China's 'ghost cities and malls' or promise of a new Urban China?

A documentary by SBS Dateline (Australian TV) March 24, 2011 hightlighted China’s perceived ‘ghost cities and malls’ http://www.youtube.com/watch?v=rPILhiTJv7E  The impression is one of a massive bubble waiting to burst, driven by blind pursuit of GDP growth built on concrete.

This is not the first time that the world is anxious, if not very worried, that China’s much-hyped urban miracle will turn out to be the next Dubai. Indeed, this is why some hedge funds have long gone into the business of ‘shorting’ China. See my earlier Paper  ‘Is China the Next Dubai?’ at http://www.andrewleunginternationalconsultants.com/chinawatch/2010/03/is-china-the-next-dubai.html

To understand a little better what is going on, one has to appreciate the ‘China Speed’ in urbanization. Many marvel at the now famous Shanghai Pudong skyline symbolizing China’s economic rise, without remembering that Pudong was just a patch of rice patties in 1990 when plans were first announced for its transformation. When the new city started to take shape, likewise it looked like a ghost town with rows of empty buildings. Today, the district has a population of over 5 million, and counting.

That was, well, only Pudong. However, China is now experiencing the fastest and most extensive urbanization drive in human history, spreading deep into the inner provinces. A huge number of vibrant, second, third and fourth-tier cities has sprung up across the country.

According to a recent McKinsey research report, China will be adding 350 million more urbanites by 2025, more than the existing population of the United States. The total urban population will reach 1 billion by 2030. There will be 221 cities with a population over one million, compared with 35 such cites in Europe today. In the process, 5 million square meters of roads will have been paved, 170 mass transit systems built, 40 billion square meters of floor space created in 5 million buildings, of which 50,000 will be skyscrapers, equivalent to 10 New York Cities (Preparing for China’s Urban Billion, McKinsey Global Institute, March 2009).

According to another McKinsey research report, the economic power of cities around the world will become dominant, particularly in China,  where 216 cities, including many middle-weights, are expected to contribute nearly 30 percent of global growth between 2007 and 2025. Of the world’s top 23 middle-weight cities outperforming megacities in terms of household growth and consumer income segments above $20,000 (in Purchasing Power Parity (PPP) terms), 15 and 14 of such cities respectively will be in Mainland China. The number of households in China will approximately double, to be growing at a compound annual rate of 3.5%, driven by explosive demand for housing from smaller-sized families. In the same period, out of 120 million households entering into the consumer segment in the world’s developing cities, 75 million will be in China. (Urban World: Mapping the economic power of cities, McKinsey Global Institute, March 2011).

The rampant growth of the China’s middle class is confirmed in a separate report by Euromonitor International, a world leader in consumer research (Emerging Focus: Rising Middle Class in emerging markets, 29 March 2010).  Households in China with annual disposable incomes of $5,000-15,000 as a percentage of total households are expected to increase from 31.7% in 2010 to 46.2% by 2020.

But is China already overheating and, along the way, will the housing bubble burst first?

China's inflation has remained stubbornly high, in spite of the government's tightening measures. The consumer price index rose 5.3 percent in April from one year earlier, slightly lower than March's 5.4-percent rise, but still higher than expected. With still more room for administrative measures, hikes in interest rates and banking reserve requirements, inflation seems unlikely to reach unmanageable levels. Nevertheless, mild inflation is an inevitable feature for China's current stage of development characterized by rapid industrialization and urbanization, according to Zhang Xiaojing, a researcher with the Chinese Academy of Social Sciences, a government think tank. (Article dated 22 May, 2011 posted on English.Xinhuanet.com at http://news.xinhuanet.com/english2010/indepth/2011-05/22/c_13888124.htm).

As for the housing bubble, private mortgage lending in China is extremely conservative. You would be extremely lucky if you could manage to get a mortgage loan approaching 70%. Moreover, China’s banks are much better capitalized in comparison with their Western counterparts and most are supported by the state’s massive currency reserve.

China is decisively switching course with the latest 12^th Five Year Plan (2011-15), channeling the country towards higher-quality, if slower, growth, with more domestic consumption and a more balanced, equitable, innovative and sustainable economy.

Nevertheless, the risks of inflation and overheating remain top of the national agenda, as I have outlined in a published article ‘Chinese Economy at Risk of Overheating’ in The Analyst, official journal of The Institute of Chartered Financial Analysts of India (ICFAI) University Press, March 2011, which is accessible at  http://www.andrewleunginternationalconsultants.com/files/icfai--chinese-economy-at-risk-of-overheating.pdf )

So, as in the case of Pudong, the many empty buildings and roads are set to come alive with China’s burgeoning middle class over the years. In the process, some bubbles may burst but any image of total collapse is likely to be over-hyped. What is more probable is that China’s urban economy, driven by her emerging 221 new cities, will soon grow beyond recognition.

Best regards,

Andrew

www.andrewleunginternationalconsultants.com

Comments

[Chandra]

I usually do not leave a bunch of remarks, however i did a few searching and wound up here CHINAwatch: China's 'ghost cities and malls' or promise of a new Urban China?. And I do have some questions for you if you usually do not mind. Is it simply me or does it look like a few of these responses appear like left by brain dead people? :-P And, if you are posting at additional online sites, I would like to keep up with everything fresh you have to post. Would you list of the complete urls of your community sites like your twitter feed, Facebook page or linkedin profile?