11 ms·

There are a lot of things I don't understand about China's economy, and every time I think I might have a handle on it, I come across juicy tidbits like these o

by cs702 14y ago

There are a lot of things I don't understand about China's economy, and every time I think I might have a handle on it, I come across juicy tidbits like these ones: * The ghost city of Ordos. Built on spec for one million residents, this city sits empty in the middle of nowhere. A lot of money went into building all its plazas, museums, parks, office buildings, and residences, but no one needs or uses any of it.[1] * The New South China Mall, in Guangdong Province. With nearly 10 million square feet of retail space, it's by far the world's largest mall. Opened in 2005, almost no one ever visits it, and only around 1% of the retail space has been leased -- it just sits empty. A lot of money went into building it, but no one needs or uses it.[2] * A well-known hedge fund manager recently reported that China is building "2.8 billion square metres of Class A office space over the following couple of years... That’s basically a five-foot by five-foot office cubicle for every man, woman and child in China.” A lot of money is going into building a new cubicle for everyone, but what's the economic rationale?[3] [1] Here's a recent BBC article on it: http://www.bbc.co.uk/news/magazine-17390729 http://www.bbc.co.uk/news/magazine-17390729 and a great photo essay in Time: http://www.time.com/time/photogallery/0,29307,1975397,00.html http://www.time.com/time/photogallery/0,29307,1975397,00.htm... [2] Here's a recent video of the mall on a Saturday: http://www.youtube.com/watch?v=Eel1r1nm1lU http://www.youtube.com/watch?v=Eel1r1nm1lU and here's an article about it: http://www.dailymail.co.uk/news/article-1223747/Ghost-mall-The-worlds-largest-loneliest-shopping-centre.html http://www.dailymail.co.uk/news/article-1223747/Ghost-mall-T... [3] For example, see http://www.theglobeandmail.com/report-on-business/rob-magazine/chanos-calls-china-syndrome/article596067/?page=all http://www.theglobeandmail.com/report-on-business/rob-magazi...

