Analyst: I Ain’t Afraid of No ‘Ghost Cities’
February 28, 2013 Leave a comment
February 27, 2013, 4:34 PM
Analyst: I Ain’t Afraid of No ‘Ghost Cities’
For China bears, the empty “ghost cities” that dot the Chinese landscape stand as concrete evidence that economic doom is just around the corner.
In the aftermath of a construction frenzy that lifted China out of the Great Recession, Western hedge fund managers set off on trips to places like Ordos in Inner Mongolia to view the eerie phenomenon – and spooked themselves into believing that a massive oversupply of real estate meant a Chinese economic collapse was inevitable.
What happened? Well, housing prices and sales volumes have been steadily rebounding, to the point where the government is now contemplating new cooling measures. So much for the epic oversupply that bears predicted would wipe out growth.
“Hurray for Ghost Cities,” writes the economist and veteran China-watcher Jonathan Anderson in a recent note.
The former UBS analyst, now with the Emerging Advisors Group, isn’t a cheerleader for senseless real estate projects. His point is that by investing in “ghost cities” to underpin growth, China saved itself from even more unwise overinvestment in areas that could have done lasting damage to the economy, such as manufacturing.
Even though China has been investing almost 50% of GDP for the past few years, Mr. Anderson doesn’t see much evidence that it’s resulted in widespread industrial overcapacity. He notes that industrial profits have been picking up along with sales, suggesting that manufacturers still have plenty of pricing power. And, in contrast to the situation a decade ago when the last credit bubble burst, China isn’t saddled with a massive glut of industrial commodities that it’s trying to dump on the rest of the world. Steel exports, for example, have increased only modestly this time around.
Mr. Anderson defines “ghost cities” as a relatively narrow slice of investment, conducted mainly by local governments, in urban infrastructure and certain types of construction, notably subsidized “social housing” units rather than commercial housing. They’ve certainly been a black hole, he says, but a hole that has emptied largely into the equally dark vaults of China’s state-owned banks, where bad debts can remain buried for a long time.
“Lesson learned: If you’re going to waste capital best to waste it completely, where it will do the least damage to everyone else,” writes Mr. Anderson.
Or, to put it another way, he offers: “Why truly crap investment projects help ‘save’ China.”
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