The ghostly growth of China’s ghost towns

Bloomberg has released a new video series called “Ghost Cities of China.”

Journalist Adam Johnson describes how the Chinese government is building huge cities where no one lives yet. Expectations are that China is going to “grow” among these cities.

A remarkable thought, indeed. Authoritarian planners in Beijing or wherever decide it would be fine if, say, a million or more people moved into a pre-planned area.

Then they build the infrastructure, or rather the entire metropolis, skyscrapers, traffic lights and all, and wait.

Stop for a moment and consider how absurd this is. Last time your editor checked, central planning wasn’t a big success. Historically, bureaucrats who administer directives over long distances tend to allocate resources poorly.

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

It’s supposed to be a good thing that only tens of thousands of people live in these ghost towns built for millions of residents, because all that wasteland square footage will eventually be put to good use.

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

China is creating new jobs in construction, civil engineering, urban planning and the like through superhighways, building steel and glass towers on dams. This whole build looks fabulous on paper. Ghost infrastructure counts as an efficient output, and the ultra-aggressive GDP target is maintained.

But what is wrong with that picture?

In one, there is a problem of central planning. Growth and development are free market forces marked by trial and error. Successful cities are built from the ground up, not by bureaucrats rubber-stamping a decree. So how does the government know where the new metropolis should go, or what its optimal size should be?

Then you have accounting problems. Should the promise of tomorrow be so easily reflected on the balance sheet today?

Imagine if a public corporation said: “We’re going to grow at 20% a year, building idle factories in the middle of nowhere that nobody will use for a long time. Don’t worry though, there is a demand for these plants. will appear. After all, we will profit from them. Just don’t ask when.”

Such a plan would be hit hard by the market, as public companies are held accountable for profits and return on investment (ROI). (At least most of the time, investors in bubble times will gladly suspend their rational faculties.)

Of course, the Chinese government does not have to seek profit in its actions. Or it can measure results in entirely unconventional ways: “how many jobs have we created” or “what do the GDP numbers look like?”

After all, the “ghost town” mandate is a direct nod to John Maynard Keynes, who once suggested digging holes and then filling them in again as a way to put men to work.

China is more complicated. Instead of digging holes, it places buildings. However, the effect is the same. “One day” empty skyscrapers will have value if they are not first condemned as decrepit structures, but until then they are just pits.

Chinese bulls are not bothered by ghost towns for at least three reasons.

First, they convinced themselves (with more than a little faith) that the empty metropolis would one day (sooner rather than later) be filled.

Second, they figure China has plenty of money to burn even if the ghost towns don’t work.

And thirdly, as the old saying goes, “a mobile loan doesn’t hurt”. As long as the speculative music plays, property developers can keep dancing.

The trouble, as always, comes when the music stops. If China turns out to have built, say, 20 years of excess capacity before that happens, then hundreds of billions in stagnant projects will have to be written off.

Harder still is the idea that China’s “economic miracle” is in fact a hugely effective bet on mercantilism…underpinned by uninterrupted construction…the end of the boom has been unwisely extrapolated from sky-high projections for the future. growth.

This is another favorite tactic of investment fanatics. forever in the embrace of skyward growth curves, mortgaging (and borrowing against) tomorrow for the sake of today.

Even if China can write checks to cover the costs of writing off all those cities, there’s a big multiple built into the global economy right now on the assumption that China’s growth is the real deal. When it sinks into most of that growth is actually “ghost” or “ghost” growth, nowhere in line with these empty monuments, that multiple collapse can hurt.