China's "Ghost Cities" Go Mainstream, But Will Anyone Actually Notice?

From Business Insider comes news that 60 Minutes has done an in-depth profile of China's ghost cities - only a couple years after many of us started noticing this creepy and telling phenomenon, but, hey, better late than never.  BI has plenty of good screenshots worth perusing, but here's the whole video for your viewing pleasure:


After seeing this crazy video (or any of the others that have been floating around since 2009), how can anyone steadfastly declare the inevitability of China's future economic dominance or take headlines like the following seriously?

BREAKING: China sets 7.5% goal for 2013 growth with 3.5% inflation target
— Bloomberg News (@BloombergNews) March 5, 2013

(Hint: they can't.)

Debunking US Politicians' China Infrastructure Love... Again

US politicians, particularly Democrats, have been enamored with China's massive infrastructure spending for years now.  I've already taken a few swipes at this misguided affection, but it seems that it - and the underlying assumption that massive new spending on US infrastructure will boost jobs and jumpstart the flagging economy - will again play a prominent role in the 2012 elections.  For example, Massachussetts Senate candidate and Democratic National Convention headliner Elizabeth Warren released a new TV ad during the 2012 Olympics opening ceremonies, in which she questioned why the US government wasn't spending more on infrastructure when so many citizens are out of work and our "competitors" like China are spending like crazy on their roads, bridges, trains and cities.  Warren certainly isn't alone: President Obama has long been a fan of comparing US and Chinese infrastructure spending, and has been on the campaign trail trumpeting the notion that infrastructure spending is an obvious and uncontroversial jobs plan.

What Warren, President Obama and their big spending friends seem not to understand, however, is the simple and obvious fact that comparing US infrastructure spending to Chinese spending is a really, really dumb idea.  First, given the differences in the countries' governments, budgets and stages of development, their rhetorical ploy is a classic case of comparing apples to oranges, as made clear in this lucid critique by Reason's Ira Stoll:

The first problem is mathematical. U.S. gross domestic product is about $15 trillion a year. Increasing infrastructure “investment” to the 9% Chinese level that Warren cites would mean an additional $1 trillion a year in government spending. That’s an immense spending increase. To put it in context, the entire federal government spent about $3.6 trillion in 2011, on revenues of about $2.3 trillion.

Where would this money come from? Not tax increases, right? Warren has already reportedly promised nearly a trillion dollar tax increase, spread over ten years, by raising the estate tax, imposing the Buffett Rule, and letting the Bush tax cuts expire for those earning $250,000 a year or more. But that money, she has said, would go toward deficit reduction. If Warren really wants to spend $1 trillion a year more on infrastructure, she’d need to eliminate all national defense spending ($705 billion) or all Social Security spending ($730 billion) and then find another more than quarter trillion dollars. Or else she’d have to go on the biggest borrowing or taxing binge in American history.

Math, though, is hardly the only problem with emulating China’s approach to infrastructure spending. History is another. America and China are at different junctures in our development. America built a lot of bridges, tunnels, and highways in the 1950s and 1960s when China was stuck under Communism. A lot of China’s spending now isn’t going to outpace America but to catch up with things that we’ve had here for decades, like potable water and a population that is mostly non-rural.

Finally, not all of China’s infrastructure spending is worth emulating. The Chinese Communist treatment of those who stand in the way of their projects makes Robert Moses, the mastermind of so many of New York’s neighborhood-destroying highways, look like Mother Teresa. For example, the group International Rivers reports that 1.2 million people were displaced to construct the Three Gorges Dam. That $40 billion project also reportedly had devastating effects on the Chinese river dolphin, river sturgeon, and paddlefish.

China is able to spend so much on infrastructure because it’s an unfree country. It lacks the rule of law that lets American community groups wage legal and political battles against big government projects. Warren may protest that when she’s talking about “infrastructure” she mainly means maintaining existing roads and bridges, not building brand new projects that flatten urban neighborhoods or destroy scenic rivers. But that’s not what’s happening in China.

Stoll's criticisms are all valid, but he only hints at what, in my opinion, is the broader and more systemic problem with using China as some sort of model for a US infrastructure/jobs plan: the well-documented list of failures associated with the Chinese government's attempts to direct, via central planning, huge amounts of money to ambitious infrastructure projects in order to support domestic employment.  Such failures include not only the nasty dislocation issues that Stoll mentions, but also rampant fiscal mismanagement, capital misallocation, outright fraud and corruption, and, because of serious, often ignored safety problems, even death.

