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This is What a Bubble Looks Like

September 10, 2011

Two years ago, I appeared in a TV report by Al Jazeera’s China correspondent Melissa Chan about the “ghost city” of Ordos, Inner Mongolia, which illustrated — in extreme form — my somewhat eccentric hypothesis that the Chinese real estate market was being driven by the willingness of investors to buy and hold empty villas and condos indefinitely as a “store of value,” like gold, an unproductive but supposedly safe place to stash their cash.  Her report inspired a steady stream of journalists to make the pilgrimage out to Ordos, and helped turn my “store of value” explanation into a stock part of the discussion about China’s ongoing real estate boom.

Last week, Melissa returned to Ordos to see what, if anything, had changed, and asked me to comment and help make sense of what she had seen.  You can watch the segment by clicking here.  Suffice it to say, Ordos remains largely empty, and construction continues — although there’s a growing nervousness about how long it can last.  As I’ve frequently said, demand in China for real estate as an unproductive “store of value” may be extremely persistent, but that doesn’t mean it’s sustainable.  And the longer it persists, the more worrisome the overhang becomes.

After you’re done with that, check out this recent TV report by Steve Engle at Bloomberg, about the debt-funded building binge that’s taken place in just one relatively obscure city in Hunan.  Note the guy being interviewed about halfway through who talks about all the high-rise condos that have been built and what the occupancy rates are.  Steve’s segment is actually a companion to a Bloomberg investigative piece about local government debt that I’ve mentioned before as a must-read.

Then take a look at this Bloomberg segment, from earlier this year (January 2011), about China’s largest mall, which is standing almost entirely empty.  You may find it interesting to compare it with this Bloomberg article, about the very same property, written in April 2007 — empty then, still empty now.  As the later report states, the original developer went bust and then Peking University bought it, and now doesn’t know what to do with it.  The real gem comes at the very end:

Reporter:  Despite obvious problems, the malls owners plan to expand.

Mall Manager:  We’ve been trying hard to make money, and we’re actually heading towards that direction.  We still have some 200,000 square meters soon to be developed.  I think we’ll balance out as soon as those 200,000 square meters are open.

Ah yes, we’re losing money on each unit we sell — but we’ll make it up on volume!  The solution, as always, is to keep building.

[UPDATE:  Melissa Chan has posted some of her own thoughts about her latest report, along with the video, on the Al Jazeera blog, which you can read here.]

[The photo above, of a housing development in Ordos, was taken by Michael Christopher Brown, a photographer based here in Beijing, as part of a story for TIME Magazine, and is republished with his permission.  You can check out his work — including more photos of Ordos — at his website,]

12 Comments leave one →
  1. September 11, 2011 2:18 am

    is there any comparison with Spanish (or Irish, …) ghosts?

  2. kailing permalink
    September 11, 2011 4:04 pm

    And still prices are sky-rocket high…

  3. Michelle permalink
    September 11, 2011 6:06 pm

    Ordos’ property bubble story is quite different from that in Hunan. Probably you could read two case study reports by Go High Fund, which will definitely give you some ideas about the relatively “safe” bubble in Ordos, at least in short term.

    • prchovanec permalink*
      September 11, 2011 6:19 pm

      Yes, there is a distinction, although it is not as great as many would make out. I have discussed the issue of non-leveraged bubbles extensively, I recommend my previous posts: and

    • HonoH permalink
      November 25, 2011 10:30 pm

      “According to Japanese maps officially published before 1895, the Diaoyu Islands were never drafted into Japan’s map,” Ju Deyuan said.

      And changes on lots of Japanese maps tell the real ownership of the Diaoyu Islands.

      In 1945, the Japanese Government accepted the Potsdam Declaration, which stipulated that Japan must return all territories it seized from China. From then on, the Diaoyu Islands were deleted from Japanese maps.

      “Such changes actually mean Japan has returned the Diaoyu Islands to China,” Ju Deyuan said.

      However, in 1971, the Japanese Government announced that the Diaoyu Islands belong to Japan, which showed that Japan is in conflict with its commitment to the Potsdam Declaration.

  4. dengzhi permalink
    September 13, 2011 6:42 am

    thanks for the updates on Ordos. I remember see a report about it a year or two ago.

  5. ddjiii permalink
    September 13, 2011 10:36 pm

    Sorry, I find your blog really valuable, but here is a pet peeve: failing to distinguish between a real live operating Chinese city and the empty new district nearby. Ordos is not a ghost town, it’s a bustling city with lots of money from coal and cashmere. It’s the new district of Kangbashi, about 30 km away but still within Ordos municipality, which is empty. This is like the many reports I have read in Western media about the new green city of Tianjin which is being built in China.

  6. September 17, 2011 6:14 am

    I’d say the top management of China seriously realized this real estate bubble problem a long time ago. But it’s the large scale of corruption, especially in the construction and urban planning sector in the local governments, that prevents itself from solving this problem in a top-down manner.
    China is far off a balanced growth path if we fit it into a neo-classical growth model (I am an economist myself). Nevertheless, its sustainability cannot be measured or comprehended in a modern economic model, because of the special position of the government.
    As a Chinese economist, I’d say that this real estate bubble is “solvable” if the government shows enough determination in eradicating corruption.

  7. November 18, 2011 1:02 am

    People think that something is in bubble because prices went very high. Real estate in China isn’t in bubble. They have a lot of USD so they want to spent it before it will be worthless so prices go high.


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