China's Risky Fourth-Tier Ghost Cities
Video Transcript:
A recent report published by the China Real Estate Information Corporation raises important questions about a process that has been touted as the engine of future Chinese economic growth: urbanization in China’s third- and fourth-tier cities. According to the report, all but one of China’s 50 riskiest property markets are in these smaller provincial cities, where rapid-fire, debt-fueled housing construction over the last five years has outpaced actual demand. As China’s economic crisis deepens in the coming months and years, the systemic financial risks posed by artificially overheated markets in these third- and fourth-tier “ghost” cities will only grow. Chinese cities can be divided into four tiers based on population size and economic heft. Over the last two decades, first-tier coastal cities like Beijing, Shanghai and Shenzhen, along with second-tier cities such as Chongqing, Chengdu and Wuhan have served as key drivers of Chinese urban and economic development. Today, these cities boast mature property markets underpinned by relatively strong demand from ordinary homebuyers. They are still the heart of the Chinese economy but are increasingly less capable of absorbing new workers -- and thus driving future urbanization. That task has fallen to China’s lesser-known provincial cities like Wuxi, Changzhou and Yingkou. Over the next decade, the Chinese central government plans to transfer -- by government fiat when necessary -- up to 250 million rural Chinese into these cities in an effort to ramp up economic activity and domestic consumption. Beijing’s hope is that as more farmers enter cities, rising internal Chinese demand for Chinese-made goods like cars and household appliances will reduce China’s reliance on consumers in Europe and the United States. The basic reasoning behind this second great urbanization push is sound. While many parts of coastal China are now highly urban, with official urbanization rates well over 50 percent, much of inland China remains rural and underdeveloped. Despite the rise of megacities like Chongqing, Xian and Wuhan, most interior Chinese provinces have urbanization rates closer to 40 percent, meaning there is plenty of room for growth -- if not for the premier cities then for their smaller coastal and inland counterparts. Much of the investment into third- and fourth-tier cities over the last five years has proceeded on the assumption that natural room for growth, combined with Beijing’s policy of expanding urbanization, would ultimately justify rapid development now. In theory, it will. But the problem is that urbanization, especially healthy urbanization that leads to sustainable consumer markets, is a gradual process. It took Shanghai and Beijing decades to develop the strong consumer markets they now boast. Unless and until those markets develop in smaller cities, property markets there will remain extremely risky. They will be shaped far less by real demand from homebuyers moving in than by speculation and debt-fueled local governments’ need to keep construction activity high. In the near term, the imbalance between real demand and speculative investment creates a potent, painful brew in the form of China’s army of inland ghost cities.
