Yves here. Just as the people who saw the US housing bubble early were treated like negative know-nothings until they were proven right, so too have the China skeptics had a tough go of it, as the middle kingdom pulled out all stops on the fiscal stimulus front during the crisis. Since then, commentators have gotten increasingly concerned about its unheard-of dependence for an economy of its size on exports and investments, with the two combined accounting for over 50% of GDP. And the evidence also for years has been that these investments are less and less productive. The most recent figures I’ve seen (I hope readers can provide an update) is that it took $7 of debt to generate $1 of GDP growth in China in 2008. That contrasts with $4 to $5 to $1 in the US on the eve of the crisis.
The Chinese government, as has been widely reported, is trying to cool growth, in large measure to take the hot air out of its shadow banking sector. Another scary factoid is estimates of the size of this sector (as much as $5.8 trillion) and the fact that a big chunk consists of wealth management products that are repo financed. So while most commentators take the point of view that Chinese government, which exercises more control over its economy and banks than is the case in the West, can engineer a soft landing, I recall similar cheery views in 2007 (notice, however, that the Chinese financial system is not well integrated into the rest of the world’s, so the risk of transmission of any problems in China to advanced economy financial players won’t take place via tightly coupling. But China is a big enough economy that an overly rapid slowdown and/or financial trembles would have broader ramifications given the background of tepid and weakening global growth).
By Leith van Onselen, Chief Economist of Macro Investor, Australia’s independent investment newsletter covering trades, stocks, property and yield. You can follow him on Twitter at @leithvo. Cross posted from MacroBusiness
Ordos in inner Mongolia has regularly been cited as the quintessential example of China’s unsustainable construction-led economy.
In 2009, AlJazeera posted an explosive video showcasing Ordos’ ghost apartments and frenetic pace of construction, which exemplified the “build it and they will come” approach that has underpinned the Chinese economy. AlJazeera provided a follow-up in 2011, which was equally revealing.
Then Business Insider posted a slideshow of China’s empty cities, headlined by Ordos.
And in late 2011, a video from NTD Television showed how Ordos’ home prices were crashing, having fallen by almost one-third. Meanwhile, construction had finally ground to a halt, leaving many construction workers unemployed.
Then last year, a video from the Atlantic followed a group of skaters through Ordos, showing a city that appeared almost completely empty three years after Aljazeera’s first ground-breaking report.
Now it appears the city has gone bust. According to Bloomberg, apartment sales have ground to a halt and a myriad of cranes now stand silent amid half finished developments:
“In the past few years there was a lot of coal so people came from all over the country,” says Gao Wei, 30, smoking in an office that deals in second-hand construction machinery and had no clients that day. “Now the economy has collapsed, they’ve all gone”…
Fueled by a boom in coal production, Ordos saw a building spree in recent years, with an expanded airport, a sports stadium and the new area of Kangbashi where high-rise apartments surround an artificial lake. Many local residents owned two to three homes each…
Now the local government’s revenue is falling because the property crash has scuppered land sales, while residents no longer have compensation to buy property and make loans… About 70 percent of Dongsheng district’s real estate market was funded by private lending that has now stopped…
When the government sold land over the past few years, it always used the funds for infrastructure construction, Zhang said from the sales office of a new apartment complex with 1,000 units. “Now they don’t have any money.” Meantime, the city’s coal rush has dried up amid sluggish domestic demand, with prices dropping to an almost four-year low.
That hasn’t stopped efforts to keep the boom going…
Some Ordos district governments had to borrow money from companies to pay municipal employees’ salaries…
“Ordos is a warning to other places in terms of how to guide the local economy and in what not to do,” said Yao Wei, China economist at Societe Generale SA in Hong Kong. “The local governments are still not waking up to what they should do in this new environment”…
Consider for a moment how much of Australia’s iron ore and coking coal has gone into the construction of such projects, and what will happen to commodity prices when construction across China inevitably slows.
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the author may be unaware of this:
China’s Great Uprooting – Moving 250 Million Into Cities – NYTimes : China is pushing ahead with a sweeping plan to move 250 million rural residents into newly constructed towns and cities over the next dozen years — a transformative event that could set off a new wave of growth or saddle the country with problems for generations to come.
