The last time your editor checked, central planning was not a huge success. According to history, bureaucrats wielding directives over long distances tend to allocate resources poorly.
But are ghost cities a recipe for a bust? Some say no. The Bloomberg reporter, for instance, assures us that China's economics are different -- that is to say, "it's different this time." (Where have we heard that before...)
It is supposedly OK that these ghost cities, built for millions of inhabitants, have only tens of thousands of people living in them -- because all that deserted square footage will eventually be put to good use.
As a bonus, building ghost cities is great for economic growth.
Via running superhighways out to the middle of nowhere, erecting steel and glass towers in the boondocks, China generates new jobs in construction, civil engineering, city planning and the like. All this construction looks fabulous on paper. The ghostly infrastructure gets counted as productive output, and the super-aggressive GDP target is maintained.
But what is wrong with that picture?
For one, there is the central planning problem. Growth and development are free market forces, with signature markings of trial and error. Successful cities are built from the ground up, not decreed by bureaucrat stamp. So how does the government know where a new metropolis should go, or what its optimal size should be?
Then you have the accounting problems. Should the promise of tomorrow be so readily reflected on balance sheets today?
Imagine if a public corporation said, "We are going to grow 20% per year by building idle factories in the middle of nowhere, that no one is going to use for quite some time. Don't worry though, the demand for these factories will show up. We'll make a profit on them eventually. Just don't ask when."
Such a plan would be brutalized by the market, because public companies are held accountable for profits and return on investment (ROI). (At least most of the time -- in bubble times investors will happily suspend their rational faculties.)
The Chinese government, of course, does not have to seek profit in its actions. Or it can measure results in some entirely non-traditional way, via "how many jobs did we create" or "how do the GDP numbers look."
At the end of the day, the "ghost city" mandate is directly channeling John Maynard Keynes, who once suggested digging holes, then filling them up again as a way to put men to work _TaipanPublishing
China’s blistering growth over the last two years were based on massive government stimulus and unconstrained lending from banks. The end result was over-investment in infrastructure and over-construction in buildings, which did not bear fruit for the money spent and offers only a shaky foundation for further economic growth
Moreover, inflation began to accelerate, forcing the Chinese government to curb lending and raise interest rates. In fact, the tightening efforts of the Chinese government in 2011 has taken the lending rate close to 1 percentage point of pre-recession levels and the bank reserve requirement ratio for large banks to an all-time high of 20.5 percent.
The fear is that if China’s growth has been fueled by rampant lending, the slowing down of lending may therefore crash the economy, or at least slow it down. Furthermore, the construction of commercially unviable buildings, many of which remain empty, is economically unsustainable and must stop sooner or later.
The main problem for the Chinese economy is the failure to distribute income to its massive population and cultivate consumption. Before the financial crisis, the Chinese economy relied on exports to the US. In the past two years, it has been fueled by over-investment and over-building.
Investors in the Chinese stock market may have already wised up to the dangers facing the Chinese economy as the Shanghai Composite has steadily declined since late 2009. _IBTimes
... the recent explosion of domestic credit creation has saved the collapse of China’s economy.Peter Hitchens tours a Chinese Ghost City
But Duncan is concerned that rapid credit growth could in fact lead to a banking crisis in the mainland. “There could be no more certain way to destroy a banking system that to permit 60 percent loan growth over a two-year period… Every boom busts, China's boom will be no exception."
China has been seeking to ramp up domestic consumption in order to rebalance its economy. It is one of the key tenets of the country's 12th 5-year plan.
However, Duncan says the rate of wage inflation will not be quick enough to allow the Chinese to consume what they produce due to the country’s “adverse” demographic trends.
“There are so many young people coming into the workforce and there are so many people coming from the countryside into the cities that wages can’t just go up very rapidly.” _cnbc