The Monster that Ate the Economy

The WealthCycles Staff

China’s remarkable economic growth is one of the great stories of our time, the image of a wakening dragon shaking off the scales of massive poverty and a rural, subsidence society to take its place as the world’s most powerful industrial engine and most ravenous consumer marketplace.

But China’s government, never one to lay all its cards on the table, continues to ply its ancient skills at illusion and deception. China’s infamous “ghost cities” are a perfect example. All over China, vast, modern cities are springing up—beautiful, gleaming places that would be the pride of any nation, especially at a time when in most parts of the world construction has ground to a screeching halt. But new China’s cities, so glamorous on their surface, are lacking a critical component—people.

As we wrote last November in the WealthCycles.com article, Rising Dragon, Falling Star, China began implementing a series of free market reforms in the late 1970s. Within a couple of decades, the nation was transformed from a closed society, steeped in the legislated mediocrity of a socialized economy, into a capitalistic rising sun, albeit one that remained subject to close government scrutiny.

“The results of China’s free-market experiments have been staggering. Since 1978, China has averaged economic growth of 10% every year, while the United States has eked out an average growth of just 2.7% annually. Since 1978, China has managed to grow its economy to a mind-boggling 25 times its original size. Today, the U.S. economy is only four times the size of China’s, and according to Goldman Sachs' estimates, China’s economy will pass that of the United States by 2027.”

China’s growth really took off in the wake of the 2008 Financial Crisis. As the United States desperately borrowed to fend off deflation, China happily gobbled up U.S. debt, resulting in a currency bubble that fed speculation and a runaway building spree.

Aerial images of China’s sprawling new cities have flooded the Internet—hundreds of thousands of high-rise apartment buildings, university campuses, luxury condominiums, residential neighborhoods, government complexes, shining freeways—all empty.

BusinessInsider.com cites a commenter from the World Bank blog:

“Several years ago, a company from Hangzhou, China took me on a sightseeing trip to 1000 Island Lake, which is not far from Hangzhou. They showed me a residential development that looked every bit like it came from Southern California. It was in absolutely pristine condition in every way. The houses were fabulous. The view of the lake was magnificent. The odd thing was, there were no cars, no people anywhere. This beautiful town was built with the expectation by the individual owners of each property that they would sell their property in the future at a profit, but none of them wanted to live there themselves because it was too far from where business was conducted. So, it was pure speculation and investment risk. I have no idea if anyone moved into that town yet or not, but it would certainly be a nice place to retire to.”

For the most part the new development has occurred at the far-flung outskirts of major metropolitan areas. The logic is that as China becomes more industrialized, there will be people to occupy the vast developments. Problem is few people want to live long miles from where their jobs are, and vast swaths of the population have no realistic hope of ever being able to afford to live in the shiny new buildings.

The Chinese government keeps interest rates low, or in some cases funds the development itself, and encourages Chinese banks to loan money cheap to builders and speculators. Meantime its constantly growing GDP continues to amaze the world.

We wrote about China’s ghost cities in another WealthCycles.com blog in March, Building Pyramids:

 “Like any government statistic, it is hard to reconcile the torrid economic growth numbers that come out of the Chinese National Bureau of Statistics with the reports of ghost cities, bridges to nowhere, and ‘modern pyramid building.’ Is China’s success real, or is it just the illusory mirage of wealth generated by a credit bubble on steroids?”

All bubbles pop eventually, and when this one does property prices inevitably will fall. The question is whether enough people will come to occupy China’s ghost cities before they have fallen into ruin with time. Right now they appear of a kind with the half-finished shells of resort casinos in Vegas or the strange empty skyscrapers of the Singapore skyline—just one more victim of the voracious currency printing monster that was created by governments and central banks and which ultimately cannot be controlled.

Deflation is a contraction of the currency supply, which causes prices to fall and the value of currency to rise. When prices fall, a boom becomes a bust, and suddenly a recession becomes a depression.  Fed Chairman Ben Bernanke, a scholar of the Great Depression, knows the dangers that deflation poses to a debt-based economy.

Great article. I've seen those ghost cities, pretty crazy!
Although I'm curious where the information comes from regarding the empty skyscrapers in Singapore?? I live and work in Singapore and haven't seen any empty buildings. Thoughts??

Hello Dmacbay22,

I'm not sure if you had a chance to view our blog Building Pyramids and view the video. We get some information from there.

Earl 

Great article. But curious where you heard there are empty skyscrapers in Singapore? I live and work in Singapore and I know of no empty buildings.

So if a deflation happens does the price of gold and silver go down as well?

Hello Dangblamit,

Good question.

The prices of gold and silver could fall in a deflation but not very likely. People will leave their worthless stocks to invest in something that is gaining value. Everyone turning to gold and silver will push the prices of the metals up. 

Check out "The Road Ahead" article on the website as well.  

Earl

well you said that deflation means contraction of currency supply and prices to fall. but i wounder how can prices fall if there is less currency-deflation and same amout of stuff? wouldnt that cause prices to rise? thank u, grega

Hello Grega,

I can see how it can be a little confusing. 

If there is less currency that means that eventually everything will go down, including wages. When people have less money to pay for the same amount of stuff they decide to spend less. This causes prices to fall, and the value of currency to increase.  

Earl 

Isn't there a saying that life is an illusion? Well, aside from your article there was a news broadcast, I remember, talking about these ghost cities of China. In view of both your article and the news program; nothing is as it seems. However, since we are making inroads into China with KFC's, Walmarts and other businesses then who is to say that these ghost towns may be filled one day. But, as you said if the bubble bursts then the house of cards will eventually come tumbling down. I enjoy your articles immensely; keep them coming!

Are the Chinese complete fools? Maybe. But maybe there are other reasons for building new cities on such a huge scale. Did you notice that at least some of them are located virtually in the middle of nowhere, far away from the coast lines, on rather high elevations? What if China is preparing for a major relocation of people?

That's a really frightening thought. Thanks for sharing the insight. They must certainly have a master plan for something.

Hello,

We will have to wait and see what happens. However as mentioned all bubbles eventually pop. 

Earl 

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