no links for Daya Bay or Green Island).

The principal “expert” interviewed was Gillem Tullloch of Forensic Asia. If Tulloch is a short-seller he did a good job of talking his book. More on Tulloch and the China bubble story at Fortune (Dec 2010)

(…) Last week, the naysayers were handed quite a piece of convincing evidence in the form of a research report from Hong Kong-based outfit Forensic Asia entitled China: Ghost Cities. Gillem Tulloch, the analyst who wrote it, did some shoe-leather (of the virtual web surfing sort) research to compile a list of seven ghost cities in China that should strike fear into the heart of anyone with exposure to the country’s financial sector.

This Daily Mail article from Dec 2010 has a number of satellite photos of ghost cities:

These amazing satellite images show sprawling cities built in remote parts of China that have been left completely abandoned, sometimes years after their construction.

Elaborate public buildings and open spaces are completely unused, with the exception of a few government vehicles near communist authority offices.

Some estimates put the number of empty homes at as many as 64 million, with up to 20 new cities being built every year in the country’s vast swathes of free land.

The photographs have emerged as a Chinese government think tank warns that the country’s real estate bubble is getting worse, with property prices in major cities overvalued by as much as 70 per cent.

Following are a few other articles on the “coming bubble collapse”. Some of these articles are from 2009, 2010.

April Rabkin for Foreign Policy (Feb 2010):

(…) Built in a breakneck five years, Kangbashi is a state-of-the-art city full of architectural marvels and sculpture gardens. There’s just one thing missing: people. The city, built by the government and funded with coal money, its chief industries energy and carmaking, has been mostly vacant for as long as it has been complete, except for the massive municipal headquarters. It’s a grand canyon of empty monoliths. In a paradox only possible in today’s economic system, Kangbashi manages to be both a boom town and a ghost town at the same time.

Kangbashi represents a particularly destructive economic force at work in China today: an obsession with GDP that ignores all other metrics of progress or human capital. GDP as calculated in China — or the rest of the world, for that matter — doesn’t make any distinction between quantity and quality, or between creative and destructive expenditures.

(…) Meanwhile, in places like Kangbashi, an accelerated development in the real estate market has not been matched by long-term sustainability, and in recent months, predictions have grown louder that China’s real estate bubble is about to burst. This debate has been batted back and forth by columnists and TV talking heads lately. For now, income growth is still outpacing housing price growth, meaning that the real estate market is not technically a bubble.

(…) The new buildings look great from the outside, and they’re economically fine on paper, if you believe the local government. And they may continue in this state, since the government will prop up the property market because it holds up so much else as well. Local governments’ revenues are completely dependent on land sales. Eventually, perhaps, the population will catch up with this accelerated development.

Gady Epstein, The China Bubble, Forbes (Dec 2009):

…Take a close look, however, and you may come away thinking China resembles nothing so much as Japan shortly before its stock and property markets melted down two decades ago. A speculative frenzy of borrowing and bidding up is at work. If and when prices crash, there will be hell to pay.

Signs of the times: government bureaucracies funding themselves by foisting debt on state-owned business enterprises; local governments raising capital by selling land at sky-high prices to corporations they own; and a People’s Bank of China lavishing liquidity on the entire system in a way that makes Federal Reserve Chairman Ben Bernanke look downright stingy.

“It’s a Ponzi scheme whose head is the central bank, and it can print money,” says Victor Shih, a China expert at Northwestern University.

The U.S. government’s $7.2 trillion in debt at the end of June represented 50% of gross domestic product. The Chinese government’s officially disclosed $840 billion in public debt represents less than 20% of GDP. But the People’s Bank of China and the treasury are also on the hook for potentially $1.5 trillion in off-balance-sheet debt owed by cities and provinces and entities they control. They’re also implicitly obliged to backstop $1 trillion, both in loans that “policy banks” were directed to issue, even when they made no economic sense, and nonperforming loans that the government removed from the books of state-owned commercial banks over the past decade.

Add it up and the national government is responsible for debt equal to over 70% of 2009 GDP. That doesn’t count any loans generated this year that might go sour amid a 30% increase in debt balances nationwide. (The U.S. government, in addition to its direct debt equal to 50% of GDP, is responsible for cosigning of mortgage borrowers’ obligations equal to another 18% of GDP.)

(…) As fast as China is growing and urbanizing, its cities are churning out more office towers and luxury malls than can be leased for years to come. Tianjin, a gritty metropolis not far from Beijing, will soon have more prime office space than will be filled in a quarter-century at the current absorption rate. Shunyi County, in the capital’s suburbs, sold a residential plot last month for $400 per square foot, a new national record. The bidders were mostly state-owned companies and the winner none other than a developer owned by Shunyi County. Where the developer came up with the money for the purchase is unclear, but the county will nevertheless book $740 million as revenue from the sale.

