On China’s Overinvestment

Patrick Chovanek, who writes from China, features an South China Morning Post story on his blog that helps give a better sense of the scale of overinvestment in real estate projects in China than isolated pictures of large, empty buildings. Data, of course, would be nice, but the Chinese officialdom specializes in misleading statistics.

From the South China Morning Post (via Chovanek):

China’s economic stimulus programme has accelerated the already aggressive pace of urban development in the country. But while investment in construction is creating much-needed infrastructure in some cities, it is also adding to the number of ghost towns with nearly empty facilities in other parts of the mainland….

Over in Guangdong, many residential units sit empty, said Neeraj Sawhney, a Hong Kong textile trader who often travels to the province.

“I have seen houses and shops built in second and third-tier cities in Guangdong in 2005 that are still empty,” he said…

China’s fixed-asset investment increased at a faster rate after Beijing launched its four trillion yuan (HK$4.5 trillion) stimulus package in late 2008 to combat the global economic crisis. Investment rose 30.1 per cent to 22.5 trillion yuan last year, 4.6 percentage points higher than in 2008, the National Bureau of Statistics said. Gross domestic product grew 8.7 per cent last year, thanks to the stimulus.

To support the stimulus, banks lent out a record 9.59 trillion yuan last year, of which a quarter went to infrastructure construction….

Although it is difficult to judge any single project as unviable, given that so many massive projects are being rolled out, the probability of waste increases, Chovanec said.

“All over the country, every province has at least one mega project. It’s one thing to build one mega project over a 10-year plan. It’s another thing to build this 10-year project in two years and do many of them all over the country. How much capacity expansion can the economy digest at one time?”….

“I can’t think of any economy where that rate of growth is sustainable,” Bruce Richardson, an American businessman living in Yingchuan, said….

Some local officials have realised the massive build-up is generating undesirable effects and are switching towards sustainable growth, including Yun Guangzhong, the mayor of Ordos, a city in Inner Mongolia.

Ordos, with a population of 1.55 million, has been described as a “ghost city” in blogs and Al-Jazeera television, because it contains a newly built city centre with ultra-modern buildings that is nearly empty. Ordos’ population density is 17.8 people per square kilometre, compared with an urban density of 10,606 people for New York City…..

In contrast to focusing on building infrastructure last year, Yun recommended alternate policies like attracting competitive industries to Ordos and increasing jobs this year.

Yun admitted failings in the administration of projects, saying: “We must not undertake prestige projects for the sake of image and must not fake data.” …

Jonathan Woetzel, a director in the Shanghai office of international consultancy McKinsey, said: “There is a lot of living dead out there.”

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  1. paper mac

    Not to deny the underlying truth of the story, but some odd sourcing on this one. “Over in Guangdong, many residential units sit empty, said Neeraj Sawhney, a Hong Kong textile trader who often travels to the province.” This guy is based in HK and he has to rely on random textile merchants to go to the mainland? For reference, Guangdong is literally “over there”, a stone’s throw away from HK. Are SCMP reporters typically excluded from the mainland?

  2. MyLessThanPrimeBeef

    What ever happened to China’s “One family, one investment” policy to curb their overinvestment?

  3. ab initio

    At least China has empty buildings and city centers. They also will have a $200 billion national high-speed train network and several nuclear power plants as part of their 2008 stimulus spending.

    What can we show for our stimulus package? $180 billion to Goldman and European investment banks through the AIG cutout. Trillions in taxpayer guarantees of TBTF debt and blank checks for Fannie/Freddie losses.

    What would you rather have – Chinese excess or US excess??

    1. Vinny G.

      We also have bonuses. Lots and lots of bonuses. Bonuses to Wall Street and bonuses (or is that called “kickbacks”) to all the criminals that our trojan horse betrayer of the people Oh’bama has surrounded himself with.

      Wouldn’t you rather have a nice kickback to Summers that than high speed rails?…


  4. attempter

    Here’s an example cited by Dave Cohen:

    Most of this Chinese investment goes to fixed assets (e.g. infrastructure), not manufacturing where there is so much overcapacity. My favorite example involves tearing down and then rebuilding perfectly good structures. “A 2.9-kilometer elevated highway in Hunan [was] demolished when it was meant to last for 36 more years. A “bridge of strength,” nicknamed as such because it was unscathed by last year’s devastating earthquake, [was] dynamited in Sichuan.” The Chinese will rebuild these structures and thus boost GDP.


    In the end the Chinese won’t be any more able to generate a new “consumer” horde than America will be able to keep zombifying its own. Everything both countries are doing is futile and in exactly the wrong direction.

  5. Glen

    The problem in Australia is the lack or unwillingness to acknowledge that the China boom for what it really is. The record commodity exports will decline as the breaks are applied to the Chinese economy and this is going to cause alot of grief at a time when interest rates are on the increase and private debt levels are reaching stratospheric levels. Let’s hope they gently deflate this bubble.

    1. stick

      Oh, you Austrian types are so cute when you get all worked up! Too bad we can’t just turn back the clock to the 19th century… no?

  6. Thomas McGovern

    Re: Overinvestment

    There is no such thing as “overinvestment.” There is such a thing as malinvestment. The root of the current financial crisis was the Fed’s manipulation of interest rates to a point far below what the market interest rate would be. This underpriced credit caused people to miscalculate the economic viability of their investments, such as when banks wrote mortgages with borrowers who were not credit-worthy. This is similar to von Mises’ demonstration that rational economic calculation is not possible under socialism. The US has, effectively, a socialist monetary system in that interest rates and the supply of money are not set in a free market, but are arbitrarily manipulated by the central bank. All of this financial fantasy is only possible in a fiat currency regime; it could not happen if we had a gold standard, free banking, and abolished fractional reserve banking.

  7. sac

    Anyone who strongly believes the story should buy put against china, just to put your money where the person’s mouth is.

  8. Binhaimaven

    I must protest on two grounds. First, the analogy between the American real estate implosion and Chinese overbuilding is labored. Second, because overinvestment in real estate does not necessarily imply overinvestment generally in the Chinese economy.

    Granted, credit has been loose and there are a lot of empty buildings. Granted, real estate speculation is the first sign of overheating in the Chinese economy.

    However, those buildings can and will be filled. The savings rate is still very high and there is real demand for housing. Another non-harbinger of general collapse is the absence of inflation in consumer staples, housing excluded. To this, compare the gains in the Chinese stock market this year to the dizzying pace of 2006-2007.

    One can concede the stated point – overinvestment, misinvestment etc. – and still contest the stated or implied corollary, which is a general implosion. My verdict on Chinese social market planning of the past five years: messy, but they’ve been able to clean up the messes they’ve made, cope with a global crisis, and advance their cause as a global economic power. Still bullish on that country.

  9. psychohistorian

    A couple of observations.

    China is lucky in a sense in that it populace can still fairly readily (Relatively speaking) shift back and forth from agrarian to manufacturing. This can not be said for Americans if/when that devolutionary step is needed.

    China has a large population and as it grows itself forward within the vagaries of the international economy there will be painful dislocations. That said I think that China is in a lot better position to embrace the coming economic adjustment than America is.

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