China’s ghost city of Ordos

By Candy Tang

http://www.youtube.com/watch?v=0brcZTVde-I

Ordos has quietly become China’s luxury good capital. Located in once the most impoverished area of Inner Mongolia, Ordos has about one sixth of China’s coal reserves and one third of the natural gas reserves. With a population of 1.6 million people, its GDP per capital reached $20K, twice as much as that of Beijing and Shanghai. The affluent local government began a public-works project, building a district called Kangbashi in the city. The area is filled with office towers, museums, theaters and sports fields—not to mention acre on acre of subdivisions overflowing with middle-class duplexes and bungalows. The only problem: the district was originally designed to house, support and entertain 1 million people, yet hardly anyone lives there. The city is empty.

The rising of these ghost cities brings up a broader issue. The urban area of China triples since 1980, while urban population only grows by 120%. The urbanization of land significantly outpaced that of population.

A series of public policies contributes to this problem. Arguably the most critical one is the financial reform in 1994, since then central government claims a bigger share of budgetary revenue but a smaller share of expenditures in providing public goods. Local government, eager to expand revenue source, acquired rural land at low price and resell it to real estate developers. City expansions are therefore not driven by careful planning but the need to fill in local government fiscal gap. Furthermore, thousands of “economic development zones” and “industrial parks” are established to attract corporates with an expectation of expanding the tax base. The turnout is low utilization rate. It all could be best summarized in one comment of a municipal officer from Fujian Province: you should think about cities here are built for whom? Not for the citizens, but for officials who want to look good in front of their superiors.

Policy advisors therefore suggest, besides GDP growth, performance metrics on sustainability should also be included in the scorecard of local government officials to correct such behavior. However, problems in undesirable environmental impact, poor quality of construction and weak transportation system take years to surface and an even longer period to be acknowledged, analyzed and, if fortunately enough, addressed by the government.

Pessimists argue that China is building all these ghost cities which in no way are sustainable.  The bust will come. However, several journalists who constantly revisit those cities tell a more tricky “reality”.  They are attracting new residents, though very slowly. It brings up an even bigger concern: the city, lack of a real growth driver, could not provide a decent life quality for them and will eventually break the promise it gave and lead to a divided society.

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8 thoughts on “China’s ghost city of Ordos

  1. Pingback: Most Commented through Friday, March 8th | Sustainable Cities: Urbanization, Infrastructure, and Finance

  2. Really interesting topic, Candy. The incentives of city government definitely seem out of whack.

    I’m trying to understand the buyers’ side of the transaction. The linked video suggests that investors are buying most of the newly built homes in anticipation of rising inflation. Presumably, they want to protect idle capital from devaluation at a minimum. And potentially speculate on rising prices for a big win.

    What I don’t understand is.. who finances it? In the US housing crisis, banks & national lenders were giving out high-risk mortgages to individuals. The breakdown in screening & qualification standards was considered a major organizational failing, fueled by a huge market for repackaged securities. In China, on the other hand, I assume some sort of centralized control exists to prevent this kind of overheating – especially if the buyers are relatively sophisticated investors vs. ordinary citizens.

    Any idea what’s going on? Or any opinions on who should be stepping in to defuse an asset run-up?

    • By John Macomber

      Here’s one explanation I’ve heard often about who are the buyers of homes (apartments or condos) for investment in China. The buyers are citizens newly entering the middle class and with some funds to save (with two earners and probably one or no children). The funds are earned from salary or from the informal economy, it’s not debt at the retail level. Saving is important since one has to look out for oneself in old age. Passbook rates are very low for retail savers in Chinese banks, the retail stock market does not exist, and people fear inflation. So parking funds in a speculative apartment, even if it is not rented, can seem like a good idea. If prices are going up (for whatever reason), it starts to look like a better idea and people buy more (think Miami in 2007). This is consistent with Matt’s presumption.

