Are Chinese “Ghost Cities” a Myth?

This report suggests they might be a myth:

China’s “ghost cities” may be a lot less ghostly than previously thought.

The phenomenon of eerie shopping malls and completed apartment blocks completely devoid of stirrings of Chinese life has been well-documented in Western media in recent years, from video segments to photo series and more.

But according to CLSA analyst Nicole Wong, those reports might be missing the forest for the trees—or in this case, missing the people for their timing. Ms. Wong, who recently returned from a tour of 137 projects in three Chinese cities often cited for their ghostly developments, says that the presence of empty apartments is thanks to some unusual quirks of China’s real-estate landscape.

Specifically, she noted at Tuesday’s CLSA Asia-Pacific Markets Investors’ Forum in Hong Kong, new Chinese apartments are typically sold as virtual concrete shells that buyers must outfit, installing everything from showers to flooring to kitchen sinks to make them move-in ready. Accordingly, Ms. Wong notes, many such “ghost” developments take awhile to gain traction—especially as it’s often the sale of the land they’re sitting on that allows the city to fund subsequent facilities and transportation links that will eventually help make them mature neighborhoods.

“When buildings are first completed they are actually not that habitable, so it takes a long time before most people want to move in,” Ms. Wong said.

In a report on her findings, Ms. Wong notes that buildings completed between 2008-11 in Zhengzhou, Ordos and Wenzhou—often cited as instances of an overly frothy property market—have typically seen tenants move in over a three-year period. Among such buildings, Ms. Wong’s survey found an average of 48% take-up in the first 12-18 months, another 19% in the next year, and then yet another 15% in the year after that. Such a delay, she says, can be attributed to the fact that residents need time not only to fully outfit their units, but many also like to wait until their neighbors have done so as well to avoid moving in before the dust clouds and drilling sounds have subsided.

In the case of Henan’s Zhengzhou—frequently dubbed China’s “largest ghost city”—Ms. Wong notes that a number of media portrayals of the city’s newer areas have used photographs taken between 2010-12, before the metro system connecting the district to the city’s more established neighborhoods was completed. On her most recent visit there in August, Ms. Wong said she saw many cars, “hordes of pedestrians” and considerable ground activity in addition to curtains and air-conditioners installed in numerous residential buildings.

“I asked local people about what they think…about Zhengzhou being a ghost city and the answer is, ‘What?’ They don’t actually have any idea they’re being labeled a ghost city,” Ms. Wong said.

But Ms. Wong also goes on to suggest where the real problems lie:

Still, while the spectral quality of some “ghost cities” may be fleeting, other white-elephant developments built in cities with smaller populations, such as northeastern Tieling or Inner Mongolia’s Ordos, are likely to continue struggling. For example, the deflation of Ordos’s coal mining industry has further hurt the city’s ability to draw new residents, Ms. Wong notes, spurring vacancy rates as high as 37% in certain neighborhoods, a trend CLSA expects to deepen. Some property developers have suspended work, while others have simply fled.

I see an analogy to the US financial crisis.  Both liberals and conservatives missed the real problem.  It wasn’t the big banks, it was the way FDIC encouraged small banks to make risky loans to developers.  The US taxpayers were saddled with the bill.  This WSJ article suggests that in China the real problem is in the smaller cities, which are not seeing the population growth of the big cities:

Still, relatively low government debt, which the IMF recently estimated at 45% of GDP, means China still has scope to backstop any sharp slide in growth or prop up the financial system, if required. But to avoid the mistakes made after 2008, Beijing would need to figure out how to target its infusions of money into underfunded parts of the economy to produce a long-term payoff.

One can see the byproducts of the previous big stimulus program everywhere, from ghost towns of big unoccupied housing projects on the outskirts of many Chinese cities, to unfinished infrastructure and factories.

GK Dragonomics, a Beijing research firm, says much of China’s housing investment since 2008 has been directed at smaller cities where population growth is ebbing and not toward large cities where population is rising. The result: housing shortages in Beijing, Shanghai and other large cities, driving up home prices, while there are housing gluts in hundreds of others.

In other East Asian countries you are seeing a striking concentration of population in the urban centers.  Tokyo is far and away the largest city in the world.  Greater Seoul is third, and has 1/2 of Korea’s 50 million people.  I’d guess that the Chinese will tend to migrate toward the Beijing/Tianjin, Shanghai, and Pearl River delta areas.  One again, the WSJ:

SHANGHAI—Pundits once mocked Shanghai’s Pudong district, a purpose-built version of Manhattan, as overdesigned and underoccupied, evidence in steel and glass of a property bubble of historic proportions.

Deng Xiaoping sparked the transformation of Pudong’s riverfront of warehouses with a 1990 utterance: “Shanghai is our trump card.” A decade later, Pudong was Exhibit A for critics of an urban-development model guided by state planners, a soulless district where 70% of the buildings stood empty. Visiting economist Milton Friedman called it “a statist monument for a dead pharaoh on the level of the pyramids.”

Today, as worries of a Chinese property crash are back in force, there is an unlikely bright spot: Pudong.

The district’s transformation into a vibrant nexus for finance, trade and entertainment is testament to factors like the strong momentum of Chinese migration toward urban centers.

Again, the real problem is the smaller Chinese cities.  The big cities can use almost everything being built, and more.  The problem is that smaller cities are building subways, airports, city halls, etc that are far too lavish for their needs.  It’s not clear than many people will want to live in these smaller cities.  And the cause of the problem is exactly the same as with our smaller banks—moral hazard.  Large banks have such diversified portfolios that the incentive to gamble is much lower.  At a bigger bank a $1 billion gamble is more likely to come out of the hide of shareholders.  At smaller banks a gamble that goes bad might well be picked up by taxpayers.  In much the same way the smaller Chinese cities expect to get bailed out by Beijing.

This comment links to some videos made by a guy who recently visited some of the more famous Chinese “ghost cities.  The reality is mixed.

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