The following video is the first of the great series on China’s ghost cities that Bloomberg is running this week.  Getting China right is key to your P&L and the direction of many markets, including emerging equities and commodities.   We’re grappling with who financed these cities, who is holding the paper, and how were they financed.   Recall China’s massive money supply growth and credit expansion which funded the country’s stimulus after the 2007-8 financial collapse.

Our basic assumptions may be wrong, such as time horizon and holding period, and Adam Johnson does a good job covering these, but this is one issue that keeps us up at night and we won’t rest until we’re comfortable with a good working understanding of what is going “over there.”  The renowned hedge fund manager, Jim Chanos,  has and we suggest you do the same.

Our good friend Deano Williams reminds us of the cheerleading mantra of the real estate industry , “they ain’t building anymore real estate.”   Well, yes, they are, and we suggest these cheerleaders take a “slow fast boat to China” to see for themselves.

By the way,  Henry Kissinger is out with a new book on China this week. See also NY Times review.

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Category: Think Tank

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

16 Responses to “China’s Ghost Cities”

  1. Nuggz says:

    Strangely reminiscent of Las Vegas & Phoenix.

    Of course the only difference is that there isn’t any mortgages.

  2. Topspin says:

    There’s a huge difference between US and China let alone Vegas/Phoenix and China.

  3. “Of course the only difference is that there isn’t any mortgages…”

    Says who?

    see some of .. “…Mortgage loans China’s outstanding residential mortgage loans increased 142 times from 1997…”
    http://www.bis.org/publ/bppdf/bispap46g.pdf

    “…The residential mortgage market becomes a financial engine for the booming residential . housing development and sustained economic growth in China…”
    http://www.usc.edu/schools/sppd/lusk/research/pdf/wp_2004-1001.pdf

    http://search.yippy.com/search?input-form=clusty-simple&v%3Asources=webplus&v%3Aproject=clusty&query=China%27s+residential+Mortgage+growth
    ~~~

    “Getting China right is key to your P&L”

    GMM is spot-on about that.

    though.. http://search.yippy.com/search?input-form=clusty-simple&v%3Asources=webplus&v%3Aproject=clusty&query=Kissinger+should+be+in+Jail

  4. socaljoe says:

    One needs to put this in perspective with the vast scale of what is China.

    For example, if it is true that 25 million chinese migrate to the cities every year, then a ghost city built for 1 million residents will accommodate about 2 weeks of migration.

    My guess is that once jobs are made available in the vicinity of the ghost city, they will fill up very rapidly.

  5. “…if it is true that 25 million chinese migrate to the cities every year…”

    socaljoe,

    Right, you are, to go with that (“Major”) predicate…

    http://www.thefreedictionary.com/predicate

  6. ricecake says:

    “We’re grappling with who financed these cities, who is holding the paper, and how were they financed.  ”

    Who’s holding paper and how they financed: The holder(s) are the Chinese government and local governments.
    In China, all lands are nationalized. People own not land but the leasing rights for a time frame like 70 years +. Banks are also nationalized. The government sell lands and print money and develop them into residential or commercial districts. The government also make political and economic policies the ensure the projects to success. When money are made, large chunk go back into the Chinese government so they can develop their great infrastructure like high speed rails, ports and so on. The Chinese Developers are actually work for the governments.

    Why China won’t crash down violently? Unlike the U.S, the EU, or Japan, China government have more than enough hard cash in the banks to weather many storms. They are not in debt. They don’t need to borrow money . Yes! Few cities are empty and may get wasted eventually, so what? That’s part of the calculated lose in China’s country business as in any kind of business small or big there are lose and gain for sure . Those loses to China are some cuts on their big body but won’t kill China at all.

  7. ricecake,

    take it EZ on the Propaganda (…develop their great infrastructure…), see some of http://www.fastcompany.com/1749952/the-problem-with-chinas-high-speed-rail .. for starters…

    “What a happy place the U.S. would be if we could zip from state to state on high-speed trains, never even considering taking short plane rides or spending hours in traffic just for a trip between neighboring big cities. This is, we’re told, how it is in China, where a utopian network of trains carries people across the landscape in minutes. Reality check: China’s growing network of high-speed trains is riddled with safety problems and corruption concerns.

    The situation is so bad that the Chinese government actually had to come out and admit that the high-speed rail safety situation is “severe” (hat tip, Washington Post.) Part of the problem is that contractors may have used low-quality fly ash mixed with other substances in construction instead of using the high-quality fly ash required in concrete train line construction. In layman’s terms: They built it cheap and fast and out of shoddy materials. And now they’re running trains on it really fast….”
    http://search.yippy.com/search?input-form=clusty-simple&v%3Asources=webplus&v%3Aproject=clusty&query=problems+with+China%27s+High+Speed+rail

    as, but, one of your Errors..

