Keynesian Ditch Diggers At Work: China's Construction Orgy Has Planted Malinvestments Everywhere

Back in 2006, Hu Jintao was excited when he visited Caofeidian, the “the world’s first fully realized eco-city”, built on land reclaimed from the sea. Since construction began in 2003, it has devoured the princely sum of $100 billion, most of it provided by banks. One million resident were once supposed to live there. It is a ghost town today, sporting only a few thousand inhabitants. Practically no-one has ever stayed in the city, and the buildings are already deteriorating. In fact, many of the buildings have been left half-finished, as credit eventually ran out.

The Guardian has posted a number of haunting pictures of this monument to massive capital malinvestment.

As the Guardian notes:

The ‘eco-city’ was made possible through huge bank loans. Once it was half-built, these loans were halted and many projects suspended due to the rising cost of raw materials and a lack of government support.”

A few of the pictures are reproduced below:

 

bridge to nowhereThe city's obligatory bridge to nowhere – only the ten pylons have been erected, then the project had to be abandoned.

(Photo credit: Gilles Sabrie)

 

idle factory

Idle factory – the factory was moved there due to tax incentives, but was never started up.

(Photo credit: Gilles Sabrie)

 

empty shopping mall

The 'Italian style shopping mall' – this complex was finished, but no business ever moved in …

(Photo credit: Gilles Sabrie)

 

tourist resort

The tourist resort on the beach – no tourist has ever visited it and likely never will, as it couldn't be finished anyway.

 

 A Growing List of Ghost Towns

Everybody knows of course the pictures of China's ghost towns – it all started with Ordos, which was a copy of…well, Ordos. The inhabitants of the old Ordos were apparently supposed to move into the new one, but never did.

By now there are apparently more and more such modern ghost towns dotting the landscape in China. They can possibly earn back a fraction of what was invested in them if a wily tour operator arranges “ghost town tours” for overseas tourists.

Consider though that all this mad-cap construction activity was recorded and reported as “economic growth” by China – even if it is in the final analysis  not much different from Keynesian ditch digging. They might as well have erected a big garbage bin in the Gobi desert and have thrown all the cement and steel in there – it would have been cheaper.

There are of course pockets of economic dynamism in China one must not underestimate, and it is a huge country. And yet, there is so much empty residential and commercial property by now, all of which was debt-financed on the basis of unrealistically high prices for real estate, that the question has always  been when rather than if the bill would have to be paid.

Note that the high prices of real estate in China (they are especially high when compared to incomes) are the consequence of a closed capital account and the resulting lack of investment alternatives, real interest rates that have been negative for a long time, a plethora of dubious shadow banking financing schemes (“wealth products”) promising what are really unattainable returns and used to piggy-back on the real estate boom, local governments using real estate development as a way to obtain funds, and a state-controlled banking system that has created so much credit from thin air, that they could hypothetically have simply bought Europe and put it on their front lawn.

Worrisome Data

Pictures of ghost towns are only anecdotal evidence of course, and reportedly, the situation is not as bad in the so-called “tier one” cities, the really large cities with several million inhabitants. However, we did take a comprehensive look at a number of data back in March (see: “China: Bubble Trouble May Be Brewing” for details) and those are not exactly giving us great comfort either.

Here are a few additional charts relevant to the topic that were published by CLSA a while back:

 

China-res

Residential vacancy rates by city – “tier 2” and “tier 3” cities are considerably worse off than the largest (tier 1) cities – click to enlarge.

 

China-residential vacancies by yearVacancies in China by year of construction: this shows that the real estate bubble/ building boom really went into overdrive in the course of the post 2008 credit expansion – click to enlarge.

 

China-debt-to-GDP-disaggregatedChina's total debt-to-GDP ratio, including public and private sector debt. From a previous fairly stably 150%, this ratio has exploded to 250% since 2008 – click to enlarge.

 

China-money supply growthAnd lastly, money supply growth (year-on-year) in China, which has slowed considerably from the manic peak of 2009. At one point early this year, M1 growth had declined almost to zero – click to enlarge.

It is slightly alarming that after an attempt to slow this crazy real estate bubble down a little bit, China's authorities have decided to have at it again – all over the country, restrictions have once again been eased. The shares of real estate developers have recently shot up by 10%. The question is though: does the country really need more real estate development at this stage? Have all those vacancies magically disappeared?

They haven't of course. We rather suspect that the authorities are getting cold feet in light of the many “wealth management products” that are coming due. Behind these shadow bank activities are China's state-directed big banks. Whenever one of these trusts goes belly-up, duped savers become very restless indeed – and the one thing China's leadership traditionally wants to preserve above all else is “social harmony”.

As Asianomics recently reported, China's banks have been encouraged by the PBoC and the government to engage in a kind of “targeted QE” to inject money directly into preferred economic sectors. So in spite of all the talk about serious market-related reform, the new government is just as wedded to central planning as its predecessors were.

Conclusion:

There are undoubtedly many parts of China's economy that are quite dynamic and are creating wealth. If that were not the case, it would not have been possible to misdirect scarce resources on such a vast scale. And yet, in spite of the leadership's ability to keep an increasingly extreme amount of bubble activities going by intervention and credit growth, there has to be a limit somewhere. The parts of China that are actually generating wealth cannot be expected to be able to subsidize malinvestment of such gargantuan extent indefinitely.

Moreover, economic statistics released by China are not only not very reliable, they describe all these bubble activities as “growth”. But much this is actually not genuine growth. The proper term for erecting entire cities that stand empty is not “growth”, it is “capital consumption”.

 

empty residential blocks

Empty apartment blocs in

(Photo credit: Gilles Sabrie)

 http://www.acting-man.com

 

Charts by: CLSA

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