Will China’s ghost towns make or break the nation’s development?


China at present is one of the fastest growing economies in the world. As major cities like Beijing and Shanghai are expanding, there is an increasing demand for services and production and hence an increasing demand for labor. With over a billion people inhabiting the country, most of whom live in the countryside, major cities are beginning to become more and more dense in order to meet the needs of China’s economy. However, major cities are beginning to see the limits of their development and housing is becoming harder to come by. Therefore, new housing developments are being created but the supply has been much higher than the demand and is causing housing bubbles in China.

As a means to counterbalance China’s population and economic development to be more well spread out, local governments are investing in huge infrastructure projects to build new cities to house the increasing number of permanent and migrant workers. Local governments are being directed to report specific annual GDP growth numbers and are using construction as a means to reach those goals. China has begun to see new towns popping up all over. With an estimated 10 million people leaving the China’s countryside every year to relocate in cities, it would appear that the need to extra housing would be necessary, especially in areas in China that have yet to been developed. Or would it?

Purpose of the blog

 Examining current ghost towns in China and the way they are being used to promote local GDP is important in determining the future of China’s economy and whether it will produce a an economic crisis that will be detrimental to both China’s and the world economy.

Ghost towns

While local governments claim that there will be huge influxes of migrant workers to new cities, there has yet to be sufficient evidence showing that the demand is really there. Investors all across China have been investing millions of dollars into purchasing homes that are being directed by the government to construct in hope that one day their purchases could be turned around for profit.

There are estimates that the number of empty homes in China are as many as 64 million, with up to 20 new cities being built every year both near and far away from already developed cities. The biggest most recently constructed city in China is Zhengzhou New District, located in China’s west central province of Henan. The new district was expected to house several hundred thousand people within the first 5 years after being constructed in 2006. However, only a fraction of that number live in the area and the town has obtained the nickname “ghost town”, just like so many other new cities being built in China due to the area being virtually uninhabited. In that area, one can see office towers, administrative centers, museums, theaters and sports facilities as well as thousands of homes virtually deserted.

These developments have remained empty because of high prices in housing and interest in investment. According to research carried out by Time magazine, fixed-asset investment in China accounted for more than 90 per cent of its overall growth in 2010 – with residential and commercial real estate investment making up nearly a quarter of that.  Local governments in China are being directed by the central government to reach a certain GDP and inevitably are choosing construction to meet those goals. Patrick Chovanec, a business teacher at Tsinghua University in Beijing, who explains that the reason for this is that no mayor wants to report that he didn’t get 8 percent GDP growth this year and that the incentives in the system are to build, which if that’s the easiest way to achieve growth, then you build.

Many economists are worried about the construction local governments are pushing forth especially since there is so much fixed investment. Some people with more extreme views such as Anthony D. Poerio have said that the result of China’s unnecessary expansion is that we have perhaps the first outposts of civilization that are impractical to the point of being unusable, as many of them have housing prices so high that even if there were people available to fill them, it would be impossible to do so. He also said that the money simply isn’t there, and ideally never will be, otherwise the investments of an entire country’s wealth would be utterly devalued (unless China someday controls so much of the world’s wealth the cost of living in these cities becomes affordable only to them. Poerio thinks that China’s ghost cities are not being built in China to be inhabited. Instead, they are being built to embody capital in a physical form. In addition, the New York Times speculates that China’s ghost cities might be nothing more than real-estate speculators working with the government to build extravagant new cities that turned out to be unneeded or unwanted. However, the newspaper does point out that China’s efforts might all seem mere nouveau riche folly, were it not for China’s national goal of moving hundreds of millions of rural residents to big cities over the next decade, in the hope of creating a large middle class.

But is this emerging middle class in China going to be able to afford these new homes, especially after they have been taken over by investors? Chovane insists that the building boom is being driven by frenzied investors, not by the housing needs of millions of migrating workers.  “People are using real estate as an investment, as a place to store cash – they treat it like gold,” Chovanec said. “They’re stockpiling empty units. This is going on in cities of virtually every size.”

