China’s economic boom leaves a trail of ghost cities

China’s economic boom leaves a trail of ghost cities

by Rob Schmitz

Monday, June 2, 2014 – 16:09

Nearly a year ago, I visited a replica of New York City under construction outside the Northern Chinese city of Tianjin. Workers were constructing dozens of skyscrapers on a piece of swampland inside a bend in the river, giving it an uncanny resemblance to the island of Manhattan. There were plans for a Lincoln Center, a Rockefeller center, and much more.

Lin Lixue, a salesman for one of the developers, was beside himself. “Our goal is to create the world’s largest financial center, right here, within ten years!” Lin told me. “We’re building skyscrapers, we’ve got China’s largest high-speed railway station coming soon, we’re building a tunnel under the sea, and we’ll soon build several subway lines.”

A year later, construction on this city, named Yujiapu, has all but grinded to a halt. Investors have pulled out. And a cluster of skyscrapers sit, half-finished – Manhattan on hold.

“It was a failure before it even started,” says Gao Fei inside the Tianjin office of Centaline Property, where he works as director of investment consulting. “The most important thing for Tianjin’s government has always been a high GDP rate. That means the government has to spend a lot of money on huge projects like this one. In China, these kinds of wasteful projects are everywhere.”

For years, high GDP growth has ensured local officials promotions within the Chinese Communist Party. In the case of the faltering Manhattan replica of Yujiapu, it helped boost Tianjin’s GDP growth rate to around 16 percent for three years, the fastest in China at the time. And that helped former Tianjin mayor Zhang Gaoli get promoted – to Vice Premier of China. In Zhang’s rearview mirror on his way to Beijing: a failed project and mountains of debt.

Hundreds of miles away lies China’s most infamous example of a colossal waste of investment: The city of Kangbashi, where on most mornings, you can watch staff members of the local hotel do a choreographed dance to techno music sprinkled with horse calls while taxi drivers pull up to watch.

There’s really nothing else to do here. The city – built for a population the size of Pittsburgh – is nearly empty. It was built a decade ago to house around a half a million people. At the time the region, known as Ordos, was rich from selling coal – Ordos sits atop one of China’s largest coal deposits. But today, coal prices are at an historic low, and according to state media, Ordos is in so much debt that it had to borrow tens of millions of dollars from a local developer just to pay the salaries for its city employees.

Xiong Gang, a migrant from faraway Sichuan province, came here to set up a restaurant to serve them. “Everyone knows this is a ghost town, so our restaurant doesn’t have to pay rent for three years,” says Xiong. “The government gave it to us for free so that they had a place to eat – they also hoped more businesses would come. “

The Ordos shopping mall next door is five floors of emptiness. Red banners hanging from the central atrium congratulate the mall on its grand opening. They dangle over a single squatter living in a tent in front of the first floor’s vacant information booth.

Across an empty public square filled with giant bronze statues of Genghis Khan’s family, I walk through the dark corridors of an office building, where dozens of doors have “for rent” signs on them.

I see a woman coming out of one of them. She says she works at a grocery store serving city employees, she came here from the countryside, and she pays the equivalent of $75 a month to sleep in an empty office space. She washes herself in the building’s public bathroom down the hall. She’s not alone. More than a hundred migrant workers live here, too – all trying to make what they can off of what’s left of this city.

Ordos’ government just issued a ban on all construction. But before it goes into effect, the city just can’t seem to help itself. It’s building a new skyscraper park near a manmade lake and three sports stadiums for the 2015 Chinese ethnic minority games costing hundreds of millions of dollars. Next door to that: a Formula 1 racetrack. Porsche used to sponsor the Porsche Carrera Cup Asia here until last year when sewage reportedly filled the pit stops and racers complained about the quality of the track.

Back in Tianjin, real estate analyst Gao Fei isn’t optimistic about China’s efforts to prevent future economic waste like Yujiapu and Ordos. “You can’t do anything about it,” says Gao, shaking his head. “Local officials are too powerful. They’re only concerned with the problems during their 5-year terms in office. If they can produce good numbers, they’ll be promoted. They’re not interested in the long-term plan.”

Gao hopes for a day in China when government officials are evaluated for more than just local GDP growth. He says what really matters is the income of the people they govern, access to good health care and education. If these were the new goals in China, he says, all of this would be pretty easy to solve.

 

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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