There is perhaps no better example of many of these facts than China's "ghost cities" - multitudes of literally-empty apartments and shopping malls built in the middle of nowhere in order to boost Chinese employment and GDP. (Seriously, if you haven't taken five minutes to watch the breathtaking video provided at the link above, do it now.)  But many recent stories about Chinese infrastructure projects make clear that these ghost cities have a lot of company:

• According to one of the Chinese government's top central planners, China's transportation construction initiative is all about "excessively big, redundant construction and unfair competition."  In the linked interview, he details how these projects have resulted in giant, unused "roads to nowhere" and a dangerous rail system that has not been reformed due to massive bureaucratic pushback.  As I concluded at the time: "government mismanagement of China's supposedly-awesome infrastructure spending has resulted in many wasteful - and often dangerous - bridges, highways and railways. And despite serious problems surrounding China's vaunted rail program, the government is quietly dumping even more money into the current, broken system in order to maintain arbitrary GDP and employment benchmarks."
• China's overinvestment in shipping transport, combined with an unexpected slowdown in the Chinese economy, has resulted in a huge Chinese "ghost fleet" of cargo ships roaming the high seas looking for business.  (Insert pirate noise here.)
• China's enormous spending on construction projects for the Olympics - lauded at the time by myriad fans of both architecture and central planning - may have produced fantastic venues for the 2008 games, but many of those arenas now sit empty and decaying (even in bustling Beijing).  And the Chinese government is struggling to pay the tab for these once-beautiful-now-creepy "ghost facilities."  Paying off the "Bird's Nest" alone will cost almost $500 million and take 30 years.  Oof. 

And today we see a lengthy new expose of China's big subway project, finding that it, like its infrastructure brethren, is riddled with waste, debt, mismanagement, danger and corruption (emphasis mine):

"Construction will cost at least 1 trillion yuan in total," said Chen Xunru, a member of the Chinese People's Political Consultative Conference, who conducted research into subway construction and delivered a speech on his findings to the CPPCC's annual meeting in March.

Experts are concerned that the construction could strain the resources of some city governments and plunge them heavily into debt.

They are also worried that the cities may not have taken account of the possible long-term costs of operating and maintaining the network. Moreover, there are concerns that the large-scale move toward construction has resulted in a shortage of trained professionals, which in turn could lead to reduced safety levels...

[T]he belief that a subway system is a symbol of a modern metropolis means smaller cities are also keen to build. "They see subways as their chance to polish their civic image and look like a modern city," he said.

Amid the raging competition between many similar-scale cities, some lost their ability to think rationally. "Some cities are mapping subway networks that will cost their entire combined income for five years," he said.

The NDRC imposed minimum requirements to prevent financially weak cities from building subways: A city must have an urban population more than 3 million, annual GDP must exceed 100 billion yuan, the local government budget must be at least 10 billion yuan, and the one-way traffic flow must reach 38,000 at peak time.

But, caught in the grip of subway fever, some cities have acted inappropriately.

In 2008, the State Council eased its grip on subway construction in the hope that infrastructure construction would further boost the economy. Zhang Yan, secretary general of the China Association of Civil Engineers, said that some cities manipulated the figures to meet the minimum requirement and obtain the green light: "Except for those in the first-tier, most other applicant cities submitted exaggerated figures for local one-way traffic flow."

Adding to the problems, enthusiastic cities tend to overlook the huge construction costs and overestimate the potential operating income. The heavy financial burden on local governments has crushed some underprepared cities...

Even Shanghai, with a population of 23 million and GDP of 1.9 trillion yuan in 2011, has been dragged into debt.... Ying Minghong, board airman of Shanghai Shentong Metro Group Co, said that only Line 1 is profitable. The income from ticket sales and advertising covers its daily operating costs, but is not enough to pay for maintenance or the interest on its loans. The city's other lines are in debt....


"I doubt there are more than five people in our company and the local government who know how much money the Shanghai metro loses every year. The problem is that it's not a simple mathematical question of adding the government's yearly subsidy and subtracting the metro's annual operating costs," said Yang....