Many economists feel that what Chovanec says is legit due to the investor frenzy in China’s major cities. For example, the China Daily cited the Chinese Academy of Social Sciences saying that out of the 35 major cities surveyed, property prices in eleven including Beijing and Shanghai were between 30 and 50 percent above their market value. This in turn could be the reason why so many new developments are being invested in. Even Chinese government think tank warns that the country’s real estate bubble is getting worse, with property prices in major cities overvalued by as much as 70 per cent. 8 Prices in Fuzhou, capital of the southeastern province of Fujian, had the worst property bubble with average house prices more than 70 percent higher than their market value, according to the survey conducted in September. The average price in the 35 cities surveyed was nearly 30 per cent above the market value.

Aside from investors penetrating the market, there are other reasons why China is seeing property prices remaining high despite the government adopting a slew of measures since April including hiking minimum down payments to at least 30 percent and ordering banks not to provide loans for third home purchases. Massive stimulus measures taken since 2008 to fend off the financial crisis injected huge amounts of liquidity in the market and have been blamed for fueling real estate prices.  As a result, prices have continued to soar and investors have increasingly turned to property speculation fueling the continued bubble. The onset of the 2008 global recession was the bursting of the real estate bubble in the U.S. and experts fear a similar situation in China could prove catastrophic for still struggling economies and banking systems.

So could China see a huge financial crisis similar to that of the recent financial crisis offset in the US which triggered a global financial crisis? Public discontent has been fueled by high prices in China’s cities and the measures, introduced in April of 2010, have made it more difficult for speculators and developers to hoard land and chase up prices as lending has been restricted. However, Beijing has introduced measures to cool “ridiculous” property prices, but the risks of a crash mean the campaign is unlikely to ease up in the next year. More so, Wang Shi, chairman of China Vanke – the country’s largest property developer – said: ‘Tightening measures will not loosen next year. ‘If we can control the pace of property price gains within a reasonable range, it’s already an achievement.’ ‘It could be really, really bad without the government stepping in.

But short-seller Jim Chanos has issued a more dire warning, and said he expected China’s economy to implode in a real estate bust. He said the country was ‘on an economic treadmill to hell’ and the country’s bubble was ‘Dubai times 1,000’. Chanos points out that in the 1980s, Tokyo saw a massive rise in property prices and a subsequent crash. The Hong Kong property market experienced a similar phenomenon in the 1990s.

The ghost towns being created in China are not affordable for the average Chinese nor will they be in the upcoming future. According to Hong Kong-based real estate analyst Gillem Tulloch, the housing units are priced well above what an average Chinese person can afford. The result, he says, is a housing bubble that is terrifying in size, “a property bubble like which I don’t think we’ve ever seen,” he says. “It will make the United States pale in comparison. It’s essentially the modern equivalent of building pyramids. It doesn’t add to the betterment of people’s lives, all it does is it promotes GDP.

Meanwhile, Hong Kong-based Asianomics Ltd. and former chief economist at CLSA Asia-Pacific Markets, Jim Walker, says the result will be “pretty horrendous,” slashing economic growth to less than 5 percent over two years and saddling banks with more than $400 billion in bad loans. Banks are at risk because they often use land as collateral for loans from developers. Also, a 50 percent fall in property prices would mean the loans are no longer covered by the land’s value, calling into question “the solvency of the entire banking system.”  The nation’s 13.6 trillion yuan ($2 trillion) of new loans in the past 17 months, bigger than the economies of South Korea, Taiwan and Hong Kong combined, is “unprecedented in 400 years of economic history,” said London-based hedge fund manager Hugh Hendry, co-founder of Eclectica Asset Management, which manages $420 million. Risks associated with home mortgages are growing and a “chain effect” may appear in real-estate development loans, the China Banking Regulatory Commission said June 15 in its annual report.

