China's Ghost Cities and High Savings Rate

There is much speculation as to what the long term effect of China's continuing city building programs will have on the overall Chinese economy.

There is not doubt tremendous glut of occupancy for many of it's newly built cities' skyscrapers. This leads many to believe that the Chinese are in the middle of their own real estate bubble. That might be the case in the short run. However, I believe there's another angle that's largely been ignored by many analyst who keep tabs on the region.

First off, I am not advocating, endorsing or commending any of the methods the Chinese government have taken. I would never advocate any policy other than a completely hands off approach to all things economic. However, it would be very ignorant to assume that the Beijing would take a hands off approach to any major market adjustment that it did not consider in the ruling parties best interest. With that in mind, what I present here is just my own theory of China's long-term strategy.


http://www.sbs.com.au/dateline/story/watch/id/601729/n/China-s-Empty-Cities

In the video at the 9:41 mark, the presenter points out an one of Beijing's goals as far as its expectations of urbanization.

"China's goal is to move an estimate 400 million people out of the country side and into the cities in the next ten years."

Why then is China using government policy to make the cities long before the demand for living in these cities even materializes? After all, China has made many market reforms over the last 20+ years, why not let the demand for housing creep up on its own have that signal developers to start building? Or, even if Beijing had wanted to use the State's resources to fund and develop the land, that would still leave the nagging question of why they would be in such a rush.

The following is complete speculation:

China is preparing for a very rapid appreciation of its currency. The goal of having such excess capacity in it's real estate market is to avoid a prisoner's dilemma in real estate purchases brought about by a middle class that will multiple exponentially in a very short period of time.

Now, an obvious question is: Where would this new found wealth be coming from? The answer, at least the one I would wager a small some of money on, is that its high savings rate would result in such a tremendous spending power gain that the aforementioned movement away from the country side would indeed take place, there would also be many Chinese in the more over-populated cities such as Shanghai and Beijing that would find themselves more comfortable in the unoccupied "ghost cities."

See China's reported savings rate:  http://www.tradingeconomics.com/china/gross-savings-percent-of-gdp-wb-data.html


I guess we'll just have to wait and see.