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 nobody lives yet. The expectation is that China will “grow” in these cities.
A remarkable idea, really. Authoritarian planners in Beijing or elsewhere decide that it would be nice if, say, a million or more people could relocate to a previously planned area.
Then they build the infrastructure, or rather the entire metropolis, skyscrapers, traffic lights and everything, and wait.
Stop for a moment and reflect on how crazy this is. Last time your editor checked, central planning wasn’t a big hit. As the story goes, bureaucrats managing directives over 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, meaning “this time it’s different.” (Where have we heard that before…)
Supposedly, it’s okay that these ghost towns, built for millions of people, 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 superhighways 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. This whole build looks fabulous on paper. Ghost infrastructure is counted as a productive product 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 hallmarks of trial and error. Successful cities are built from scratch, they are not decreed with a bureaucratic stamp. So how does the government know where a new metropolis should go or what its optimal size should be?
Then 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, which no one is going to use for quite some time. Don’t worry, though, the demand for these factories will show up. Eventually 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 times of bubbles, investors will happily suspend their rational faculties.)
The Chinese government, of course, does not have to seek profit on its actions. Or you can measure results in a totally non-traditional way, through “how many jobs do we create” or “what do the GDP numbers look like”.
At the end of the day, the “ghost town” mandate is channeling right into John Maynard Keynes, who once suggested digging holes and then filling them back in as a way to put men to work.
China is becoming more sophisticated. Instead of digging holes, he is putting up buildings. Although the effect is the same. “One day” empty skyscrapers will have value, if they are not first condemned as worn-out structures, but until then they are just holes.
China’s bulls don’t mind ghost towns for at least three reasons.
First of all, 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, “an ongoing loan is no loss.” While the speculative music plays, developers can keep on 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 stalled projects worth hundreds of billions 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 runaway construction… with the tail end of the boom unwisely plucked from projections of the future. increase.
That’s another favorite tactic of investment mania: Along with embracing skyward growth curves forever, mortgaging tomorrow (and borrowing against it) for today’s sake.
Even if China can write checks to cover all those cities’ cancellation costs, 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 “ghost” or “ghost” growth, according to these empty monuments to nowhere, the collapse of that multiple could hurt.