The government, often by fiat, is replacing small rural homes with high-rises, paving over vast swaths of farmland and drastically altering the lives of rural dwellers. So large is the scale that the number of brand-new Chinese city dwellers will approach the total urban population of the United States — in a country already bursting with megacities.
Moving 250 million people by fiat by hopes and prayers isn’t as easy as it is to put a piece of propaganda in a U.S. paper especially the NYT which did sit on the Bush wire tapping story for fear of causing people to change their vote with new information* in response to concerns about the limits of Chinese growth in light of stories about pollution, ghost cities, and restless workers.
*Considering the lavish devotion Obama receives from “serious and pragmatic” Democrats, perhaps the NYT was trying to keep the fascists in the Democratic Party from recognizing W. was one of their own.
Interesting complaint, with which I agree.
Multiple African countries tried things like this.
Usually ended up in complete failure, lost production output for the country, and misery and starvation for the population.
Lets see if the Dragon can pull that kind of thing off any better.
The writers, as in the China skeptics, are well aware of this. I suggest you do additional homework.
The ghost cities are all built to what is now upper middle class for China housing standards. It’s meant to be investment property for the emerging wealthy. That’s who buys it, to the extent it gets bought, the well off who need some place to park their cash (China’s banks have long paid well under the inflation rate on bank deposits, thus fostering stock market, real estate, and commodities speculation. And the Chinese were already fond of gambling).
This housing in no way, shape, or form is affordable by migrant workers, either as rentals or as purchases. This speculation is not part of a sensible or organized labor strategy. Any number of account will tell you peasant migrants live in shantytowns, not this spec glamor housing.
This housing is being built with massive local government support via debt financing. It’s a local employment/local graft story on a massive scale.
@ Yves, a suggestion:
Why not make such a comment an occasional Post? Among its merits (in no particular order) — 1) no speed typos; 2) written in plain English; 3) CONCISE; 4) provocative and bound to elicit serious commentary.
Ditto.
The last episode of UK Top Gear was in Spain.
They drove on a great mountain road, which ended in a middle nowhere (mony run out).
For overnighting, they slept in one of the empty apartments that were built and never sold. They had a few races on an abandoned airport (which was in operation for a few years, but went bankrupt since), an in the end “city” race where they raced around part of a ghost town (newly built).
Of course, lots of it has been staged to some extent, but even so it was scary how empty it was.
And their accomodations had no plumbing. Gee, those poor Brits, looking for some half-priced villas. They probably worked up a good stink.
Wow! One would think ex(?)-Commies could come up with a better money system than ours? One that justly “shares?” So that consumption can keep pace with production as well as vice versa?
Much of the party elite weren’t socialists in an indoctrinated sense. They were Maoists. When Mao and his inner circle were gone, they were loyalists who were left to their own devices. The question is what happens next. The current nominal rulers aren’t Mao or connected to Mao in a real way, but Communist indoctrination has occurred in the absence of a cult of personality for some time now even with it on the back burner. The high profile prosecutions and even the recent tightening of Chinese liquidity leads me to believe that the party congress might be exerting its muscle. They might not have a leader yet to direct their force, but I don’t think the ex-Communists have the power they had a few years ago because why they have been poaching elephants they have been ignoring party membership.
I think this is a coal and steel story. Especially the last comment by Yves @ Australia’s precarious trade position. Ordos was a big coal producer and took off “gold-rush” style before the Chinese could gain control. Which control coincided with a Global Warming Crisis and an unpublished (?) ban on coal. Worldwide. Which is the good part. Mr. Gao Wei who is clearly a liquidator of “used construction machinery” in the ghostly town of Ordos in inner Mongolia – is going to be overtaken by sand dunes. And we learn that other parts of China have no revenue because housing collapsed so nobody can do infrastructure. It sounds to me like China is meeting its international obligations to curb the use of both coal and shadow banking (which relied on unsustainable growth and fossil fuel addiction) and housing was the first casualty. That sounds familiar… I hope that’s the explanation.
It is, and was all so predictable.
