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January 09, 2011

Why are there ghost cities in China ? Corruption visible from space

This is my opinion and a theory about the ghost cities and over construction in China.

The Daily Mail and others have pictures and videos of what are claimed to be ghost cities or empty malls and other overbuilt and unused infrastucture

I believe that partially things are being built in advance because of the rapid pace of urbanization (20 to 30 million people per year move from the rural areas to cities) and I think partially there is land/buildings being banked by individuals via corruption which does not really cost them anything personally but which they own. So holding them in reserve is personally ok for them. I will discuss how I think the mechanism works. The central aspect is that because the easiest way to hold 1 million to 1 billion dollars for years when you cannot get diamonds and cash to a swiss bank account then you get property built and then leave it. You wait until safe times to cash and hide it. The result is corruption visible from space satellites.



Various claims of empty malls and ghost cities

The UK Dailmail says -

* Zhengzhou New District residential towers: Soaring property prices in China and high levels of investment has fueled the construction of up several new cities. Experts fear a subsequent property crash could damage the global economy

* The orange area to the north-east of the Xinyang has yet to be occupied

* The ghost city of Dantu has been mostly empty for over a decade

* Half of Erenhot is empty. The other half is unfinished

* Property bubble: Zhengzhou New District features vast public buildings that have never been used

* The mostly empty city of Bayannao¿er, which boasts a beautiful town hall and World Bank-sponsored water reclamation building

* Ghost city: Kangbashi was meant to be the urban centre for wealthy coal-mining community Ordos and home to its one million workers, but its roads are eerily empty and the houses stand vacant. Kangbashi, a new city with capacity for 300,000 -- that houses 30,000

Theory of the mechanism for building and banking buildings

Many different corrupt officials are using empty buildings as places to hide money. It is the empty buildings themselves that are the stores of value and not physical cash. (There is a common saying that people hide money at home under their mattress when they do not trust holding it in a bank account Hiding a lot of money in physical cash in China is tough because the largest currency is 100RMB. There is talk of people having rooms just with stacks of cash but a room full of US$10-$20 bills fairly obvious way to get caught for corruption)

They order them built and it costs them nothing personally. It is built wholesale at cost by builders who get say 4-9 regular contracts and one probono (cost of materials written off in another regular project). It is 10 to 20% of extra effort as a price for profitable work.

At some later point it gets released to start cashing it in.

That kind of property is also something they are not forced to unload or introduce to the market, to cause a collapse in prices. It can be put on or pulled off with far less financial pressure. They do not have any loans or anything against it It can take the edge off of a future runup in prices as this sitting capacity would be introduced.

If prices are going down the holders can wait.

Say there are ten thousand officials each with 500-5000 units sitting around. Their could be one million who each have one or ten as well. It costs them virtually nothing to order built for them. They arranged to get the leases for the land from either themselves or someone that they know in the government via connections. the builder does it with labor that is already paid for and the cost of materials, and the costs are folded into other projects.

The main concern of the official would be when to sell or rent for maximized gain (waiting for peaks) and also to do it in a way where they can still hide and disguise gains. It can be hard to hold cash as I think the largest paper currency is 100 RMB but it is super easy to exchange RMB for USD or HK dollars in Hong Kong. Physical property is and easy form to hold the value for long term. But they have to be able move it into liquid assets which is probably mostly not cash. Or they have to wait for financial loosening. They also have to avoid corruption investigations, where if they are caught and are low enough they get executed as an example.

If you were an official in China, what are your other mechanisms to take $100,000 to $10 million payoffs ? Sometimes you could take piece or have a company set up, but if you are not in the part of the government for industry then that might not be so easy.

NOTE - there is very limited access inside China to satellite images and there is the great firewall of China which limits access to websites outside of China. Also, those people who have access to satellites are high ranking military, who probably have plenty of their own "side businesses"

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