Chinese Ghost Cities: How and Why They Exist

Many people have seen and commented upon photos such as these, of China’s so-called ghost cities:

Jiangsu ghost city

New villas in Jiangsu Province--no cars, no people, no signs of life

Changsha ghost city

A large development in Changsha. No one lives there. Possibly, no one ever will.

Ordos ghost city

China's most famous ghost city, near Ordos, has been empty for years.

(Many more photos at the link.)

To be fair, not all of the new construction in China will go to waste. There are many, many complexes of new villas and apartments that have been built near large cities that are being lived in and used. At the same time, depending upon the city you visit, there are large swaths of new construction–including skyscrapers–which are unoccupied, and sometimes even unfinished.

This is not a new phenomenon in China. When I first visited Haikou, Hainan some years back, what impressed me most were the unfinished skyscrapers standing vacant in the city. Construction had stopped on them, and they had been standing there for years, forlorn and unloved. While I have not been to Haikou in several years, I imagine that they are still unfinished.

What is going on here?

It is not at all laissez-faire capitalism, as some people assume. Rather, it is pure, unfettered, unbridled greed, mixed in with a good deal of corruption.

Because of China’s neo-mercantilist economic policies and currency restrictions, money tends to flow into China, and not out.  This money is used by the government to spur economic growth within China, partly through spending on infrastructure projects, partly through offering loans on easy terms to favored borrowers.

“Favored borrowers” is an important point. Normally, in order to buy anything of value on credit in China, you must put 1/3 down. Given the high price of property, people may have to scrimp and save for years to afford the down payment for a house or an apartment. Obviously, then, easy credit is not going to “normal” people–it is going to people who are well-connected, people who have guanxi. More often than not, these well-connected people are close relatives of high-ranking party members, as bloodlines are the best guanxi one can have.

So, someone with good guanxi decides to speculate and build a luxury housing complex. However, he has to buy land–a lot of land–to do this, and he has to find the land at a good price or the whole deal is a waste of time. Remember, this is unbridled greed we are talking about, so the speculator will not be happy with a ten or even a twenty percent return–he wants to double or triple his investment, or he isn’t interested.

The problem is that cheap land is hard to find, as everyone can smell the money when the speculator comes by, and will want a piece of it. The speculator can always use his guanxi to make the landowners an offer they cannot refuse. However, this has risks, as you never know if a landowner has better guanxi than you do. Thus, the speculator tries to find a place where none of the landowners can conceivably have any guanxi to speak of. Better yet, he tries to find a place where the landowners have no guanxi, and where they may not have much in the way of legal documentation to prove that they own the land.

This generally means farmers.

The farmers are given notice, courtesy of the local government, that they are to vacate their property within, say, one week. In return for vacating their property, they will be given a small, ratty old apartment on the far side of the earth. This is naturally an apartment with no farmland attached, which means that they will lose their livelihood. Alternately, they can receive a small cash settlement (typically, several thousand dollars) according to a “reasonable” valuation of the farmland, with which they can buy land somewhere else, if they can find land that they can afford (the Gobi Desert perhaps?). Their homes are then spray-painted with Chinese characters that say the house is to be “torn down” (拆).  One can commonly see houses such as this throughout China, both in cities and in the countryside.

Many landowners take whatever is offered to them. They have always been screwed by the system, and see no hope of any change. Others fight. In some cases, they get better deals, though they still lose their homes. In other cases, the police–or even armed thugs–come to move the people out by force. There have been numerous violent assaults as a result. A handful of homeowners have even set themselves on fire to protest the unfairness of it all.

Some landowners simply refuse to leave–they would rather die. Such cases are called nail houses, because the development will continue around the obstinate landowner, leaving his house sticking up like a nail. Pictures of such situations are common on the Chinese Internet, and can sometimes be rather hard to believe.

Nail house

A nail house in Chongqing

So, the speculator, by hook or by crook, finally gets his hands on the land. Construction begins immediately and the property is developed as fast as possible. In cases where there is an actual market for the kind of real estate they are selling, many of the homes and apartments will be sold before the construction begins or even before the land is obtained. Such a situation is more common around cities such as Shanghai. However, in most cases, the construction is done purely on speculation, so they want to get it finished as quickly and cheaply as possible.

Of course, there is always the unlucky speculator where things have fallen through. His contact at the bank–the man funneling the loans to him–got angry with him, got fired, got arrested, or hightailed it to Canada with most of the bank’s money. Or, more likely, the whole deal was smoke and mirrors to begin with: The speculator really did not have the guanxi or financing he said (or thought) he had, could not get people to buy the property in advance as he had hoped, and could not continue to pay for construction. Thus, an instant, unfinished ghost town which may have so many liabilities attached to it that no one will ever want to touch it again.

But let’s say that the construction gets finished. As typical in China, everything will look nice–beautiful–on the outside, but all of the houses or apartments will be shoddily constructed and in need of immediate repair, and all of them will be unfinished on the inside–nothing but concrete floors and plaster walls. No kitchen, bathrooms, nothing. The home buyer will therefore need to spend as much as he paid for the house–or more–in order to get the house repaired and livable. This was a calculated move on the part of the speculator: he has people in the construction industry he owes favors to, and may even be a part-owner of a home-remodeling service.

Now the speculator waits. Will anyone buy the houses or apartments? This is a gamble. If they are bought, likely it is by those people who have for years saved the 1/3 down, or by lower-tiered speculators who will buy three or four houses or apartments on credit and hold them thinking that the price will eventually go up.

Depending upon the location of the property development, the market, and the quality and price of the homes and apartments being sold, the complex may end up fully sold and occupied, or fully sold but to speculators who have no intention of living there, ever, or selling anytime soon. Of course, it could be that sales are slow to non-existent, because no one has the money to buy the property for any reason. And they never will.

Hence, the ghost cities.

Lest we feel sorry for those failed speculators, remember that corruption is a way of life for such kinds of people. If they are smart, by the time the project is over they will have skimmed off enough money to buy several homes in the US and retire.

As for the loan they got from the bank to start this whole thing off, you didn’t really think they ever intended to pay it back, did you?

Indeed, that’s the beauty of China: “favored borrowers” never pay back their loans, and no one ever expects them to.

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9 Responses to Chinese Ghost Cities: How and Why They Exist

  1. Absolutely amazing, John. Here I thought the government of Hugo Chavez was the most corrupt on the planet. It looks like he has some stiff competition. How long do you think it will be before the tauted economy of China collapses?

    • John Scotus says:

      It is anyone’s guess. Certainly, it is unsustainable–Wen Jiabao himself has said so on several occasions. However, apart from currency restrictions the one thing keeping the mess going is a lack of transparency and the opaque nature of the Chinese banking system. Usually, when a bubble collapses it is a result of a panic. If people do not know what is going on or how bad things are, how can this occur? Wen Jiabao’s own comments are routinely censored within China, so many people have no clue as to the extent of the problems. It will collapse, but when?

  2. loopyloo305 says:

    Amazjng look inside China! Greed and corruption on a massive scale!

  3. Pingback: Build. - Page 2 - US Message Board - Political Discussion Forum

  4. alna says:

    they’re just like the empty buildings and developments here in Australia – only more of them …

  5. Pingback: Le città fantasma in Cina – Parte I

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  7. Pingback: Ordos, China: A Modern Ghost Town | English

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