According to a Xinhua News Agency analyst, who spoke on condition of anonymity, the total liabilities of the Shanghai metro exceed 100 billion yuan. However, the situation is far from unique....

It's estimated that in 2015, when the [Beijing] network reaches 581 km, the system will have an operating loss of 4.3 billion yuan, despite the huge traffic volume, Wu said. If depreciation and accounting costs are included, the loss will hit at least 17 billion yuan....

Many cities now spend money on subway equipment that consumes energy and pushes up construction costs, but doesn't improve safety, according to Wang Mengshu, of the Chinese Academy of Engineering....

One reason behind the spiraling cost is that builders blindly seek size and luxury in most cities, said Wang. "When the first subway line was built in Beijing, the platforms were smaller than 8,000 square meters. Now, none of the new platforms is smaller than 12,000 square meters," said Wang....

One of the drawbacks of the complex systems is that they use too much energy, with the power to drive the engines accounting for just 30 percent of total energy consumption.

The unnecessary facilities also pose potential hazards to subway operations. "Once a small problem occurs, the whole line is halted," added Wang.

This is partly because decisions about subway construction in many cities are not made by professionals. "Since the construction of subways in most cities is guided by the government, officials often have the final say in design and construction, instead of the experts," said Wang.

The November 2008 collapse of a subway construction site in Hangzhou, Zhejiang province, that killed 21 workers is a good example of the situation, he said. The local government blamed violations of construction regulations and technical failures. "But I think the accident exposed the serious consequences that can result from excessive interference by government officials in subway construction," said Wang, who inspected the accident scene.

"It normally takes three years to build a subway station of that size, but the construction period for that line was reduced by one-half by the city government," he said, adding that local government saw the completion of the subway line as an achievement of its tenure and thus attempted to reduce the construction period.

The CPPCC's Chen believed that the construction boom has resulted in a shortage of professionals: "Construction teams in many cities were scrambled to meet a deadline and untrained workers were hired. Safety cannot be guaranteed."

The idea that Republicans, conservatives and even most libertarians oppose state spending on infrastructure is a nonsensical strawman argument.  What these groups (myself included) oppose is massive deficit spending on centrally-planned infrastructure projects in an attempt to boost domestic employment.  This is what Ms. Warren and President Obama are proposing, and while their comparison to Chinese infrastructure spending is inapt for several reasons, their focus on China's experiences is helpful in one respect: it demonstrates the folly of thowing billions of taxpayer dollars at shiny new infrastructure projects to "grow jobs" in America.  Indeed, China actually provides the ultimate cautionary tale for people attracted to Warren's and Obama's plans to support US jobs via huge increases in federal government spending on US roads, bridges and trains.

Warren's and Obama's China infrastructre rhetoric is not just comparing apples to oranges; it's comparing apples to rotten oranges.  And fiscal conservatives are smart to avoid taking a bite.

UPDATE: Colin at ToGetRichIsGlorious adds via Twitter: "And look at Beijing's sewers!"

The Continuing Absurdity of Breathlessly Praising China's State Capitalism

Back in April, I posted an astonishing video of China's "ghost cities" - sprawling, brand new cities replete with malls, office buildings and apartments, but with literally no actual residents.  Since then, I've posted other examples of how China's state capitalist system is creating massive distortions in its domestic economy.  At the time of my original posting, I asked a simple question:

After watching this video, how can anyone - anyone! - seriously advocate copying China's state-run approach to economic policy?

Yet people keep doing it.  Indeed, earlier this month former SEIU head Andy Stern praised "China's superior economic model" and added, quite ridiculously, that "the free-market fundamentalist economic model is being thrown onto the trash heap of history."  President Obama's also described China as an economic paradigm (at least on infrastructure spending).

Something tells me that Mr. Stern and his fellow sinophiles hadn't seen that first video and certainly hasn't seen this doozie about China's biggest ghost city, Ordos:



Blogger Unconventional Economist comments on the profoundly negative implications that, if repeated elsewhere, this implosion could have in China:

[A] video from NTD Television shows that Ordos’ home prices are crashing, having fallen by almost one-third. Meanwhile, construction has finally ground to a halt, leaving many construction workers unemployed.

With the real estate market accounting for around 10% of China’s GDP growth, and affecting many related industries, the concern is that the property downturn might become widespread, dragging China into a sharp recession.

