Ordos city of Inner Mongolia has been the most famous ghost city of China, a demonstration of the most wrong aspects of Chinese economic growth model, with every problem multiplied by a factor of 10 (sort of). In Ordos, you can see constructions of buildings for a population that does not exist, with its residents all involved in real estate investment and informal lending, etc.
Oh, and of course, Ordos just hosted the Miss World Pageant, something that we could not care less. Needless to say, it was more than obvious from the start that all these real estate speculations and informal lending would not end well. And indeed, they did not end well. People’s Dailyrecently reported that the hangover of this feverish real estate speculations and informal lending boom has been so bad that not only is the new district of Kangbashi a ghost city, but the old city centre has also become a place with unfinished buildings everywhere.
Many real estate constructions have been stopped, and we previously noted that workers who sought jobs in Ordos have left as constructions stopped. People’s Daily pointed out that some 90% of the residents of Ordos have invested in real estate, which are now all becoming these unfinished buildings. Not only that, many residents are also invested in informal lending schemes that funded real estate developers, now as many real estate developers are being squeezed, many residents are now worried about getting burned both from real estate investments and informal lending, while some owners of real estate developers are hiding.
By Fanghong (Own work) [CC-BY-SA-3.0 or GFDL], via Wikimedia CommonsAccording to estimates cited in the report, some 80% of all buildings currently under construction have had the constructions stopped (so no longer under construction, really), with the total floor area of more than 20 million square meters. Nowadays, there are no buyers outside of sales office of real estate, and most of those people who do appear every now and then are hoping to get a repayment of debts from developers.
Ordos, while very extreme, nevertheless demonstrates how things can go wrong, and very badly. Asset prices fall and over-leveraged borrowers get squeezed, investments collapses, etc. Eventually, some of the debts will never be paid back, bad debts will increase, and that will most likely be true for informal lending schemes as well as the formal banking sector.
Of course, no one is suggesting that this is what China will come down to as a while. But this gives one a general idea of what can happen when everything goes very wrong. And as a reminder, there is not many things which are not going wrong at the moment, just not this wrong that is.
This article originally appeared here: Constructions at China’s most famous ghost city grind to a halt
Also sprach Analyst – World & China Economy, Global Finance, Real Estate
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