      Another conjecture is that funds from the informal economy can get spent in buying and apartment and after that it’s a nice clean asset. I’m working on a case with Joe Bower and Lynn Paine about China Vanke, the largest homebuilder in the world, and Vanke has noticed phenomena like this. Some of you went to their Dongguan facility in January but I don’t think that visit was about finance. BTW the China debt that the doom – and – gloom types look to is municipal and provincial debt, not consumer debt or federal debt (related comment here).

  3. Candy, thanks for sharing this very interesting situation in Ordos. Thinking about the role of Chinese government as the ultimate arbitrator of societal planning, I couldn’t help but think of Jean-Jacques Rousseau’s concept of the social contract. One of Rousseau’s central tenets for legitimate rule is that of the local magistrate carrying out the general will of his citizens. In Ordos, we seemingly have the exact opposite with the government dictating actions based on agenda uninformed by the will of its citizens. Yet, the laws of the natural world have changed with humans’ ever increasing friction with the environment. This is a corollary to the discussion we had about PlaNYC: is the ultimate audience constituents of the present or those of the future? The problems of tomorrow will be greater than the ones faced today, but does any actor have the incentive to figure out in which instances the future must be prioritized ahead of short term alleviation of current problems?

    Chinese government’s action in Ordos can be viewed as that of a benevolent caretaker of future interests. With 1/6 of the country’s coal reserves and 1/3 of the natural gas reserves in the area, there is a clear catalyst for rapid growth. It’s true that right now the construction looks misplaced with Ordos’ 1.5 million resident choosing to live a half hour down the road in Dongsheng. Yet without this planning now, at some future inflection point, the infrastructure and housing would not be able to sustain the area, and the marginal economic and social cost of patchwork investment at that point would greatly exceed the prophylactic planned cost right now.

    No doubt arguing for this centrally mandated decision process is a slippery slope. From that perspective, I would definitely contrast this situation in which there are clear signs of looming social needs with that of other planned cities we’ve looked at such as Masdar in which there were no natural societal pressures pointing to a need for action.

  4. While I agree that a real estate bubble is an economic peril and that ghost cities that remain empty for decades are a waste of resources, I wanted to talk about some of the pros of China’s ghost cities.

    In India, slums, blackouts, water shortages, housing shortages and congestion characterize rapid urbanization. Assuming that the quality and infrastructure in these cities is up to world standards, and assuming that they are affordable for people to occupy, these cities are what Indian urban dwellers are clamoring for. However, it takes time to build such cities. This brings us to an eternal dilemma – should governments wait or should they build build in anticipation of demand.

    I believe that, within reason, its better to build in anticipation of demand. Real estate and city development is a long gestation and long lead time project and thus by waiting for overwhelming demand before embarking on such developments can lead to enormous social tensions and disharmony. Building slightly ahead of demand creates safety valves for rapid urbanization and thus may in fact prove a wise move on the part of the government. The tradeoff here is short term economics for long term harmonious urbanization.

    As Candy says, these cities are filling up slowly. This provides hope that the plan envisaged by urban planners is indeed prudent. To be clear, I think that it is a very fine line that planners have to walk to ensure that such cities do not remain unoccupied for decades and decay into unlivable developments. However, for a rapidly growing nation with resources available, I think this is a gamble worth taking.

    • By John Macomber

      One apparent risk of building out roads and infrastructure ahead of demand is that some governments have done this by borrowing money secured by land values. If the people do not come and the land values fall then the credit goes bad. China gloom-and-doom types see this kind of risk (”
      The “Chongqing Model” and the Future of China” HBS 713023 by Meg Rithmire here.)

      India may build infrastructure behind demand instead of ahead of it, but no naysayers seem to worry that Indian public debt at the state/provincial level is too high in the same way they fret for China (and for the US).

      • Following the structure of “three trends” proposed by Professor Macomber in class, I’d argue that the three greatest issues in today’s China are: 1) Urbanization (population, land, and private intervention), 20 Social fragmentation, and 3) Structural transformation. I agree with Candy’s point that the municipal governments are motivated to develop the under-developed suburban areas because of the incentives of expanding the tax base and increasing municipal revenues. Furthermore, as the proceeds from land sales constitute a large percent of the municipal government’s income, the high cost of land acquired by the real estate developers contributes to the skyrocketing residential property price. Land sales at high prices benefit the municipal government coffers.