twelvechairs 14y ago
A few points (with no overarching narrative): - China's construction industry is a force unto itself - important economically and a huge employer. Its hard to say 'stop'. - As it said in the OP - property seems the simplest way to invest money. After all, can prices go down when they are already so low compared to the west? - In the west we built in the 1960s at (what seemed then) a ridiculous pace, with new building typologies that were often terribly designed. Like us, they will be living with (or in) the consequences for the next 50 years. - Various levels of govt are already trying to put the brakes on the worse kinds of speculative development, with some success. Aside from the already clear examples of 'bad investment' (like the ones you point out) - the brakes are already coming from other directions too.
- jbattle 14y ago
  Why can't prices go down? As chinese apartment-owners start to look to 'cash in' their investment en masse, the supply/demand equation will flip and people will see at whatever prices they can to get some cash back out of their investment. Unlike Chinese workers, a Chinese apartment is never going to compete against a western apartment
WalterSear 14y ago
Simple: cargo cult economics. All modern western countries have big cities, masses of office space, and huge shopping malls.
est 14y ago
> The ghost city of Ordos Did you know Ordos has higher GDP per captica than HongKong?
- etrain 14y ago
  Only in certain environments does divide by zero == +Infinity.
- cs702 14y ago
  Surely. Every single yuan spent on construction -- whether what is being built is useful or not -- gets added to GDP; so, if one takes all the spending in Ordos and divides it by its near-zero population, the number is surely impressive. The same logic applies to the entire country's GDP, BTW: take out spending on construction, and China's GDP growth looks a lot less impressive.
  - est 14y ago
    Ordos has high GDP because it's extremely rich in natural resources. http://en.wikipedia.org/wiki/Ordos_City#Economy http://en.wikipedia.org/wiki/Ordos_City#Economy I think it's comparable to Dubai.
    - cs702 14y ago
      Oops, I meant to write, "if one takes all the spending in the ghost city of Ordos and divides it by its near-zero population, the number is surely impressive." The point I was trying to make wasn't about the overall Ordos area, just about its ghost city.
      - est 14y ago
        The old city has higher GDP per captica than HongKong. And the city looks like crap. That's why they've built a new one nearby.
  - pjin 14y ago
    This whole divide-by-zero rhetoric is a little silly. A quick google search yielded the following explanation: http://en.wikipedia.org/wiki/Kangbashi_New_Area http://en.wikipedia.org/wiki/Kangbashi_New_Area Ordos City itself apparently has close to 2 million people, but there's a fully developed urban housing district designed for 300,000 which has only reached 10% occupancy since 2010.
Estragon 14y ago
> There are a lot of things I don't understand about > China's economy I found the videos which the following blog post is based on quite illuminating. Unfortunately, the videos seem to have been taken down. http://asiavalueinvesting.blogspot.com/2011/09/chinese-banks-these-things-arent-banks.html http://asiavalueinvesting.blogspot.com/2011/09/chinese-banks...
PakG1 14y ago
A lot of money is going into building a new cubicle for everyone, but what's the economic rationale?[3] Often, the economic rationale is simply the desire to create jobs (on the part of the government to stave on social unrest) and the desire to create profit (on the part of private enterprises that couldn't figure out how to be more innovative and so jumped on the bandwagon of the construction boom without seeing the risks). As another comment notes, the government has realized this is a bad situation, and they're trying to put the breaks on it, but it's hard to do that and also enable a soft landing so that there's little or no social unrest. They're trying to shift from an infrastructure investment-driven economy to a consumption economy and an innovation economy, and the big debate is whether or not they have the right horses to be able to compete in that race.
rcamera 14y ago
I once read a Citibank's report on China's real estate market that might give insights to the answer to that. The report is lengthy, as it addresses many questions, but the core argument for the craziness in China's real estate market is that it is the most common form of (long-term) investment in China, and the government is the biggest beneficiary of it. Basically, if you look at an asset breakdown of personal wealth, real estate will account for 65% of all investments in China, while in other countries like the US or in the EU, that number is close to 20% (source: World Bank & Citibank's Investment Research and Analysis). Other than that, because of a reform on the tax sharing mechanism (in 1994), local governments are highly dependent on the real estate market, as 40-55% of their direct income comes from land sales and property-related taxes. That gives the government a very high incentive to keep property prices up and the real estate market booming. I can email the report to anyone interested in it (sorry, can't just upload to the public here, I worked at Citibank once, could get me into trouble), just send an email to me (rafaelcamera@gmail.com) and remember to put HN on the subject.
- wisty 14y ago