Chanos further points to preliminary data on 2010 accounts. “Fixed income investment is now a record 70% of the Chinese economy,” he says. Of this $3.5 trillion, Chanos says around $100 billion goes to high-speed rail and similar low numbers for other celebrated infrastructure investments. Most of that money is locked up in real estate. He also says that the problem is that consumers are less and less of this economy as this property bubble has gone on and a large amount of consumption that the consumers are embarking on is real estate related, it’s furniture, it’s appliances, these sorts of things you buy when you’re buying a new house or condominium. He further said that any time you try to take something that’s 70% of your economy and reign it in and transition history tells us that usually the risks are to the downside.

Chanos also indicated that China’s real estate companies own too much land, which he said had previously in the US had been the cause of a real estate bubble. Now there are only 30 billion square feet of space in construction for commercial property, which is enough space for a five square foot cubicle for each individual in China.

There are indeed tens of millions of Chinese people who would like to own their own homes — but is the urban development the government has backed creating housing stock that is hopelessly out of their reach, even as it destroys old neighborhoods and cities at a feverish pace? This paper will examine this aspect more after my fieldwork has been conducted. In addition, I speculate that the people who could afford these new houses being built are already well off elsewhere in another city and are not looking to relocate. This along with the fact that farmers looking to migrate to cities and purchase houses that are not affordable for them, along with difficulties in obtaining house loans, puts China’s economy at a great risk.

To see evidence of where huge development projects were also developed and have yet to shown any economic growth, one can look at the South China City Mall, which has been open for about 7 years. Developers boasted that it would become the world’s biggest shopping small with plans that 1,500 shops would be opened in it. Developers also estimated that an average of 70,000 people were expected to visit the mall on a daily basis. The New York Times even said that the mall was proof of “China’s astonishing new consumer culture.” However, almost all of the stores but one toy store are empty and the owner of the toy store reports that he sells one toy a day on average.

With areas like New Zhengzhou District and the South China City Mall showing little growth both population and economic wise, has there been an overestimation in China’s predicted middle-class, population transfers as well as consumer culture? This aspect will be researched as well. So far it appears that is the case unless the government decides to step in and start taking more initiatives to try and get people to move into these new cities. More so, the government will have to loosen its restrictions on the down payments needed to purchase house as well as the amount of time buyers have to finish paying off their homes. 

Implications on world economy

The biggest question now is that if China is putting itself at risk of a financial crisis, will this effect the global economy? There are many points to consider. In Western countries, GDP is the residual of the free market. It becomes the end result after people have save, spent, invested etc in the economy. But in China it is essentially the opposite. GDP is a planning tool and a target that the government adopts and tries to reach. The means by which that targeted amount will be reached are decided afterwards and the government can set quotas for local governments as they please. China is a command economy and the government controls where resources are spent. Therefore, it is quite possible that if any crisis was on the horizon the government would most likely step in and counterbalance the situation.

If there were a risk of a more prolonged drought, the Chinese government would most likely act further. If there are some bad loans on the Chinese banks’ or private trust companies’ books, the government would — if needed — buy them. This is a lot different then what has happened in other countries that have had economic crisis. In the US, the government bailed out banks due to a crisis that was not initiated by excessive government infrastructure projects, but rather, a free market economy that had too many bad loans being given as well as greed on Wall Street. More so, due to strict rules set by the government that state that a person must have 50% of the total cost of a house prepared for a down payment and that the remainder of the housing price must be paid off in 3 years. It is said that due to these restrictions China has been able to avoid a credit implosion like that of the US.

People are also concerned because China is the biggest buyer of US debt and does it through treasury bonds. If China’s economy were to face serious issues, it could mean that China will stop purchasing the US’s debt. Global economic growth is now inextricably linked to that of China. China now accounts for an astounding two-thirds of world iron ore demand, around one-third of aluminum ore demand and more than 45% of global demand for coal.

