Ticking Bomb and Ghost Cities of China

In my previous post: "Tickling China (and gauging it's heat)", I talked about some stunning facts about their GDP, artificial growth and unimaginable infrastructural investments. In this article I intend to focus on their infrastructure growth and why that (the most celebrated face of their growth story) could result in their downfall. 

On a different topic Andrew Potter recently argued "You can’t outsmart crazy’- or can you?". China's fixation with pumping their GDP via infrastructure is nothing less than crazy. Can they outsmart their own craziness? Historically it has not been possible, but let's grasp the amplitude first. These are some stats, keeping in mind we are still coming out of a massive recession:

Unnatural Growth
-- As I mentioned earlier, 95% of their growth last year came from fixed asset investments! 
On an average fixed investments have contributed to 40 to 45% of their GDP in the last 5 years. Thomson Reuters's research shows this is much higher than what Japan (85-91: 32%) and US (01-06: 17%) experienced during their Real Estate Bubbles. 

-- According to recent reports land sales were up 70% as US$411 billion was spent on transactions last year. Cost of real estate in Beijing alone went up by 42% last year. The government is fighting hard to control the madness - imposing caps on the maximum number homes a family can buy, hiking down payments on second homes... 

Over Capacity
-- Empty buildings are becoming a common sight in major cities now. This is not normal for a developing country. The official vacancy rate in Beijing capital is 30% but touches 50% in a lot of pockets. 

-- Even with the rising vacancy rate, the rentals don't seem to go down. The reason is a little crooked: lowering the rental would mean lowering the value of the underlying land, which in turn is used as a collateral on another loan for current development work. So rentals seem to hold their ground. Oh yeah, this looks similar to a chapter from the classic Madoff or Ponzi book.  

Rapidly Ageing Population
The One child policy introduced 32 years ago might have been necessary but it also means that their population will age at a faster rate than normal. Their working population is set to decline from 2010 onwards. In 10-15 years the population pyramid could look similar to Japan's. By 2050, India will have the highest working population. 

They will have a serious ageing problem in the next 15-20 years if the trend continues. With 10 times more people in China and nearly the same output as Japan, here is what's being predicted:

"China could have a ageing problem similar to Japan before it gets as rich as Japan"

Now, I am not an economist or a researcher (not a renowned one, anyway). But here is what I find interesting:

Inflated "bubble" property prices + over capacity + dwindling work population  

=  Vacant cities (homes/offices) + increasingly fewer people who can afford to pay for the infrastructure/ homes/offices/rentals.. 

= (Don't cut down infrastructure spending ---> risk of a collapse) ... OR ... (Cut down infrastructure spending ---> famous GDP growth takes a hit

and on top of that...

 + highly probable real estate bubble-burst (more like a bomb-explode). 

We all have fresh memory of 2008, so I will skip elaborating on that. Can I be wrong? Of course I can. But before you write me out, go ahead and a take look at some images of ghost cities of China. Some of the 65 million vacant homes would be a part of these ghost cities

Click here for a photo blog. 


There are lot of other cities that run a shockingly high vacancy rate. A simple Google search will get you to more information and pictures. Here are some more interesting pictures

I hope I am wrong about China, because there are a lot of countries that could be dragged into the hole. I happen to work in one of them - Canada.