  > That gives the government a very high incentive to keep property prices up and the real estate market booming Note, the central government doesn't want high prices, but the Chinese government is not entirely monolithic. "Heaven is high, and the Emperor is far away", is a common Chinese saying - people bend the rules when they can get away with it. But yes, local governments get a lot of their revenue from land scales. If they are anything like Western local governments, they also get most of their bribes from developments (there are opportunities for zoning bribes, development approval bribes, building inspection bribes, waste disposal bribes, infrastructure connection bribes, and so on, depending on how corrupt they are).
- arethuza 14y ago
  I've just finished reading Boomerang by Michael Lewis and that huge concentration of assets in real estate sounds awfully like Ireland before the crash of 2008 - on a tiny scale compared to China, of course. Do you think that is valid comparison? (NB In many ways I hope it isn't as a crash like Ireland's on the scale of China would presumably be disastrous).
analyst74 14y ago
Well, China is power-centric culture rather than money-centric. This means you cannot assume market participants are all there to maximize their monetary gain, which is assumed by most economic theories. For example, a large force behind the housing bubble is the drive to increase local GDP, which is a vital promotion metric for local officials; another force is local bank executives' desire to pretty-up their promotion metric by pushing for more "safe" yet profitable loans. Construction companies are mostly just there to ride the train.
- simonh 14y ago
  > For example, a large force behind the housing bubble is the drive to increase local GDP, >which is a vital promotion metric for local officials; Also top party men are rotated from region to region regularly, so they only care about the local economy for as long as they are in tenure, typically 5 years. Whatever happens after that isn't their problem. The guys who built those empty cities and super-malls moved onwards and upwards. You can always blame the guy who took over after you for dropping the ball, or the guy you took over from for passing you a dud.
shimon_e 14y ago
A city for one million residents is very small for China. Most of the time such a place would only be called a village. I lived in another ghost city in China for a few months. Suddenly, over night the city filled up and everyone was told they must work in a certain industry. Previously there was some other small industry (e.g. a shipping company with a few trucks with using the street as a warehouse and local services like a laundry mat). They were all kicked out because they were not the designated industry. The laundry mat re-opened a few weeks later on another street. People forget that China is a command economy. The government tells you where to live and what to do. If you want to live somewhere else or do something else you need to apply for permission from the government. Cities like Ordos shouldn't make anyone blink. Once the government knows what it wants to do it will be filled overnight.
- warmwaffles 14y ago
  Do you have any references for this anecdote? I'm very interested in this
  - shimon_e 14y ago
    I live in China. You can search about the hukou and business registration systems online.
- westiseast 14y ago
  Sorry, but you're just 100% wrong. You're describing some version of China from the 1960s, not today. People in China are not told where to live, or what job to do. The government makes use of various macro-economic tools to steer the economy much more forcefully than in Europe perhaps, and perversely, the market forces (w/ Chinese characteristics!) are also fairly brutal and fast-changing, but people mostly choose their own professions and locations and in many respects, society behaves pretty similarly to the US/Europe.
  - thebooktocome 14y ago
    > People in China are not told where to live, or what job to do. Not directly, no, but the hukou system still exists, and the choice of living location is in some circumstances still heavily restricted.
guard-of-terra 14y ago
"2.8 billion square metres of Class A office space" The grading inflation makes me sad. If you have 2.8 bn sq meters of above average quality office space, how much average and adequate quality office space do you have?
- furiouslysleepy 14y ago
  Just one really shitty cubicle.
  - WalterSear 14y ago
    It's a big one, though.
taybin 14y ago
The article mentions how property is the best savings institution the Chinese have, so they build even if there isn't a buyer yet.
JPKab 14y ago
"There are a lot of things I don't understand about China's economy, and every time I think I might have a handle on it, I come across juicy tidbits like these ones:" Every tidbit you state is fully explained in the article's explanation of the lack of investment vehicles for middle and low income Chinese. When your bank account has a negative real interest rate, then real estate becomes a great vehicle for it, provided there is no crash. I suspect that the lack of non-government media in China causes many of the investors in these properties to have no idea that they sit dormant.
digitalzombie 14y ago
I've read about those, it feels like their economy is base on building stuff. They've also built one of the longest bridge that only save like 20 minute of traffic... http://www.autoblog.com/2011/07/01/china-opens-26-mile-long-road-bridge-over-water-claims-world-re/ http://www.autoblog.com/2011/07/01/china-opens-26-mile-long-...

