Sunday, September 11, 2011

China's Empty Cities are Still Empty

Ordos is a new city in China that was built to house more than a million people, but it's greatest claim to fame is being a ghost town. (There is an old city of Ordos, too). David Levinson commented on Ordos at The Transportationist. I've commented on China's rapid urbanization here. Al Jazeera has returned to Ordos and found that it is still mostly empty.This link has their story. Here is part of their story that highlights the bizarre world of Chinese urbanization:
Others who later visited Ordos, including economist Ting Lu of Bank of America-Merrill Lynch, pointed out that the real estate was not sitting idle, but had all been sold. So while the city lacked human beings, it was certainly supplying this odd demand from Chinese purchasers for empty apartments. Ting Lu went on to recommend it as a "must see for emerging market investors". However, Ting Lu's bullish assessment of Ordos was challenged by Patrick Chovanec over at Tsinghua University's School of Economics and Management. He wrote a rebuttal, which you can read here in full. Below is Chovanec's main point: "Demand for empty residential units as a store of value [like gold] is real demand, but it's also a historical aberration. It's based on a highly unstable set of unique circumstances, including (1) limited investment alternatives for Chinese savers, (2) a limited track record, since China converted to private home ownership in the early 1990s, in which investors have never really seen a sustained downturned, and (3) minimal holding costs for idle property, including the absence of any annual property tax." Right. Keeping your savings in the bank yields very little because interest rates are so low in China. Inflation hit a three-year high this past July at 6.5 per cent, meaning that wherever Chinese store their savings, it had better yield something that can keep up with the rate of inflation. The stock market is no longer a popular choice for many ordinary citizens, who find it too unpredictable. That really only leaves property to dump your money. Ordos is one oversized, inefficient bank vault. And when we decided to check in after two years to see how "Bank of Ordos" was doing, we found a surprise: construction is still happening at a fierce pace. Ordos now boasts Asia's largest fountain show. Its theatre has managed to hold a few concerts this year. There are definitely more signs of life than the last time around - but still comparatively little relative to the size of the city. We came to realise just how little when our team got thirsty midway through our shoot and decided to buy water.
This is a weird situation. My guess is that eventually the city will fill with people and businesses, either by choice or governmental action. I'm not convinced that fulfilling the promise from the investment in the city decades late will make the overall investment worthwhile. I know China has plenty of cash and they have to invest it somewhere, but it seems likely there is some more productive use of those monies than building Asia's largest fountain show in an underpopulated desert city.
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