Ya push up land values past the capacity of folks to afford it – always through speculation – and folks just don’t have the wear-with=all to consume other stuff. No wonder the Chinese government wants to throw off the shackles of the shadow banking system. After all, as we all know, here in the USA… we don’t call it shadow banking..just plain old legalistic assisted corrupted banking that feeds the nations appetite to get something for nothing…speculation, predatory capital, debt leveraged skimming et al. On the bright side – if China can persist to drive down real estate prices (land value) to reasonable levels – then the internal demand can be turned up because people will have more to spend.
Wealth creation requires four legs – labor, industrial capital, land (upon which to live and work) and, the fourth leg – public infrastructure to bring goods to market.
As Simon Patten, the first economics professor at the nation’s first business school (the Wharton School) explained, public infrastructure investment is a “fourth factor of production.” It takes its return not in the form of profits, but in the degree to which it lowers the economy’s cost of doing business and living. Public investment does not need to generate profits or pay high salaries, bonuses and stock options, or operate via offshore banking centers.
From “Tax Facts” written in the 1920’s
Legal Gambling
The gloom is fading from the real estate situation. More nibbles during the last few weeks than the last three years. If January brings us good rains, this next year will open the door to the sunshine – a case of rain bringing the sun.
It is to be hoped, however, that there will never be another boom. The crash of the boom of 1923 was due to the same causes that wrecked the wall street stock market. People sold what they did not own. They made a payment down in the hope of getting the property off their hands before it began to burn. Real estate fell into the hands of sharp-shooting gamblers who had no interest in land. To them it was just a pile of blue chips on a roulette wheel.
Gosh, who saw this coming?
I’m not too sure how much of an indicator this is for China as a whole though, it doesn’t necessarilly mean they won’t be able to prevent the rest of the economy from going into a meltdown. Ordos was always a bit of an outlier, deep in Outer Mongolia and stuff.
They’ve had a massive over-investment boom, but they’re still sitting on huge FX reserves, which they may have to use to bail out their shadow banking system in some form.
If I were running the economy in China – I would say…screw the shadow banking folks…. do not bail out…intentionally sink em. – No Bail Out – they knew the risk – to bad they don’t have the backing of the USA taxpayers… too bad they don’t have a say with regard to threatening the global economy and threatening a congress with going over the cliff.
Gamblers take losses… it is the way
The ‘new town’ strategy is seen everywhere and the usual problem is jobs don’t follow. The previous Chinese great leap forward was a vile, lunatic disaster under megalomaniac Mao.
Could wealth management be the reason so much debt is needed to get GDP increase, the money never really invested, but hoarded in some repo-monopoly game? I know we suspect this in terms of financial parasitism – today’s Chinese player in a Macau casino not looking much different from a Scottish land-owner in a London gentleman’s gambling club. With no one in occupation of the ghost cities, plenty of Chinese money is available to buy real estate in cash elsewhere, proceeds of crime style.
Pretty much every European grant I managed to finagle with honest intent really got lost in overhead traps and had to be justified by ludicrous claims on job creation, safeguarding and other stuff as real as any Soviet production quota scheme or Italian mafia road construction project. To achieve the desired results, one would generally need a project 7 times as big or just the original money on time, in ‘cash’ to spend with honest discretion. I’ve seen £500 given to a local kid soccer team do more good than £500,000 to employment schemes equipping textile workers with qualifications to work in the rapidly declining – er – textiles industry, often just accrediting existing skills.
My impression is that finance has become what we thought was the red-tape corruption in nationalised industry and government investment. There have been many schemes across Asia to re-house from slums – often building far away from work with n provision of alternatives near the housing. The Chinese already have form for rural resettlement with no jobs. It looks bleak.
Honestly, if they wanted bailouts, they shouldnt have had the balls to be ‘shadow’ banks in the damn first place. At least the banks that got bailed out were technically legal. Whether they should have been or not, that is of course a different story all together.
