Kangbashi, a desert ghost city in China.

[agamemnus]

http://www.bloomberg.com/video/69817240/
(doesn't work for me in Firefox -- had to use Chrome)

May 16 (Bloomberg) -- Bloomberg's Adam Johnson reports on the construction boom in Kangbashi, a city in China's Inner Mongolia originally designed to accommodate around 1 million people that currently has about 30,000 residents. The desert city is part of the Chinese government's plan to add 36 million units of affordable or social housing in the next five years. Critics warn that "ghost cities" like Kangbashi are adding to the nation's real estate bubble. (Source: Bloomberg)

Fascinating.

[Dreadnaught]

One of the many reasons China's economy is hitting bubble-proportions. The number of non-performing loans building-up may be catastrophic.

[Hazir]

On the upside; much of it is built so shoddily that the bubble may deflate in a quite unexpected way.

[Veldan Rath]

On the upside; much of it is built so shoddily that the bubble may deflate in a quite unexpected way.

Wow...harsh. (Or...funny cause it's true)

[agamemnus]

Bubbles are associated with market economies... bubbles need a lot of people to believe in something that isn't there.

I wouldn't call this a bubble, but more of an inefficient allocation of resources. This is 99% state-financed construction. The only way the bubble "bursts" is if the government decides to suddenly stop making these cities and not think of any other way to use the construction industry. I don't see that happening.

The government has a strong economic and political incentive to keep the construction industry employed, so they will just reallocate them to, I dunno, moving sand out of the desert.

If there was a market that grew around specifically servicing the (specifically) ghost city construction industry, and the government reallocated the subsidies, to say, creating factories to churn out solar cells, then yes there would be some bursting there.

Alternatively, the government COULD go bankrupt financing this construction, so there's that... or it could even collapse because the yuan might rise too far too fast and decide to stop the construction subsidies/financing.

[wiggin]

Actually, there is a pretty significant real estate bubble in China. While the initial financing/construction is done from above, the buying and selling of units happens in a private real estate market which is largely unregulated. A huge number of people have been snapping up these newly developed properties for 'investment' and selling them at an exorbitant markup. It's only a matter of time before these overleveraged would-be real estate barons stop finding suckers to sell overpriced property to, and then the whole house of cards will fall.

[Dreadnaught]

The more important issue is how much of their economy seems to be built around this kind of unaccounted-for (yet centrally-planned) investment spending. Infrastructure and investment is great, but clearly at some point you reach overcapacity as well as a reckoning on the revenues from those investments.

[wiggin]

Agreed. I don't agree with the doomsayers about China's economy, but they're clearly in for some rough times ahead. Wages are rising, there are clear constraints on their growth rate, and the inefficiencies and dangers of their economic structure should not be underestimated.

That's not to say that they aren't a huge economic force that is here to stay, of course, but it's clear that they have pretty poor macroeconomic policy.

[Hazir]

Funny detail, owners of this real estate sink their money into it but won't have any returns untill they sell as they can't rent. Rent would damage the resale value of the real estate

[agamemnus]

Actually, there is a pretty significant real estate bubble in China. While the initial financing/construction is done from above, the buying and selling of units happens in a private real estate market which is largely unregulated. A huge number of people have been snapping up these newly developed properties for 'investment' and selling them at an exorbitant markup. It's only a matter of time before these overleveraged would-be real estate barons stop finding suckers to sell overpriced property to, and then the whole house of cards will fall.

Ah, so they'll sit vacant and unsold then. But, what happened in the US was that the construction industry was way over-grown and it just fell apart fairly quickly, losing a lot of construction industry jobs, associated jobs, and then of course all the problems in the fall in house values.

In China, if the bought apartment/condo market falls apart in these "desert" cities, that won't devalue actual viable places like by the coast.

Anyhoo, (even if the market falls apart everywhere) I just don't see the construction industry imploding because I think the government will just use it for building other things...