Ghost Cities: A Tale of Two Chinas

Ordos Ghost CityIt’s the best of times in China.  With its GDP growing an average of 10 percent over the past 30 years, China has catapulted itself from rural obscurity to the world stage and overtaken Japan as the world’s second largest economy.

According to experts at the Organization for Economic Cooperation and Development, the country’s urban population will expand by 300 million people — almost the existing population of the United States — in the next two decades due to metropolitan migration on an unprecedented scale.  And, thanks to China’s forward-looking command economy, these hopeful migrants will be greeted by millions of government-subsidized apartment units, all built well ahead of time.

“It’s a ‘Field of Dreams’ approach,” said Professor Stephen Roach, a senior fellow at Yale University’s Jackson Institute of Global Affairs and former chairman of Morgan Stanley Asia.  “If you build it, they will come.” The soaring towers of Kangbashi, a section of the Chinese city of Ordos, are prepared to accommodate a million new residents in the next decade; one of the world’s largest shopping malls waits expectantly outside the city of Dongguang; and a huge development project in Angola stands poised to extend China’s influence to the resource-rich continent of Africa.  China is on the cusp of an age of prosperity.

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It’s the worst of times in China.  With growth over the past thirty years based almost entirely on exports, China has emerged in this millennium with a severely unbalanced economy. When world trade plummeted more than ten percent in 2009, it took China’s growth along for the ride, a phenomenon for which the Chinese government compensated by fueling an already-worrying housing bubble and substituting real estate speculation for real growth.  The result is an economy with almost 50 percent of its GDP in fixed-asset investments, as opposed to something like twenty percent in the United States and Japan, and millions of empty apartment units.

This folly has left Kangbashi, a development built for one million people, nearly deserted more than five years after construction began; it’s created the world’s second largest shopping mall, an abandoned behemoth that remains 99 percent vacant seven years after it opened; it’s gone so far as to allow a city built for half a million people, with apartments valued close to $100,000, to sprout up outside impoverished slums on another continent. China is blindly racing towards economic collapse.

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Which is the real China?  Both perspectives are compelling, and the story that future generations will tell depends on the convergence of a complicated set of factors over the next decade.  One the one hand, there are plenty of reasons to be optimistic.  China’s leaders recognize the precariousness of the situation, particularly for a government whose legitimacy largely rests upon its spectacular economic successes since the Cultural Revolution.  Some eight or nine million people enter the workforce each year, and those in charge have a vested interest in maintaining a healthy economy and preventing the sort of unemployment that leads to social unrest. To that end, China unveiled its twelfth Five Year Plan in 2011, which seeks to restructure the Chinese economy.  It lays out a program to facilitate urbanization and makes it possible to fill those unoccupied “ghost cities” through a massive social housing program for low and middle-income individuals — with China actually committed to building fifteen million more units to meet the demand.

The model may seem dangerous to Americans recovering from a financial crisis catalyzed by a housing bubble, but there is logic behind China’s plan. “You can’t do urbanization without investment,” Professor Roach explained.  “In a centrally directed economy that is implementing urbanization-led investment, the time horizons of any disconnect between supply and demand are a lot longer.” But what about structural problems inherent in an economy with such a high ratio of fixed-asset investments, where construction and real estate dwarf consumption?  To simply say that the Chinese have 50 percent of their GDP locked up in these investments is somewhat misleading, even before taking into account the new reforms.  Indeed, a low amount of capital per capita exists today in China.

“What drives productivity and economic growth over the long haul is the stock of capital relative to the stock of labor.  And so given the fact that they started with basically nothing on the capital stock front post Cultural Revolution, the high investment economy is designed to better equip workers with productive tools, and they can run high investment ratios for a long time before they get into an overhang of excess capacity,” said Roach.

That said, China still faces a long road ahead beset with pitfalls.  The country remains highly susceptible to fluctuations in world trade, and another major recession could wreak havoc on an economy counting on constant growth to pay off debts.  Filling empty cities also remains a huge logistical problem, especially when many lie in barren and faraway environments.  Chenggong, one new development, sits in Yunnan Province, more than 1500 miles from Beijing or Hong Kong.  Meanwhile, property prices in Shanghai and other high-end markets have stabilized only due to government intervention to cool down the real estate market.

The twelfth Five Year Plan contains the seeds for China’s future; its effectiveness, however, remains anything but certain.  The eleventh Five Year Plan outlined similar intentions to restructure the economy, but it lacked a clear framework to accomplish those goals, with the result being business as usual: rapid growth was emphasized over sustained, healthy growth. The new initiative is, by all accounts, more explicit in its goals, yet it remains to be seen whether the new leadership can actualize its big promises.  China’s economic future is hugely important to the United States as China is our third largest export market and our fastest growing one. Thus, the structural changes prescribed in the plan could be a huge boon to domestic manufacturing.

In the end, which story will our children and grandchildren tell about China?  Will they see places like Ordos and Chenggong flower into vibrant cities, their streets buzzing with life and business – or will they see crumbling monuments to China’s folly?  The answer, which rests with the new Five Year Plan and China’s new leadership council, is anything but certain.

Ben Weiner is a Freshman in Branford College

Published by Benjamin Weiner

Benjamin Weiner is a staff writer for The Politic from Cincinnati, Ohio. Contact him at benjamin.weiner@yale.edu.

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