ESSA

ESSA

China’s Biggest ‘Ghost Town’: A Microeconomic Perspective


Henry Lin

By

February 3rd, 2013


The newly constructed Kongbashi District in China boasts sky high apartments, gleaming infrastructure and modern townhouses. Nearly empty of residents, it has been dubbed China’s ‘Ghost Town’. Not merely a product of over zealous Government stimulus for the construction sector, the phenomena can be explained by microeconomic factors.


Freshly built from government stimulus funding, the new district of Kangbashi in the city of Ordos in China is brimming full of sky high apartments and shiny new infrastructure.  Yet since its construction the town remains largely uninhabited and untouched.

It is known as ‘the ghost town,’ with only about 30,000 residents despite a housing capacity of one million.  Few residents have chosen to move from the thriving old city district in Dongfeng just 30km away.

Economists have frequently raised concerns about China’s unsustainable dependence on construction to boost economic activity. Much like the constructed roads that went nowhere in Japan after their housing bubble burst in the 90’s, economists have taken notice of the worthlessness of Kangbashi. The government is of course attempting to engineer the economic numbers, by using the quickest sure-fire way to generate ‘economic activity’: massive funding to construction.

It would be cliché to talk about derelict apartments and streets signifying a housing bubble. Many journalists and economists have discussed the challenge facing the Chinese Government to curb property speculation. Behind these macroeconomic concerns there is a hidden microeconomic issue at work keeping Kangbashi empty which will be the focus of this article.

The current residents living in the city are mostly construction workers who have moved to be closer to their job. Take them out of the picture and you have very few people living there. Housing prices could have been a huge factor in deterring potential residents. However the housing prices in the new Kangbashi district have plummeted, and at one point during 2012 were even cheaper than real estate in the old city of Dongfeng.  So why isn’t anyone moving in?

Put simply, people don’t want to move to a place where there is no economy, no jobs and no access to goods and services. Business entrepreneurs don’t want to start up shop in an empty city where there is no one to buy their goods and services. Even current residents need to take a 30km trip back to the old city to purchase their necessities.

In Microeconomics this type of situation is called ‘assurance’ and falls under the topic of ‘collective action’ in game theory subjects. The basics of this type of problem are as follows: if there are a lot of people taking one action, it is better for you to also take that action, and vice versa. An example would be that if there are many people on Facebook compared to Myspace, then you as an individual will ditch MySpace and sign up to Facebook. Your benefit would be higher on Facebook since social networking is better with more people.

The same principle applies in this scenario. Since there are very few people living in the Kangbashi area, there isn’t a proper functioning economy which can produce demand and supply for goods and services and ultimately jobs. There is no incentive to move to the new area, whilst everyone is living back in the Dongfeng district. The individual is better off living in Dongfeng, where there is an established economy. This is demonstrated in Figure 1.

When it comes to moving to a different place to live, there are many different incentives which would motivate people to relocate to another city. Examples include the gold rush, or an economic boom such as the shale oil boom in the US.

Where such drivers do not arise, there are a multitude of policies that the Government authorities could implement in order to create sufficient incentives to lure people into moving to the new city. For example, policies aimed at creating good job prospects by successfully fostering an industry in this area, providing good education or good healthcare services to residents, or targeting housing affordability. However these policies need to be carefully executed to be successful.  Moreover the level of intervention needed to reach the tipping point, where enough people to want to move so that others will follow, may be significant.  Unless either of these occurs, Kongbashi will remain empty, notable only for its status as China’s largest ghost town.

The views expressed within this article are those of the author and do not represent the views of the ESSA Committee or the Society's sponsors. Use of any content from this article should clearly attribute the work to the author and not to ESSA or its sponsors.

  • Oliver Jiang

    Apart from the fact that this topic was first raised back in 2009/2010, there are several misconceptions I’d like to point out in this article.

    It was only designed and planned for 300,000 to live in the new city…and that was by 2020 (http://www.chinadaily.com.cn/china/2012-12/24/content_16048776.htm). Where this figure of a million comes from, I don’t know. The nearby city of Dongsheng (not Dongfeng) only has 160,000 residents, so even if the aim here was to transplant the entire population of Dongsheng into Kangbashi, it would only fill it to about 50% of capacity. While initial targets would be to draw residents from Dongsheng, sustained longterm population growth can only derive from other domestic sources. Don’t forget that this residental area is located in Inner Mongolia, which only has a population of 24 million to begin with (with the two largest cities in that province having a respectable three million each). At present, the resident population is around 72,000, indicating that the population has doubled in the past two-three years. The government is continuing to provide significant economic incentives for both residents and business to move there. As for industry, Hawtai, a Chinese car manufacturing company, has a factory in the region, with a production capacity of half a million vehicles a year. The official Ordos website also lists a 4300 kilowatt power plant as being a key regional project.

  • Monika

    Although the low occupancy was first noted in 2010 the progress of the district is still very much in the public eye – especially policy initiatives to make it more attractive from efforts to get a school up to fostering industry. I would not necessarily trust the Ordos web site as an indicator of the success of these initiatives.