by cs702 14y ago

twelvechairs 14y ago

A few points (with no overarching narrative): - China's construction industry is a force unto itself - important economically and a huge employer. Its hard to say 'stop'. - As it said in the OP - property seems the simplest way to invest money. After all, can prices go down when they are already so low compared to the west? - In the west we built in the 1960s at (what seemed then) a ridiculous pace, with new building typologies that were often terribly designed. Like us, they will be living with (or in) the consequences for the next 50 years. - Various levels of govt are already trying to put the brakes on the worse kinds of speculative development, with some success. Aside from the already clear examples of 'bad investment' (like the ones you point out) - the brakes are already coming from other directions too.

jbattle 14y ago
Why can't prices go down? As chinese apartment-owners start to look to 'cash in' their investment en masse, the supply/demand equation will flip and people will see at whatever prices they can to get some cash back out of their investment. Unlike Chinese workers, a Chinese apartment is never going to compete against a western apartment

WalterSear 14y ago

Simple: cargo cult economics. All modern western countries have big cities, masses of office space, and huge shopping malls.

est 14y ago

> The ghost city of Ordos Did you know Ordos has higher GDP per captica than HongKong?

etrain 14y ago
Only in certain environments does divide by zero == +Infinity.
cs702 14y ago
Surely. Every single yuan spent on construction -- whether what is being built is useful or not -- gets added to GDP; so, if one takes all the spending in Ordos and divides it by its near-zero population, the number is surely impressive. The same logic applies to the entire country's GDP, BTW: take out spending on construction, and China's GDP growth looks a lot less impressive.
- est 14y ago
  Ordos has high GDP because it's extremely rich in natural resources. http://en.wikipedia.org/wiki/Ordos_City#Economy http://en.wikipedia.org/wiki/Ordos_City#Economy I think it's comparable to Dubai.
  - cs702 14y ago
    Oops, I meant to write, "if one takes all the spending in the ghost city of Ordos and divides it by its near-zero population, the number is surely impressive." The point I was trying to make wasn't about the overall Ordos area, just about its ghost city.
    - est 14y ago
      The old city has higher GDP per captica than HongKong. And the city looks like crap. That's why they've built a new one nearby.
- pjin 14y ago
  This whole divide-by-zero rhetoric is a little silly. A quick google search yielded the following explanation: http://en.wikipedia.org/wiki/Kangbashi_New_Area http://en.wikipedia.org/wiki/Kangbashi_New_Area Ordos City itself apparently has close to 2 million people, but there's a fully developed urban housing district designed for 300,000 which has only reached 10% occupancy since 2010.

Estragon 14y ago

> There are a lot of things I don't understand about > China's economy I found the videos which the following blog post is based on quite illuminating. Unfortunately, the videos seem to have been taken down. http://asiavalueinvesting.blogspot.com/2011/09/chinese-banks-these-things-arent-banks.html http://asiavalueinvesting.blogspot.com/2011/09/chinese-banks...

PakG1 14y ago

A lot of money is going into building a new cubicle for everyone, but what's the economic rationale?[3] Often, the economic rationale is simply the desire to create jobs (on the part of the government to stave on social unrest) and the desire to create profit (on the part of private enterprises that couldn't figure out how to be more innovative and so jumped on the bandwagon of the construction boom without seeing the risks). As another comment notes, the government has realized this is a bad situation, and they're trying to put the breaks on it, but it's hard to do that and also enable a soft landing so that there's little or no social unrest. They're trying to shift from an infrastructure investment-driven economy to a consumption economy and an innovation economy, and the big debate is whether or not they have the right horses to be able to compete in that race.

rcamera 14y ago

I once read a Citibank's report on China's real estate market that might give insights to the answer to that. The report is lengthy, as it addresses many questions, but the core argument for the craziness in China's real estate market is that it is the most common form of (long-term) investment in China, and the government is the biggest beneficiary of it. Basically, if you look at an asset breakdown of personal wealth, real estate will account for 65% of all investments in China, while in other countries like the US or in the EU, that number is close to 20% (source: World Bank & Citibank's Investment Research and Analysis). Other than that, because of a reform on the tax sharing mechanism (in 1994), local governments are highly dependent on the real estate market, as 40-55% of their direct income comes from land sales and property-related taxes. That gives the government a very high incentive to keep property prices up and the real estate market booming. I can email the report to anyone interested in it (sorry, can't just upload to the public here, I worked at Citibank once, could get me into trouble), just send an email to me (rafaelcamera@gmail.com) and remember to put HN on the subject.