More so, Michael Pettis of Peking University has been arguing for some time that China is running up against the limits of it’s investment and export-led growth model, and that the days of double digit growth rates will soon be a thing of the past. He says that consumption growth of 8-9% will be very hard to maintain and that people should be prepared for even lower average growth numbers, perhaps in the 3-5% range. He also says that non-food commodity exporters will be badly hurt.

There is also the possibility that a material slowdown in the Chinese economy would have a negative effect on the willingness of global banking systems to continue providing credit. Those countries with the heaviest reliance on China as a destination for exports (Hong Kong SAR, Taiwan, Japan, Korea, Singapore, Malaysia, Australia, Brazil, Chile, Peru and Russia) could potentially see a retrenchment of their banking systems, with credit availability reducing. Iron ore exporters could be amongst the biggest potential losers as well. More so, this impact could be exacerbated by negative developments in the real estate markets of those countries with strong trade links to China, particularly those where property prices have risen strongly over the past 12–18 months, such as Singapore, Hong Kong, Taiwan and Australia.

Do planned cities work and could China’s ghost towns prove to be effective?

A planned community, or planned city, is any community that was carefully planned from its inception and is typically constructed in a previously undeveloped area. So then how do cities become created and attractive for people to move to? Where I think the Chinese government needs to consider more is the location and resources a given area has where the new cities are being produced. Generally speaking, cities around the globe have been built along rivers, near ports and oceanfronts, or in areas where natural resources are in abundance. There are also many political reasons as to why certain cities like Beijing have came about, such as its strategic location to defend itself from invading forces from the north during the Yuan dynasty. Other major Chinese cities like Hong Kong and Shanghai have been important due to their geographical location and have all been more or less planned hundreds of years ago. But now with so many recent infrastructure projects being constructed, most of which are located in areas that are not geographically useful, it is hard to tell whether these ghost towns will be effective or not. This paper will look into this matter further after the field study.

Why ghost towns could help China

They could help avoid land use conflicts. A land use conflict occurs when there are conflicting views on land use policies, such as when an increasing population creates competitive demands for the use of the land, causing a negative impact on other land uses nearby.Two common types of land use conflicts in urban areas are residential industrial or residential-transport land use conflicts. These can cause noise, air, and water pollution. Apart from the noise and gases released by factories, pollution is also caused by the vehicles, which carry materials to and from factories, which can cause incessant noises and smoke. Heavy road traffic also causes traffic congestion, affecting many nearby residents. In addition to factories, the presence of main roads also affects residents, causing the same problems as above. Overall, China’s already growing cities are becoming too overcrowded and polluted and if residents move to new locations a lot of the environmental issues China is facing could be solved.


The government’s number one goal in recent years has been to develop China’s economy and increase GDP growth. It is usually understood that construction is good for an economy because it creates jobs and increases GDP. But what should be taken into consideration is the quality of the GDP, not the quantity. Since there is so much construction underway and not enough demand to keep up with the production, China may be creating its own economic bubble. The government has said on numerous occasions that there will be mass movements of people from rural areas to cities in the future. While this is indeed already happening, there is yet to be a sign of how and when many of China’s rural residents will move to a city that is not inhabited. Chinese are becoming more and more aware that cities like Zhengzhou are deserted and that there are no job opportunities. Thus, naturally nobody is deciding to move there and this puts into question how China will deal with its empty cities.

There needs to be incentives for Chinese citizens to move into these new developments otherwise they will remain empty. The people who could afford to move into new housing developments are already well off where they are and most likely have no reason to move to a new development in the middle of nowhere, or so I speculate. The implications this may have on China’s society may be austere if not dealt with properly and could cause a financial crisis both domestically and even globally. More so, China could become so polarized as a society due to the imbalance in the housing market. Tulloch says that China is in the upswing of the bubble and that when the bubble bursts, many people will be impoverished and could lead to social unrest. All of these aspects must be taken into consideration if China wants to continue to develop its nation and improve its citizen’s standards of living.


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