As a tourist, you can’t avoid them. In every Chinese city, in every town of any size, as you speed through in your train or bus, you see a cluster of concrete ghosts: bare, grey blocks of concrete, usually half a dozen standing together, twenty storeys or so, bereft of glazing, fittings, furniture, cranes or scaffolding.
They are the ghosts of apartment blocks, begun but abandoned because of a lack of demand. They are a testament to the rash judgements made during the world’s biggest ever speculative housing boom. And they are a warning of what might lie ahead as China’s housing bust gathers more momentum.
These are not the “ghost cities” SBS’s Dateline has memorably documented (and which Chinese authorities have since rushed to fill). These are empty, half-finished buildings, and they’re everywhere. They are evidence that supply has run well ahead of demand for Chinese real estate.
They also have implications nearer to home. Australian leaders – ministers, economic officials and mining executives – gambled heavily on a mistaken faith that China’s demand for coal and iron ore was almost insatiable. But its steel consumption has begun falling and its iron ore imports fell 1 per cent in the first half of 2015. Coal consumption is dropping more rapidly, thanks to a serious government campaign to reduce pollution, and so far in 2015 coal imports have plunged 37.5 per cent.
And the over-investment isn’t only in real estate. We travelled on a virtually empty four-lane motorway through the hills of southern China; in eight minutes, I counted six other vehicles on the road. China has built so much excess capacity in steel making and aluminium smelting that it has caused a global glut of supply in each. In the past six years, investment comprised almost half its output. It is inevitable that at some point that proportion will fall sharply, to work off the excess supply.
The empty towers help explain the growing interest among Chinese investors in real estate in Australia. And most important, they are vivid evidence of why some fear that China is not, as so many assume, immune to the laws of economics and to the risk that a boom will end with a bust.
At the height of the boom, it was estimated that China was using half the world’s cement and producing more than half of the world’s steel. And it was using them, in part, to build those empty buildings.
It seems China keeps no statistics on how many abandoned concrete towers stand in its cities. In four weeks there, I saw hundreds of them, which suggests there must be tens of thousands across this vast country. They exist because supply vastly exceeded demand, because many working families cannot afford the kind of apartments China is building – and because, while China’s leaders have made the case for reforms that will solve problems like these, they have not matched their words with deeds.
Officially, China doesn’t have a housing bust; it says its housing sector is still growing, just more slowly. Its amazingly prompt June quarter national accounts claim investment in new real estate grew 4.6 per cent year-on-year in the first half of 2015. That’s well down from the 14.1 per cent growth reported a year ago, but taken literally it implies that the peak of construction activity is still ahead.
But there is increasing scepticism, in China and more widely, about whether China’s national accounts can be taken at face value. Many analysts believe the latest estimate of 7 per cent growth over the year to June has been padded to match the official target of “around 7 per cent.” Other figures show exports are flat, manufacturing is shrinking, electricity use is declining, the forests of cranes overheard are thinning out, and millions of displaced workers are moving back to their home villages.
Some think growth has shrunk to around 6 per cent. Prominent Peking University economist Yiping Huang estimates it has fallen to about 5 per cent, and a few think it is even lower. Given that the International Monetary Fund tells us China is now the largest economy in the world, that matters to the rest of us.
China’s current woes were the key topic of a recent forum, China Update 2015, organised by economist Ross Garnaut, a former Australian ambassador to China, at the Australian National University. The papers from this year’s update have been published in a free e-book by the ANU, China’s Domestic Transformation in a Global Context, and their tone is quite different from those of past updates.
The shift in tone isn’t because of the stock exchange crash, which Garnaut shrugged off as “shenanigans in Shanghai.” China’s stock exchange prices are rarely soundly based; it’s a new game in town, and after prices had risen 150 per cent in a year – a year in which the economy was clearly slowing – you have to expect some correction. And even if other stock markets follow them down, as they have in recent days, the question is whether they will stay down – and whether that flows on to depress real economic activity. We won’t know that for weeks, or months.
The concern of Garnaut and his colleagues is rather that, after setting out bold reform directions back in 2012 and 2013, president Xi Jinping and his team are holding back on key structural reforms they have promised – reforms that will be crucial, Garnaut says, if China is to match its neighbours’ economic achievements and become a high-income country.
In Garnaut’s list, these include:
- Reform of the hukou (household registration) system, which denies rural migrant workers the rights to government services in some cities, and hence deters them from moving to where they are most needed.
- Financial reforms, so that banks and other lenders direct loans to credit-worthy borrowers, rather than to those with political influence.
- Land reforms, to create a market for land and ensure peasants get adequate compensation when their land is taken over for other purposes.
- Education reform, to give children in rural areas the same opportunities as those in the cities.
- Stronger intellectual property rights and freedom for the transfer of knowledge, to remove barriers to innovation.
- Reform of the still-large sectors of state monopolies, through privatisation, competition and economically efficient regulation.
(Garnaut notes that while little has changed yet in these areas, one area in which the Xi team has delivered is environmental reform. Coal-fired power generation fell 10 per cent year-on-year in the March quarter, on top of a 3 per cent fall in 2014, at the same time as generation from renewable energy sources grew 20 per cent. Government data shows Beijing’s air pollution is finally falling, and longtime residents agree.)
Perhaps the most stunning news from the conference was the revelation by Meiyan Wang of the Chinese Academy of Social Sciences that the number of rural migrant workers in China’s cities shrank by six million over the year to March – an extraordinary reversal of past growth. “It’s the result of the downturn in economic growth, and of the demographic transition [as the one-child policy gradually shrinks China’s workforce],” she said. “But the decline in migrant workers also brings the growth rate down, because they have been driving productivity growth.”