Yeesh.

Meanwhile, Carl Walter and Fraser Howie debunk the widely-held myth that China's massive foreign exchange reserves will allow the government to easily fix the huge mess that is the Chinese banking system:

There's a growing consensus that China's banks are in trouble. Having overextended themselves over the past few years in a flood of government-directed credit, banks now must face rising problems with bad loans—a lot of this is basic math. But myths about how Beijing could solve the problem abound. Perhaps the most pervasive is that the government can always tap its $3 trillion in foreign-exchange reserves, and so no one should worry about a financial crisis. The truth is very different....

The role of reserves in any bank bailout is a central question now because if forex reserves can't save the banks, it's possible that nothing can. In the late 1990s, the last time Beijing faced a banking crisis, bad loans ultimately totaled more than four trillion yuan (more than $600 billion in today's exchange rate), more than one-third the size of the economy and four times national fiscal expenditures. That was tough but ultimately manageable for policy makers using a combination of foreign strategic investors, equity raising via partial share sell-offs to outside investors and, most importantly, the country's forex reserves.

But since then, the economy has tripled in size while on-balance-sheet bank lending has reached 130% the size of the economy. As nonperforming loans inevitably increase, the scale will quickly become unmanageable. In the face of ongoing national budget deficits of around $160 billion, the foreign-exchange reserves once again constitute the only pool of capital that would be sufficient for a bailout.

Sure enough, some see this perceived strength as a great comfort. In this view, Beijing could use its forex piggy bank to smooth over any problems in China's export- and investment-led growth model. But this fundamentally misunderstands what the foreign-exchange reserves are and what they can—and can't—be used for.

The authors go on to provide several key reasons why the "forex reserves fix" would be, at best, extremely messy and, at worst, might be totally unworkable for China's troubled banking sector.  They conclude: "A huge part of the wealth that has been created by China is stuck in the wrong place: offshore. To bring that wealth onshore can only create significant inflationary pressure, which, in turn, destroys the very wealth that has been created at home."

So to recap: China's housing and construction sector is a mess, and its bank system is a mess - all because of the glorious state capitalist model that Mr. Stern and others demand the United States emulate.

Yes, yes, let's like totally copy this system.

President Obama's (and Others') Clueless Love of Chinese Infrastructure Spending

Over the last few weeks, President Obama has traveled the country campaigning on the taxpayers' dime trying to sell parts of his Big Jobs Plan.  In order to sell a chunk of that plan - a massive new government spending spree on domestic infrastructure - Obama last week repeatedly cited China's infrastructure spending as the prime example of how the United States is desperately falling behind and needs to catch up:

Congress is expected to vote this week on a part of the jobs bill that would fund $50 billion for roads and bridges and $10 billion for other infrastructure projects. Obama said these projects would ease the unemployment rate, which was 9.1 percent in September, and rebuild America’s decaying infrastructure.  

“It makes absolutely no sense when there’s so much work to be done" and more than a million construction workers unemployed, Obama said, standing in front of the Francis Scott Key Bridge, which has been declared structurally deficient...  

Obama said Americans are paying nearly $130 billion a year to use bridges and roads that are out of date and unequipped to serve today’s society. He said the U.S. could be paying workers to rebuild these roads and compete with other countries transportation systems.  

Europe invests twice as much of its overall economy as the U.S. does on transportation infrastructure, Obama said, while China invests four times as much. “How do we sit back and watch China and Europe build the best bridges and high-speed railroads and gleaming new airports, and we’re doing nothing?” Obama asked.

Envy over Chinese infrastructure spending certainly isn't isolated to President Obama, or even Democrats.  Indeed, China's huge infrastructure expenditures are routinely cited by sinophobes of both parties as a clear indicator that the Chinese are eating our economic lunch these days.  For example, here's noted JapanChina-obsessive Clyde Prestowitz lamenting the disparity between the US and Chinese infrastructure budgets in his attempt to convince the American people that the US government should create an "Infrastructure Bank":

Just to maintain the current [US] transit and highway systems will take about $100 billion above current annual revenues for the next 25 years. To improve the system would take $150 billion annually. China, with an economy less than one-third the size of the U.S. economy, is spending about $1 trillion on upgrading its infrastructure. The total U.S. bill for a modern infrastructure would probably be on the order of $5 trillion to $10 trillion over the next quarter-century. That's a lot of money, and it's unlikely to come from either increased taxes or reduced government expenditures. It could, however, come from an Infrastructure Bank that could use an initial government-funded capitalization to leverage private capital on a project-by-project basis.

