The ghostly growth of China’s ghost towns

Bloomberg has a new video series called “China’s Ghost Towns.”

The reporter, Adam Johnson, describes how the Chinese government is building huge cities where no one lives yet. The expectation is that China will “grow” in these cities.

A remarkable idea, indeed. Authoritarian planners in Beijing or wherever decide that it would be nice if, say, a million people or more could relocate to a pre-planned area.

Then they build the infrastructure, or rather the entire metropolis, skyscrapers, traffic lights and all, and wait.

Stop for a moment and reflect on how crazy this is. Last time your editor checked, central planning wasn’t a great success. As the story goes, bureaucrats who manage long distances tend to misallocate resources.

But are ghost towns a recipe for a bust? Some say no. The Bloomberg reporter, for example, assures us that China’s economy is different, that is, “this time it is different.” (Where have we heard that before…)

Supposedly, it’s okay that these ghost towns, built for millions of inhabitants, only have tens of thousands of people living in them, because all those deserted square feet will eventually be put to good use.

As a bonus, building ghost towns is great for economic growth.

By running super highways in the middle of nowhere, building steel and glass towers in slums, China creates new jobs in construction, civil engineering, urban planning, and the like. All of this construction looks fabulous on paper. Ghost infrastructure is counted as productive output and the super-aggressive GDP target is maintained.

But what’s wrong with that image?

On the one hand, there is the problem of central planning. Growth and development are free market forces, with distinctive marks of trial and error. Successful cities are built from scratch, not decreed with a bureaucratic seal. So how does the government know where a new metropolis should go or what its optimal size should be?

So you have accounting problems. Should the promise of tomorrow be so easily reflected in today’s balance sheets?

Imagine if a public corporation said, “We’re going to grow 20% a year by building idle factories in the middle of nowhere that no one is going to use for quite some time. Don’t worry though, the demand for these factories will show up. Over time we’ll make a profit on them. Just don’t ask when.”

Such a plan would be brutalized by the market, because public companies are responsible for profits and return on investment (ROI). (At least most of the time: in bubble times, investors will happily suspend their rational faculties.)

The Chinese government, of course, does not have to look for profit in its actions. Or you can measure results in a totally non-traditional way, through “how many jobs we create” or “what the GDP numbers look like.”

At the end of the day, the “ghost town” mandate is channeling directly to John Maynard Keynes, who once suggested digging holes and then backfilling them as a way of putting men to work.

China is getting more sophisticated. Instead of digging holes, he’s putting up buildings. Although the effect is the same. “Someday” empty skyscrapers will have value, if not first doomed as worn-out structures, but until then they’re just holes.

China’s bulls don’t mind ghost towns for at least three reasons.

First, they have convinced themselves (with some faith) that the empty metropolis will one day (sooner rather than later) be full.

Second, they believe that China has plenty of money to spend even if the ghost towns don’t work.

And third, as the old saying goes, “continuous lending is no loss.” While the speculative music plays, real estate developers can keep dancing.

The problem, as always, comes when the music stops. If it turns out that China has built, say, 20 years of excess capacity by the time that happens, then hundreds of billions worth of stalled projects will have to be cancelled.

Even more difficult is the idea that China’s “economic miracle” is actually a heavily leveraged bet on mercantilism… underpinned by rampant construction… with the tail end of the boom unwisely ripped from projections of the future. growth.

That’s another favorite tactic of investment mania: along with embracing growth curves skyward forever, mortgaging tomorrow (and borrowing against it) for today’s sake.

Even if China can write checks to cover cancellation costs for all those cities, there’s a huge multiple built into the global economy right now under the assumption that China’s growth is the real deal. When it sinks in that much of that growth is actually “phantom” or “phantom” growth, according to these empty monuments to nowhere, the collapse of that multiple might sting.