China’s mercantilist trade policy is another contributor to its asset bubble. By artificially depressing the value of its currency and making it difficult for locals to invest abroad, China has forced an artificially large amount of capital to chase after domestic investments, inflating property and stock prices. It’s the same scenario China pursued in late 2007, before its stock market lost two-thirds of its value, but that era was characterized by monetary restraint compared with today.

“It’s a pure debt game,” says Andy Xie, an economist who advises private investors and sees the current bubble as “much worse than previous ones.”

(…) China naysayers have been wrong before. Gordon Chang, author of the 2001 book The Coming Collapse of China, has warned–wrongly, so far–that doom lies around the corner. Cushioning China’s economy is its high growth rate, an estimated $260 billion (but declining) annual current account surplus and, at $2.3 trillion, the world’s biggest foreign exchange reserve.

(…) Western and Hong Kong investors are in on the frenzy, too. Evergrande Real Estate Group, a Guangzhou developer, recently staved off a default on short-term debt by raising $800 million in a Hong Kong initial offering, which bestowed it with a $14 billion market cap. But whom is it kidding? Sixty percent of its “profit” this year is expected to come from increasing the reported value of its properties, a ploy that is a common source of earnings for Chinese real estate developers.

Short-seller James Chanos is betting against China (as of Jan 2010)

(…) As most of the world bets on China to help lift the global economy out of recession, Mr. Chanos is warning that China’s hyperstimulated economy is headed for a crash, rather than the sustained boom that most economists predict. Its surging real estate sector, buoyed by a flood of speculative capital, looks like “Dubai times 1,000 — or worse,” he frets. He even suspects that Beijing is cooking its books, faking, among other things, its eye-popping growth rates of more than 8 percent.

“Bubbles are best identified by credit excesses, not valuation excesses,” he said in a recent appearance on CNBC. “And there’s no bigger credit excess than in China.” He is planning a speech later this month at the University of Oxford to drive home his point.

(…) “I find it interesting that people who couldn’t spell China 10 years ago are now experts on China,” said Jim Rogers, who co-founded the Quantum Fund with George Soros and now lives in Singapore. “China is not in a bubble.”

5 thoughts on “China ghost cities: when will the bubble burst?

  1. Those comparing and contrasting China’s real estate market to Dubai, haven’t quite grasped the subtelties of difference between the two.

    In Dubai everything was financed on the never-never with properties flipped multiple times before completiong and deposits on properties used to finance new ventures prior to even commencing construction on the projects the deposits were for.

    Mortgages in Dubai were insane (from personal experience I was offered a mortgage equivalent to 100 times my annual salary) and all properties were considered “magic” investment vehicles where no matter how many buildings were constructed prices had to rise – because desert living is so desirable…

    Whereas in China, mortgages are low and limited, the major “bubble” will only impact big investors (who buy and large paid 100% cash for their properties), there’s none of the credit exposure, and those who are using credit are at least nationals of the country (unlike Dubai where they were all overseas investors).

    There are certainly problems in the Chinese real estate market (ghost cities are actually a very minor issue compared to price to wage ratios in inhabited zones) and corrections are essential but the impact of a bursting bubble in the property market will be nothing like that in Dubai – where the only industry was construction.

  2. Thanks for your comments. I understand your points regarding Dubai, and the residential investors highly conservative loan to value ratios. My worries are focused on the possibly insolvent Chinese banks. Japan still hasn’t cleaned up their zombie banks (nor has the EU).

    How do we obtain reasonably accurate data on what the Chinese banks exposures are? Do the technocrats have a handle on the banks’ financial condition?

    Please see today’s post for more color on the monetary policy question. When things turn to custard the technocrats are going to be wishing they had more transparency.

  3. Hi Steve,

    Before I saw this I’d already commented on the other one.

    Banks in China are actually required to hold far more capital than their Western equivalents, so the risk of empty coffers should be minimal.

    Don’t forget the trillion dollars of US debt that China purchased came from the banks, so it should be more worrying for the world if they suddenly need to call that back in.

    Kind Regards,


    • Thanks – what are the capital requirements? The potential problem with even conservative capital ratios is “define capital” and “what is the true value of that capital”.

  4. Agreed, but one of the great joys for China’s banks is that people here are savers, and they have a closed financial system.

    In essence everyone saves as much as they can, so there’s always a ready supply of capital – lending restrictions in China are tougher than almost anywhere, though credit rating is still in its infancy so its possible that bad debt exposure is also high.

    However the value of a currency in an internal system is based on consumer confidence and Chinese consumers are very, very confident in their system and country so again there’s much less risk of a collapse in currency than in other open systems. There’s also the fact that as the major banks are all essentially state owned, so runs on the bank (like Northern Rock in the UK) aren’t going to be tolerated even if confidence did collapse.

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