  8. oldbluejeans says:

    Didn’t Mao try this type of thing with his sequential Five Year Plans? As I recall they were mostly unsuccessful. This concept of a planned economy seems to be ingrained in the Chinese even today. I can’t see how this government will do any better than the Soviets. Even if China doesn’t collapse or fall into a recession or worse, this still looks like a gigantic mis-allocation of resources.

    And if this all comes crashing down, what happens to commodity prices? Or to the Australian or Canadien dollar? Or for that matter to US Treasuries?

  9. rip says:

    Was in a China a few years back. Fascinating culture. Don’t need to write a book.

    There’s a weird conflict going on. They work like hell to keep the rurals out of the urban areas without a work permit, especially Mongolians which I found quite interesting (spelled women- who can make other Asians look downright ugly – oops). And they have these population control rules. And then they have these urban housing explosions.

    WTF?

    China, according to Fukiyama(sp) has a trust and corruption issue (read collapsing schools). But they are incredible strong in their family ties. Walk down a major street in Beijing and it’s like other people don’t exist. But their family ties and neighborhood ties work quite well.

    I suppose the Chinese gov and the elites have too much money to throw around. Not all of China is going to become Hong Kong or Shanghai.

    If anybody knows how this is going to turn out, I’d love an explanation.

  10. ricecake says:

    @Mark E Hoffer,

    Never said China has no problems. They do. How can they not? All things have two sides. In this case more than two sides. But that’s problematic side of the story you are talking about.. China is not going to stop building the China dream because there are problems.

    May be the Americans do stop rebuild their American dream however.

    High speed rail is not a new discovery of China. The Europeans and the Japanese all have their high speed trains and very successful. You should read more than just one hand picked article about China’s high speed rail story. The high speed from Guangzhou to Wuhan is a great success for example. They have to add more and more schedules. More and more Chinese are taking those trains. China don’t have oil sources so they have to build massive high speed public transportation system powered by … may be nuclear power plants. (Like Japan.)

    Since 30 years ago “China Collapse” speculators have never stopped to calculate the date of China collapse. Nothing new there. But so far they are seriously disappointed. China may or may not collapse in the near future. But even if it does, it will pick itself up quickly and make progress again. Because they remember what it was like 30 years ago. There were nothing except almost a billion of starved people living in a vast dirty poor under under developing country under tyranny. Now everything is different. China is inspired by the success of Japan, S. Korea, Taiwan, Hong Kong, Singapore ….

    @rip

    Corruption and trust issue in China: Yes the worst. Chinese Premi Wen already said that. What will kill China’s advance is CCP officials corruption. Currently they are doing cleaning housing operation. Don’t know how that will turn out.

    But how much better the U.S.A in this area? In China at least they put their criminal in jail put bullets in their black hearts when the captial crime reach to certain figure. In the U.S.A, your criminals are still running around ponzing and scamming, not only jail free but also continue to corrupt your politicians and steal from the people and the society.

  11. wunsacon says:

    Henry Kissinger wrote a book? I hope he holds book signings.

    http://video.google.com/videoplay?docid=-2815881561030958784#

  12. socaljoe says:

    hoffer,

    Predicate, yes… assumption, no.

    Kam Wing Chan, in a study performed at the University of Washington Seattle, entitled Internal Labor Migration in China, estimates that the Chinese Urban population will grow from 450 to 850 million from 2005 to 2020… or about 25 million people per year.

    Who knows if this forecast will come true or if enough jobs will be created to attract workers to the city. My point was that a ghost city of a million people is not significant in a country of a billion people undergoing massive urban migration.

  13. wunsacon says:

    >> But how much better the U.S.A in this area? In China at least they put their criminal in jail put bullets in their black hearts when the captial crime reach to certain figure.

    ricecake, I don’t know “who’s doing better”. Some of those documentaries paint a picture of “full retard” central planning in China. They’re building condos that sit empty forever because they’re too expensive for the working class families living in the shadows in makeshift group housing. The new high-speed rail was built with shoddy material and is too expensive for working class to use. And, supposedly, the richest 70 of the 2,987 members of the “National People’s Congress” are worth a total of $75 billion collectively, which puts our Congress to shame. (That means “CCP” now stands for “Central Capitalist Party”?) So, when these guys put a bullet into (probably deserving) criminals, is it justice? Or is it a mob hit by the party bosses against incompetent henchmen?

  14. Chad says:

    Kissinger’s book on China? Yawn.

  15. [...] artificially inflates their numbers, don’t kid yourself. http://www.ritholtz.com/blog/2011/05…-ghost-cities/ [...]