        [Note – land is collectively owned in China. Sales are more like long term ground lease fees. There is no property tax, so that typical source of revenue is not available to fund municipal government operations. There also are disputes about which collective owns the land: the villagers, the city, the province, or the federal government – John M].

        In addition to the example of Ordos, I propose the Lingshui City of Hainan Island/Province as another example of a ghost town. As China’s most southern province, Hainan province is located to the south of Guangdong and celebrated as the “oriental Hawaii” due to its climate and scenery. In 2010, the central government nominated Hainan as an “International Tourism Island Pilot Zone”, leading to the booming of the residential property market and and influx of capital flowing into the sector of hotels and resorts.

        Lingshui City, a one-hour drive distance from the most “touristy” city of Sanya and with ample resources of hot spring and beach, is highly under-developed and remains one of the counties at the national standard of extreme poverty. However, since the 2010 the nomination of the pilot zone, the pricing of residential land in Sanya has doubled or even tripled in some areas, and the developers looked out to Lingshui for more potential sites. A large amount of golf courses, high-end hotels, and resorts were put into construction and slabs of apartment buildings rose up within a one year period of time.

        Mostly purchased by customers from the three Northeast provinces for speculation, the average pricing of residential properties is about RMB30,000/sqm [about $450/sf – John M] while the average household income of Lingshui being equal to or less than RMB2,000/month [about $4,000/year – John M]. When I drove to Lingshui in the summer of 2012, I was stunned by the slabs of apartment building rising up at an incredible pace. Most of them are not occupied, and yet they are all sold out.

        • By Yiran Gao

          Thanks Candy for bringing up this interesting topic. From the comments of “who buys it” and Lingshui City’s vacant but sold out apartments, a common paradox in current China emerges – the overheated real estate market versus ghost cities.

          To some extent, the overheated real estate market contributed to the creation of ghost cities. No matter whether driven by real housing need or speculation need, the high economic demand for housing has attracted the private sector as well as local governments to build more real buildings in pursuit of both monetary and political profits. They seem to have no worries in selling out the housing – speculators from the “informal economy” (as Prof. Macomber mentioned) aggressively bought most of the units, leaving citizens with real needs for housing with few units and a higher / unaffordable price.

          However, how long can this illusive prosperity in China’s real estate market last? No one knows the answer, but China’s central government is becoming increasingly alarmed that a bubble may bust and might even cause a paralysis of the country’s whole economy. The real estate economy touches more than 10% of China’s total national GDP, well above the international warning line of no more than 5%[1]. That’s why the central government has announced a series of policies in an effort to rein in speculative buying.

          The most recent pronouncement requires local governments to raise the transaction tax on second-hand property sales up to 20% of the sell-buy gain. While their intentions are sound, the new tax seems to be problematic in implementation. Within only one week after the policy was promulgated, Beijing’s second-hand housing turnover soared 279% year on year[2]. Large amount of transactions were made in order to avoid the high taxes. While aiming to dampen speculative buying, this policy affected largely buyers with real needs rather than the speculative buyers. Because 1) wealthy speculative buyers are less sensitive to price, and 2) they can always transfer the tax burden onto buyer’s shoulder – they only care about the sell-buy profit!

          While the high transaction tax might not be totally without effect if it had been designed more specifically targeting speculative buying and implemented carefully, what China needs might be introducing a property tax, which could largely contribute to a self-regulated real estate market. And once such a healthier real estate market is established, innovative programs such as “development rights pricing” could be used to efficiently allocate capital as well as to fund public-works -just as congestion pricing can do in the transportation field.

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          [1] http://theory.gmw.cn/2012-09/18/content_5107549.htm
          [2] http://house.ifeng.com/news/detail_2013_03/11/22952878_0.shtml

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