But don't hold your breath on this. It's not going to happen because of the policy issue.

Leaving aside for a moment the fact that the supposedly horrible state of the United States infrastructure is a highly questionable assumption, let's focus instead on the notion that China's massive infrastructure spending is something the United States should emulate.  Yes, sure, they're spending a lot of money on roads and bridges and rail lines, but beyond the sheer dollar-value, are these projects worth the money and, more importantly for our current purposes, worthy of US praise and imitation?

Well, if a high-level member of China's own planning commission is to believed, the clear answer to those questions is "no."  In a recent, eye-opening interview with Caixin, Chinese Academy of Sciences (CAS) academic and National Planning Expert Committee member Lu Dadao thoroughly explained that China's infrastructure system is rife with problems and in desperate need of reform. The entire interview is worth reading, but here are some of the highlights:

Caixin: What's the status of China's transportation construction initiative?

Lu: It's mainly about excessively big, redundant construction and unfair competition, as well as a lack of coordination between different modes of transport. First, look at expressway construction. In 2008, the nationwide total mileage plan was adjusted up to 100,000 kilometers. That year alone we built 6,433 kilometers and invested a total 600 billion yuan. Nationwide expressway mileage is expected to grow to a staggering 180,000 kilometers, if we add provincial and national building plans.

Personal vehicle traffic levels are too low on some expressways built over the past five years. Considerable stretches of expressways completed in central and western regions are usually empty, simply basking in the sun. Thus, expressway construction has suffered from excessive expansion. It's gotten out of control. Second, over-expansion for coastal port development planning and construction has clearly led to excessive competition between ports. China's port throughput capacity reached 4 billion tons in 2008, yet coastal communities continue to compete in the race to build large-scale berth and shipping container ports. Every port authority makes lofty claims about becoming a coastal or international hub for commercial shipping.

Additionally, many regional airports are being built blindly, with huge investments but no feasibility studies. This has led to major losses. In 2008, national subsidies to small- and medium-sized airports reached 9.3 billion yuan. But by 2020, we'll have added another 100 or so airports, mainly regional airports. Every year recently, construction has begun on about 20 regional airports, and more are waiting to be approved.

Moreover, there's been a surging wave of railway construction projects, including intercity rail linking big cities, suburbs and small cities in some provinces, regions and municipalities. Our research group found there will not be enough traffic to support the big, city-centered railway transportation systems after they are completed....

Currently, China's expressway network accounts for 1.62 percent of total road network mileage, which is higher than in either Europe or America. In eastern regions, the expressway ratio is as high as 2.4 percent, and in the west it has reached 1.16 percent. This sort of road network clearly reflects one fact: Expressways, which play a backbone transportation role, are mismatched against other kinds of roads. The total expressway length is too great. A reasonable expressway mileage ratio is around 1.2 percent.

Caixin: Why has China's transportation construction program been excessive?

Lu: The main cause is a lack of consideration for China's national conditions, its stage of socio-economic development, and development trends. More than 30 years of high-speed economic development have caused China's GDP, population and urban population to expand rapidly. But China's per capita GDP is still quite low, and we can't use European or American per capita indicators such as transportation capacity or road length as a basis for the scale and rate of our development.

Caixin: Profit-driven but unrealistic "leapfrog" development has been widely mentioned in official documents. Are the pursuit of GDP growth and performance stars for government officials driving the transportation campaign?

Lu: Of course. Some local leaders think a big highway investment will play a large role in boosting the local economy. The search for profit and returns on short-term investment is prominent. Wild enthusiasm among local governments for transportation development often forces central government plans to be adapted to local plans. Plans for some local government transportation networks may be redone after new leaders are appointed. In addition, the limitations of current management authority have led to fragmentation among various modes of transport, which relevant government departments have a hard time coordinating....

Caixin: After the Wenzhou train crash, everyone has been concerned about the next step for high-speed rail planning and construction in China. What kind of plan do you think high-speed rail construction should follow?