    It remains to be seen whether these industries will be sustainable without Government support and the services are not in a perpetual state of latent capacity.

    Also whilst it is in Inner Mongolia – the neighbouring district is grossly overcrowded with massive strain on infrastructure and particularly water infrastructure. So there are ample potential residents.

    All in all, I think the current situation there is a fascinating case study in terms of policies geared at relocation.

    • Oliver Jiang

      I don’t know where you’re getting your overpopulation/overcrowded statistics from. Can you link me? The entire prefecture is about the size of Tasmania, is nearly 50% desert, and has a population of two million. The prefecture capital, Dongsheng district, has an urban population below 200,000.

      Yes, it remains to be seen if the infrastuctural development can be self-sufficient. Adelaide has a population of 1.2 million, and was established in 1836. Zhoushan city, Zhejiang province, population 1.2 million, established 738. Is it a ghost city right now? Sure. But that doesn’t mean that implications that it’s failed/failing/will fail are warranted. A city is not created overnight, after all. Judging the success or failure of Kangbashi might only be possible long after you and I are no longer of this Earth.

  • Monika

    Hey – it’s overcrowded in that the area is booming due to the area being uniquely resource rich and the consequent mining development (and the people being uniquely cash rich) so the infrastructure in the old city is at capacity (not net population).

    I actually think that it will be a success in the long term if commodities demand remains high. Certainly it is an urban planners dream and the buildings super water and energy efficient.

    • Oliver Jiang

      The term “overcrowded” is meaningless without context. Dongsheng district has a population density of just over 100 persons per square kilometre. Hong Kong has a population density of over 30,000 per square kilometre in 1996.

      Ordos City’s population increased something like 41% from 2000 to 2010. If this simply was about population demographics, then why aren’t there more people living in Kangbashi? As you said, there are ample potential residents. Dongsheng district’s population more than doubled in the same amount of time; if overcrowding really were an issue, then where are all those people living? Evidently, the housing capacity in the provincial capital has not yet reached capacity.

  • Henry Lin

    1. Several sources i came across whilst researching all estimated/stated the city was built for around 1 million ressidents, it never mentioned by which year. i am sorry if this number is incorrect.
    2. you have raise good points in that dongsheng would only fill 50%, and that a populated city isn’t created overnight.

    However the twist and the point im trying to make is that the buildings have been built in a very quick period. the examples of adelaide and zhoushan whilst old cities didn’t build all this oversupply of housing capacity when they were established, they slowly grew over time and built overtime. This is much different compared to Kangbashi which built so much housing already, almost to say the governments intention was to build a city overnight.

    3. the mini mining boom around these cities is also of interest, as GDP per capita has significantly risen compared to the other states in china, and how that affects the local economies, and kangbashi in terms of population inflows would be something to look at.

    As always thanks for commenting and voicing your opinions on this topic.

    • Oliver Jiang

      My reading of your article understood that your microeconomic analysis indicated that Kangbashi was failing/would fail: “There is no incentive to move to the new area, whilst everyone is living back in the Dongfeng district. The individual is better off living in Dongfeng, where there is an established economy.”

      One good way, I think, to look at this is as a supply and demand issue. Normally, cities expand when the demand for new housing outstrips the existing supply of available housing. In Kangbashi, what’s happened is the government’s made a whole lot of housing available, regardless of the demand for such. If demand goes up, as it probably will, then that’s all well and good. If it doesn’t, well, honestly, who cares?

      We’ve got plenty of case studies about the effects of a mining boom on local economies when personal income has increased at a faster rate than the rest of the country right here in Australia. Don’t see why we would need to outsource to get the same data.

      • Henry Lin

        “If demand goes up, as it probably will, then that’s all well and good. If it doesn’t, well, honestly, who cares?”

        its true that it is essentially a demand supply problem, but i’m sure any government wouldn’t want to waste money and build empty towns on purpose.

        the intention of my article is to sort of provide some analyses on why there hasn’t been demand, and as monika stated before, sort of be a case study in terms of policies geared at relocation, and look at how game theory – assurance affects these issues.

        • Oliver Jiang

          “but i’m sure any government wouldn’t want to waste money and build empty towns on purpose” -> Well, why not? If the whole point is to pump money back into the economy, then the actual success or failure of those projects is a secondary concern. When FDR came to power during the Great Depression, one of his key economic policies was the creation of the Public Works Administration, which spent $3.3 billion dollars in the span of two years on 34,500 different projects. Hitler, too, helped the recovery of the German economy after 1933 by embarking on a massive public construction effort, essentially eliminating unemployment in the space of three years.

          The Chinese government has increasingly been faced with the spectre of trying to boost domestic consumption and demand during a period of relative economic downturn. In Australia, Rudd faced it by giving out stimulus cash grants to individuals and families. In China, they build things. Easing population pressure and combating the cost of real estate, that’s all secondary. Simply dumping money into the system is an unreliable method, especially in a market as large as China. Hence, tight government-controlled spending on specific infrastructure projects. That is the measure of success or failure, not whether residents move to Kangbashi or not.

Founding sponsors

 

 

Partner

Gold sponsors

 

 

Silver sponsors

 

 

 

 


Affiliates