From ghost cities to ghost nations. Is this a turning point?
The Chinese economy is at a critical juncture. And it’s problems have nothing to do with the US or Russia. They’re much closer to home.
For a few years now we’ve been following the ‘ghost city’ phenomenon in China. Incentivised by Federal government policy, apartment construction in some areas run well ahead of expected population growth, creating whole swathes of empty highrises.
This was a problem for Chinese property developers, with Evergrande being one of the highest profile victims.
But turns out the rot runs deep, with municipal councils creating entire ‘ghost states’:
The Fengxin Expressway, still partially closed after construction stalled four years ago, is one of the many unfinished infrastructure projects in Zunyi, a city of 6.6 million people in mountainous Guizhou province. In addition to highways, housing projects and tourist attractions also stand incomplete, symbolic of the stark debt crisis that many local governments in China are facing after years of credit-fueled stimulus to juice growth.
The model is clearly no longer sustainable, with the central government looking reluctant, or unable, to adopt that playbook even as the post-pandemic recovery falters. Decades of urbanization have reduced the demand for more infrastructure, making it increasingly hard to find lucrative projects to invest in and pushing down returns on investment. Income for local governments from land sales has also slumped amid a property downturn.
Guizhou’s infrastructure binge came after a 2012 document from the State Council, China’s cabinet, called for investment into the impoverished province to close the development gap. The province became much better connected as a result, but the excess is also clear to see. Guizhou now has nearly half of the world’s 100 tallest bridges, according to the state-backed Economic Daily newspaper. It has airports in cities already connected by high-speed rail and just a few hours’ drive apart, and many multi-lane highways with expensive tolls.
Now, the provincial government is struggling to pay its debts, small businesses are not getting paid for construction projects and displaced residents are demanding overdue compensation and new housing be delivered.
One backwater province in China has half of the world’s 100 tallest bridges!?! You’ve got to hand it to China. When they build they build big.
But money has to be real or it becomes worthless (i.e you get massive inflation.) And for money to be real, debt has to be real.
And for decades China was running a ponzi economy. Borrowing against the promise of a fully-urbanised population in the mega-cities of the future.
But the tide is turning. The directive from the top is to pull back on credit. And that’s leaving cities and entire states high and dry.
But the problem is a financial one, which means the cancer gets to your financial organs i.e banks.
How to resolve municipal debt is perhaps the biggest headache policymakers face. Last year, borrowings from local government financing vehicles, off-balance-sheet entities municipalities use to finance their expenditure, ballooned to 57 trillion yuan ($7.9 trillion), or 48% of China’s gross domestic product, according to estimates from the International Monetary Fund. Already, some poorer provinces, such as landlocked Guizhou, are lobbying for bailouts.
Investors are starting to worry that banks might become the key instruments to absorb losses from LGFV debt.
China has done a phenomenal job in moving an insane number of people out of rural poverty into urban middle classes in an incredibly quick time.
But that development model was not without its risk.
And right now, it looks like the ghosts are coming back to haunt them.
JG.