SCMP: China’s Wasteful Stimulus?

The following article, which features several of my comments, appeared yesterday as the lead business story in the South China Morning Post.  You can access the original version here (registration for free trial subscription required).  The picture of the idle steel mill that accompanied the article, which I’ve posted here, was actually a photo I took during a recent visit to Yingkou.  The other photo I’ve added here shows the planning model for Yingkou’s development zone.

The reporter contacted me because I’ve talked on this point before, on Al Jazeera and elsewhere.  I was happy to share my impressions of what I’ve seen, as well as my concerns, but it’s not my desire to beat up China too badly on this point.  I realize that China’s leaders — like many other leaders around the world — did what they felt they had to do in responding to a crisis of unknown dimensions.  They had to improvise, and looking back now with 20/20 hindsight, would probably have done some things differently.  The U.S. stimulus package cobbled together by Congress contained at least as much waste and inefficiency as its Chinese counterpart.  The danger in China, however, is that the stimulus produced such outstanding results — at least in terms of outward measures like GDP — that it’s tempting to mistake the band-aid for a cure.

I thought that, overall, the article did a very good job of presenting a balanced view.  As some of the other people quoted point out, there are parts of China that desperately need infrastructure investment.  China’s Northeast, where Yingkou is located, has great potential.  The question is, when does too much of a good thing, too quickly, become a problem?  I’m heartened by the comments by the mayor of Ordos, which suggest that some local officials are recognizing this issue and trying to come to grips with it.

Ghost towns grow with urban development

By Toh Han Shih
South China Morning Post, January 25, 2010

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.

The nation already has its share of empty edifices. Overlooking Beijing’s “Water Cube” swimming centre and “Bird’s Nest” stadium stands Pangu Plaza, a huge but little-used five-tower complex spanning the length of seven football fields. The project includes an office block, serviced-apartment buildings, a shopping centre and the Pangu 7 Star Hotel.

Although Pangu Plaza was completed two years ago, the shopping centre is mostly empty, with virtually no tenants and many outlets boarded up, Patrick Chovanec, a professor at the School of Economics and Management at Tsinghua University, said. “There are no lights in the offices. At night, people don’t seem to be home.”

A public relations executive at the Pangu hotel said the shopping centre and office building are still seeking tenants, adding: “Our hotel’s occupancy rate is alright, but this is the low season, so the occupancy is low at the moment.”

The China edition of GQ magazine threw a lavish launch party at Pangu Plaza in November last year, but a New Zealander who attended said the complex is mostly empty.

“The hallways on the ground floor are empty and you feel that it is a ghost town apart from the top floor where we were. It certainly was not full of activity beyond the show,” he said.

Examples of mega projects abound.

Chovanec describes his visit to a development zone in Yingkou, a port city in Liaoning province, where an industrial zone and a residential zone with a marina are planned.

“The scale of this thing will take your breath away. It is comparable in scale to Pudong (Shanghai’s business district),” he said.

Yingkou’s development zone is under development and hence is mostly empty space.

A government building and a steel mill are possibly the only two buildings in the zone, Chovanec said. “The administrative building is this monstrous monolith. It’s almost empty except for a presentation.”

The steel mill was completed one year ago, added Chovanec. “It’s sitting there empty and they haven’t fired up the furnace. There is so much overcapacity in steel, they can’t sell what they make.”

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. “Supply is much more than demand in these cities. Funding was easily available for developers, who went ahead and constructed, disregarding demand.”

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, the People’s Bank of China said.

And that investment in physical infrastructure boosts GDP.

“If you spend money, you’ll make 8 per cent GDP growth,” Chovanec said. “Whether it’s productive is another question. The central government said to the provinces, give us your wish list. The local governments accelerated their projects.

“You got 10 to 20 years of infrastructure developments accelerated to a three-year time frame. Once you accelerate it like that, the vetting process gets thrown out the window.”

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?”

In Yingchuan, the capital of Ningxia province, 70 per cent of GDP growth last year was related to fixed-asset investment, according to the city’s officials.

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

Both useful infrastructure and empty buildings can be seen in Yingchuan, he said. “I see significant investment in transport infrastructure like roads and airports. As soon as a road is finished, it’s used. There are no bridges to nowhere.”

On the other hand, high-end residential units in Yingchuan have a 50 per cent vacancy rate. The local government is considering discouraging the purchase of second or third residential units to slow construction, Richardson 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 a speech on January 12, Yun said the speed of development “cannot substitute quality and efficiency. GDP alone cannot represent the people’s aspirations or the raising of their income. Fixed-asset investment does not mean industrialisation and urbanisation have improved.”

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.” The city government “contains elements of laziness, falsification, laxness and shallowness in work ethic, which has seriously damaged its efficiency and image”.

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

Most cities have newly developed zones that are often initially empty when completed, he said. “Some work out well, some not.”

As a rule of thumb, if a new city centre has a population of one million in 15 years, that would be successful, and these projects have long-term payback timetables measured in 10 to 20 years, Woetzel said.

In contrast to isolated Ordos, the bustling coastal cities of Quanzhou and Jinjiang in Fujian province are benefiting from the construction of badly needed infrastructure.

The two cities are merging as part of the government’s policy to create mega cities, Douglas Sheridan, a United States footwear trader who does business in Jinjiang, said.

The result is a series of infrastructure projects such as highways, sewage systems and buildings in Quanzhou and Jinjiang, Sheridan said. “They are merging cities, but they don’t have enough fundamental infrastructure like transport and food supply logistics. Buses are not enough. There are more trucks on the roads, so traffic flow is increasing enormously.”

Woetzel said: “On a national level, China has another 15 to 20 years of rapid urbanisation, so on average, urban construction is a necessary development.”