Off topic – Are they planning a casino in Afghanistan? Because, they’ve got a casino mecca in Macau, Las Vegas, Monte Carlo, all the US Indian Reservations, Atlantic City, prolly all of Shanghai, and soon to be Mexico City – and now the place formerly known as “The Golden Triangle.” At the junction of Myanmar, Thailand and Laos on the banks of the Big Bend (of the Mekong) and probably with its own gold smelter. So what are the trade regulations for casinos, I forgot to wonder.
Yves, I’ll take the opportunity to make, I hope, a small move forward in my after-hours campaign to rehabilitate this wonderful concept and word “factoid.” The online “World English Dictionary” tells me it was coined by Norman Mailer in 1973 to mean “a piece of unreliable information believed to be true because of the way it is presented or repeated in print.” This is how I first came across it, back in the days of hard copy.
It seems that–curiously–since the word became common coinage 10-15 years ago, it’s been used only to mean “an small or insignificant fact,” which is what http://www.dictionary-reference.com says it means, in addition to the definition above. The unlikelyhood that Mailer intended the latter meaning as well (or just two disparate meanings) aside, we’re swimming in factoids these days so it seems a shame not to have this handy concept wrapped in a single word (coined by Norm Mailer no less!) to point left right and center.
I nominate “factette” for the latter definition.
In my very humble opinion, I think metaphors have more positive effects than not with regard to economics. Take “bubbles”, eg, especially now. I picture a small balloon squeezed within a fist. Sometimes, but rarely that often, it just bursts. More often, it proliferates in diminutive form, oozing between the fingers. Most important, however, is the ultimate parameter, the “pressure,” which determines the final outcome. Modern day “economastrologists” have yet to master a truly scientific approach. Instead they utilize inherited formulae to package new “potions,” or rather “lotions.” From an under-appreciated American poet, Karl Shapiro’s “Haircut” —
/O wonderful nonsense of lotions of Lucky Tiger/
The Lost Language of Crains
They could just print money and pay people to live there, in those empty cities full of nothing but empty rooms, waiting for some kind of possession and order. And then pay them to be teachers, and dentists and doctors and architects and sales girls selling cupcakes and coffee and bus drivers and shoe salesmen and groundskeepers and party planners.
If they can somehow organize a self-contained “society” they could boot it up from zero and it would walk like some magnificent and beautiful android, stepping eventually into full humanity.
This has happened before, when climate or famine or invasion wiped out a tribe and they reconstituted themselves drawing solely on nature and imagination and memory.
The problem isn’t the inherent impossibility of the task from a financial perspective but the inherent difficulty from a self-organizational perspective. The size may be too large and the diversity of abilities too narrow and the access to nature too constrained. That doesn’t make it utterly impossible it only elevates the need for an almost fanatically successful orchestration.
The Japanese may demonstrate proof of concept that when you buy back debt it just doesn’t exist. People might even realize it never existed. It was always and only in their minds as a boundary and arbiter of interpersonal relations, one of many, but not one different in kind than all those not measured that are called “customs”.
If anyone can do this, the Chinese can, with their millennia of ingrained ideas of order. But if anyone can collapse into a chaos of bloodletting and madness, the Chinese can. The great and eternal duality of everything. Faaaak. It almost makes you smile to think about it like the night and the day.
Three issues come to mind:
1. Does not the Chinese experience with fiscal stimulus have an informative bearing on MMT? Did not the Chinese do exactly what has been touted for the US (i.e. shovel-ready infrastructure targeting stimulus)? Is it possible that MMT policies are constrained, not only by inflation, but also by an ‘overproduction’ gap? There is a lack of aggregate demand, so we apply fiscal stimulus to facilitate (i.e. with better infrastructure) the production of more of the stuff we already have too much of? And the rate of increase in overproduction is more than the rate of increase in demand provided by the stimulus?
2. Should not, in a comparison of debt-fueled growth, the financial sectors of both countries be stripped out to make for a proper GDP comparison?
3. It seems that the fiscal stimulus was, at least in part, exported (e.g. Australia). Aggregate demand was increased, but not where it was needed?
the production of more of the stuff we already have too much of? tiebie66
Maybe you have too much stuff but what about the homeless? Huh?
The problem is not so much overproduction as unjust lack of purchasing power because it has (ironically) been stolen to produce goods that can’t be sold for lack of purchasing power.