Sinophrenia #4: Ghost Towns

In earlier blogs, we looked at some of the problems China is facing (too much debt hidden away; not enough spending). For those, it’s not clear if/what solution their government has in mind.

 

In this blog, we’ll look at another problem for which China did come up with, partial solutions. It is also revealing in why the details of the Chinese system matter – it creates both problems and solutions, unique to China. Thinking with a Western, or even Indian mindset, causes us to miss them altogether.

 

The problem are China’s ghost towns – entire buildings of sparkling, new apartments with no buyers; even entire towns built but having no residents! How did that happen? The first time I went to China and heard of this, my opinion was the same as what an American colleague said – Capitalism operates on (perceived) demand; but China isn’t capitalistic. Things are done because the government says so. No wonder they built so many unnecessary things.

 

Earlier blogs in this series, based on Thomas Orlik’s China: the Bubble that Never Pops, certainly confirms the gist of that explanation – in the wake of the 2008 Western financial crisis, China’s government did push for easier lending, industrial expansion, and construction. And the middle class’ need for investment options only added fuel to the fire:

“The result was intensive speculative demand.”

 

Does this sound similar to the events in the US leading to the 2008 financial crisis? Yes and No. Unlike the West, China is not yet a rich country, and there are plenty of things that remain to be built. Thus, at least parts of these expansions/constructions satisfied genuine needs – more housing, and newer towns to reduce the overcrowding of existing cities. This is a point one needs to keep in mind about China – even if many things including housing get overdone, big chunks of that activity does serve genuine needs.

 

So what did China do to wrt problem of over-construction of houses? First, they needed to slow down construction. Contrary to what many think, just because the government issues a diktat doesn’t mean it gets followed. Or is practical to enforce. Instead, they announced a policy that farmers whose lands was taken for construction activities would be paid higher amounts. See how this helps? It increases the cost of land acquisition, thus acting as a dampener of further construction. Also, it makes the government popular with farmers who are getting higher compensations. Next, the government fired a shot at the speculators: the tax rates on second- and third- homes would be increased.

 

But what about the already constructed and unoccupied houses and towns? Not only were they a waste, but they were a risk to the continued viability of real estate companies and the banks that lent to them. Here’s what they did:

#1: Slum dwellers were told that they could buy those unused apartments at cheaper rates (While the slum dwellers paid lesser amounts, at least the builders would get some money, as opposed to the zero amount from unoccupied buildings). The government would chip in with part of the money. As a further push, they said the slums would be demolished: they were old, and lacked all kinds of basic capabilities.

#2: The (slum) land would go to the local government which could then use/sell it later, as needed. This step would help reduce the amount the government would have to pour to bail out the builders and banks later.

#3: Remember the “hukou” system wherein people not everyone can get a resident status of a city/town? The government threw an incentive to such people – if you buy these unused apartments, you’ll get resident status in that city, entitling your kids to free schools, and healthcare access for you.

 

This is just one such example of how China tries to solve its problems. By using levers that don’t necessarily exist in other countries. This isn’t unique to China, of course - all non-Western countries have unique levers at their disposal. The problem is that most of us evaluate China through Western eyes, and thus our reasoning is seriously wrong on many matters. Like the time when that American colleague and I blamed the ghost towns entirely on communism + central planning…

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