If migrant workers are going home, factory employment must be falling. And that would confirm the evidence from business surveys and trade statistics that China’s slowdown might already be bigger than it admits to – and could get much bigger.
Garnaut noted that recent data shows electricity use and the volume of rail freight has fallen from a year earlier. The Caixin purchasing managers’ index dropped to 47.1 in August, the lowest level since mid 2009, implying that manufacturing output is shrinking.
Most analysts expect China to avoid major disruption but settle at a lower growth rate, perhaps around 5 per cent. But some worry that the fallout from the bursting of the housing bubble and flat global demand will pitch it into a recession the government can’t control.
Betting against China has proved futile in the past, and outsiders have learned the lesson. They expect its growth to slow, but not to stop. The International Monetary Fund in April forecast China’s growth to settle at around 6 per cent; others see 4 to 5 per cent as more likely: still impressive in our terms, but not in China’s own.
The IMF’s former chief economist, Olivier Blanchard, told his final press conference on 9 July that the stock market crash doesn’t reflect the fundamentals of China:
China had an incredibly tough challenge in front of itself when there was the housing boom. And this housing boom is turning into a housing slump. But it is a relatively smooth landing, with credit growth under control, with the adjustment to construction more or less under control. If you look at things beyond what’s happening in the stock market, there is no particular reason to have lost confidence.
Yet the ghost concrete towers remain, and not just as an emblem of China’s slowing economy. They exist because favoured developers and the development arms of local governments can get finance from banks without facing the objective credit analysis they would encounter in a developed country. Some note that the total debt load of Chinese business, government and households now exceeds 250 per cent of its GDP – and most of that debt has been given without the lenders asking too many questions.
Optimists see the ghost towers as merely a timing problem. China will fill them up before too long, they say, as a new influx of migrants and rising living standards sees demand catch up with supply. But a recent Reserve Bank study implies that Chinese developers are now carrying unsold stockpiles equivalent to two years’ demand. An IMF report expects the government to manage the sector to a smooth landing, but that is no certainty.
The most human examples of China’s malaise are its slow progress in reforming the hukou system – the curse of the migrant workers – and the one-child policy. Both were expected to be priority areas for reform under Xi Jinping, but almost three years after he took office only modest change has occurred.
Under hukou, everyone in China must have a registered household. But one in three urban Chinese workers is not registered to live in the city they work and sleep in. These 200 million people have come from rural areas to work in the cities; but while they can get a job there, they can’t get a citizen’s rights.
The rules vary from city to city. By and large, though, if you have a rural hukou, you can’t send your children to school in the city, you can’t go to the city hospital for medical treatment, and you can’t get unemployment benefits if you lose your job.
Why stop migrant workers from bringing their families to the cities? One important reason, according to Meiyan Wang, is that it saves city governments the cost of providing education, health and welfare services for a third of their workforce and their families. Local governments don’t raise enough tax revenue as it is. They are heavily dependent on revenue from land sales, which is likely to reverse as the housing boom shrinks.
“It’s very important to reform the hukou system, to promote migration to the cities,” Wang told the ANU conference. “It would increase labour supply. It would reallocate resources more efficiently. And it would increase domestic demand, as migrant workers have a high propensity to consume.”
It would also reunite families. It is estimated that as many as 130 million Chinese children have been left behind in villages after both parents have taken jobs in the cities. Most have been left in the care of their grandparents, but not all, as was shown by a tragic case in southern Guizhou province in which a thirteen-year-old boy left in charge of three younger siblings got them to join him in drinking rat poison, killing all four of them.
The notorious one-child policy is slowly being nibbled away, but not fast enough to head off serious damage. China’s working population will shrink rapidly in the decades ahead, while its population of retirees will swell rapidly. Some argue that soaring housing prices and lifestyle aspirations would inhibit Chinese couples from having more than one or two children even if all restrictions on child-bearing were scrapped overnight. This is not just China’s problem; its neighbours – Japan, Korea and Taiwan – have even lower fertility rates, and face an even sharper crunch.
What this shows is that an aversion to reform is not unique to democracies. China’s Communist Party has many vested interests to protect, and so far it has been able to stall most of the structural reforms the economists are pressing for. But without change, Garnaut warns, China’s path to becoming a First World country will remain blocked.
Look at it from the party’s viewpoint. Reform of the hukou system would require higher taxes to give local governments the resources they need to extend services to migrant workers and their families. But higher taxes could threaten the party’s control. Land reforms would threaten the finances of local governments – and the finances of party officials – which now rely on being able to turf peasants off their land and sell it to developers.
Reform of the financial sector is essential for China to reach our living standards; but that would threaten the future of the state-owned enterprises that can now borrow at will. Reform of the enterprises themselves would threaten the extensive patronage system, reaching deep into the military and the party, that has built up around them.
Reform to free the flow of information is the last of Xi Jinping’s priorities. Le Monde reports that the government, which already deletes one in every eight posts on Weibo, China’s Twitter – some within five minutes, most within a day – now plans to station secret police in Weibo itself, so that tweets can be deleted before they even appear.
Garnaut ended by noting that
all high-income countries have (more or less) democratic systems in which the votes of citizens can change the political party of government… [They] provide freedom of exchange of information among citizens and between citizens and other people that extends well beyond common practice in China. Inductive logic raises questions about whether China can reach the status of a high-income country without large changes in political institutions.
China’s earlier waves of reform under Deng Xiaoping and Zhu Rongji forced party apparatchiks to accept big changes, but didn’t threaten their ultimate control. It is Xi Jinping’s misfortune that the wave of reforms now required would undermine and limit that control. So far, he has put the party first. •