wisty 14y ago
> That gives the government a very high incentive to keep property prices up and the real estate market booming Note, the central government doesn't want high prices, but the Chinese government is not entirely monolithic. "Heaven is high, and the Emperor is far away", is a common Chinese saying - people bend the rules when they can get away with it. But yes, local governments get a lot of their revenue from land scales. If they are anything like Western local governments, they also get most of their bribes from developments (there are opportunities for zoning bribes, development approval bribes, building inspection bribes, waste disposal bribes, infrastructure connection bribes, and so on, depending on how corrupt they are).
arethuza 14y ago
I've just finished reading Boomerang by Michael Lewis and that huge concentration of assets in real estate sounds awfully like Ireland before the crash of 2008 - on a tiny scale compared to China, of course. Do you think that is valid comparison? (NB In many ways I hope it isn't as a crash like Ireland's on the scale of China would presumably be disastrous).

analyst74 14y ago

Well, China is power-centric culture rather than money-centric. This means you cannot assume market participants are all there to maximize their monetary gain, which is assumed by most economic theories. For example, a large force behind the housing bubble is the drive to increase local GDP, which is a vital promotion metric for local officials; another force is local bank executives' desire to pretty-up their promotion metric by pushing for more "safe" yet profitable loans. Construction companies are mostly just there to ride the train.

simonh 14y ago
> For example, a large force behind the housing bubble is the drive to increase local GDP, >which is a vital promotion metric for local officials; Also top party men are rotated from region to region regularly, so they only care about the local economy for as long as they are in tenure, typically 5 years. Whatever happens after that isn't their problem. The guys who built those empty cities and super-malls moved onwards and upwards. You can always blame the guy who took over after you for dropping the ball, or the guy you took over from for passing you a dud.

shimon_e 14y ago

A city for one million residents is very small for China. Most of the time such a place would only be called a village. I lived in another ghost city in China for a few months. Suddenly, over night the city filled up and everyone was told they must work in a certain industry. Previously there was some other small industry (e.g. a shipping company with a few trucks with using the street as a warehouse and local services like a laundry mat). They were all kicked out because they were not the designated industry. The laundry mat re-opened a few weeks later on another street. People forget that China is a command economy. The government tells you where to live and what to do. If you want to live somewhere else or do something else you need to apply for permission from the government. Cities like Ordos shouldn't make anyone blink. Once the government knows what it wants to do it will be filled overnight.

warmwaffles 14y ago
Do you have any references for this anecdote? I'm very interested in this
- shimon_e 14y ago
  I live in China. You can search about the hukou and business registration systems online.
westiseast 14y ago
Sorry, but you're just 100% wrong. You're describing some version of China from the 1960s, not today. People in China are not told where to live, or what job to do. The government makes use of various macro-economic tools to steer the economy much more forcefully than in Europe perhaps, and perversely, the market forces (w/ Chinese characteristics!) are also fairly brutal and fast-changing, but people mostly choose their own professions and locations and in many respects, society behaves pretty similarly to the US/Europe.
- thebooktocome 14y ago
  > People in China are not told where to live, or what job to do. Not directly, no, but the hukou system still exists, and the choice of living location is in some circumstances still heavily restricted.

guard-of-terra 14y ago

"2.8 billion square metres of Class A office space" The grading inflation makes me sad. If you have 2.8 bn sq meters of above average quality office space, how much average and adequate quality office space do you have?

furiouslysleepy 14y ago
Just one really shitty cubicle.
- WalterSear 14y ago
  It's a big one, though.

taybin 14y ago

The article mentions how property is the best savings institution the Chinese have, so they build even if there isn't a buyer yet.

JPKab 14y ago

"There are a lot of things I don't understand about China's economy, and every time I think I might have a handle on it, I come across juicy tidbits like these ones:" Every tidbit you state is fully explained in the article's explanation of the lack of investment vehicles for middle and low income Chinese. When your bank account has a negative real interest rate, then real estate becomes a great vehicle for it, provided there is no crash. I suspect that the lack of non-government media in China causes many of the investors in these properties to have no idea that they sit dormant.

digitalzombie 14y ago

I've read about those, it feels like their economy is base on building stuff. They've also built one of the longest bridge that only save like 20 minute of traffic... http://www.autoblog.com/2011/07/01/china-opens-26-mile-long-road-bridge-over-water-claims-world-re/ http://www.autoblog.com/2011/07/01/china-opens-26-mile-long-...