Lu: Our view is that high-speed railway development in China has only begun. We still lack practical experience in safety and economic efficiency, as well as coordination with civil aviation and expressways, and we need to consolidate existing domestic and international experience. Internationally, the rational operating range for a high-speed railway is considered to be between 180 and 800 kilometers. On either end of this range are the operating ranges of expressways and aviation, respectively.

Caixin: There is a lot of talk about reforming various government departments. How do you see relations between transport authorities and other institutions?

Lu: Transport-related departments are currently too strong. Each has its own, strong planning and design institutions. But authorities in charge of comprehensive coordination are too weak and cannot negate the plans of functioning departments, such as the transportation ministry. There is no overall coordination for transportation construction, and department goals are neither unified nor coordinated. In this atmosphere, enthusiasm is stoked inside various departments, and the result is that each department launches individual, large-scale projects that greatly increase the overall scale and contribute to imbalance in the transport structure....

Behold, the miracle of central planning!  On the bright side, China's vaunted economic plans are at least consistent: now they have creepy ghost highways to connect their creepy ghost cities.  Heh.

But seriously, considering all of these problems, I'm sure that the Chinese government has pulled back on the infrastructure spending in order to implement the necessary reforms that Lu has proposed, right?

Errr:

Fresh funds appear to be flowing into China's beleaguered railway sector more than three months after a deadly train crash, which embarrassed Beijing and prompted it to reassess key aspects of the rapidly built system.

China's state-run Xinhua news agency, quoting unnamed sources, said on Tuesday that the Ministry of Railways expects a 200 billion yuan ($31.45 billion) funding injection soon, though it didn't indicate the source of the support. Calls to the Railway Ministry Tuesday evening weren't answered.

Also Tuesday, bullet-train and locomotive maker CSR Corp. said the ministry late last month made a key 6 billion yuan ($954 million) payment for equipment. Also, in recent weeks, the Railway Ministry itself raised 40 billion yuan selling domestic bonds.

Railway-sector stocks have been buoyed in recent days on hopes that money is being unlocked, in a possible sign that construction halted on thousands of miles of track may resume. Any fresh commitment to railway spending by Beijing is likely to be seen by financial markets as the latest sign authorities are moving to underpin the economy in the face of slowing growth.

Railway work in recent years has been a proud Chinese achievement, and a key aspect of the country's spending on infrastructure construction. But spending slowed this year after the collision in July of two bullet trains that killed 40 people and appeared to undermine the safety of the system. The disaster added to pressures that already included tighter Chinese monetary policy as well as closer scrutiny in the wake of scandals and equipment snafus.

Money has appeared tight at the Ministry of Railways, one of China's largest government institutions. After the July crash, analysts began to question how it might pay its long-term debts: Standard Chartered Bank estimated its debts at the end of the first quarter of 2011 at $300 billion and a debt-to-assets ratio above 58%. By October, railway contractors said work on thousands of miles of track and tunnels had been halted due to cash shortages, a slowdown that in some cases left migrant workers stranded.

Though the July crash prompted authorities to promise a full safety review of the high-speed railway system, Beijing hasn't announced a pullback from its commitment to modernizing the railway, including adding new freight capacity.

Still, there is no sign China's railway troubles are over.

Top railway officials, including the minister, were fired this year by Communist Party investigators on charges of corruption, though little information has been disclosed publicly. Speculation has also swirled that the central government could revamp the agency, possibly by separating its operation responsibilities from oversight roles.

Safety questions continue to hover over high-speed trains following the July accident in the eastern city of Wenzhou. It led to a recall of certain locomotives and a pledge by Beijing that inspections would be undertaken. One sign that clouds still linger: Beijing hasn't yet released a report of a probe into the July 23 crash that was expected in mid-September.

To summarize: government mismanagement of China's supposedly-awesome infrastructure spending has resulted in many wasteful - and often dangerous - bridges, highways and railways.  And despite serious problems surrounding China's vaunted rail program, the government is quietly dumping even more money into the current, broken system in order to maintain arbitrary GDP and employment benchmarks.  But, hey, I'm sure that they've, like, totally fixed all of that, right?

Rrriiiight.

China's infrastructure problems are hardly unique to China: they're typical of any highly-centralized plan to use construction spending as an economic and employment crutch.  And yet President Obama and Mr. Prestowitz (and many others) think we should copy China's master plan?

No thanks.