When Zhang Jingqiang became mayor of Tieling in 2005, it was the poorest city in Liaoning Province. A greying, former Ming-dynasty garrison town of about 440,000 people in the country’s frigid north-east, it was part of China’s rust belt, but large-scale industrialisation had long ago bypassed the city.
Zhang wasn’t a high-flyer. A lean but jowly man with a left-to-right comb-over, he’d spent his entire public-service career in Liaoning, and this was to be his last posting before mandatory retirement, at age 60. But a few years after becoming mayor, Zhang found himself enjoying a rare moment in the national spotlight for the way he’d turned around the fortunes of his backwater town.
“Tieling has become . . . a city that you visit and don’t want to leave,” Zhang boasted with great pride at the peak of his success, in 2010. Soon after becoming mayor, Zhang rolled out a 15-year plan to reinvigorate Tieling, the centrepiece of which called for massive investment in new infrastructure 15 kilometres south-west of the city.
There, he built Tieling a twin: Tieling New City. it could well be one of the most pleasant cities in China. New Tieling was envisioned as a city-sized Chinese garden that incorporated elements of feng shui, an ancient Chinese philosophy that seeks harmony with the environment. An ornamental lake was dug in the city’s south, and the excavated soil was used to build a hill at the city’s northern limit, topped with a carefully curated rock garden. A winding tree-lined canal was dug from the lake through the future city to a wetland that keeps the new Tieling separated from the old.
But, for all that Mayor Zhang may have wanted to believe he had built a city that no one would want to leave, the reality is that no one actually came. “People have been buying units in Tieling, but they don’t want to live there,” said Hu Jie, the landscape architect who designed Zhang’s new city, as we sat in a Starbucks in Beijing. “In 10 to 20 years, Tieling could be a good development, but only if you can manage to bring businesses in.”
I first visited new Tieling early in 2013. The government had moved its offices from the old city to the new part so that during daylight hours there were bureaucrats milling about. But come dusk, when the commuters finished work and headed home, the city emptied. The lights in countless row after row of apartment buildings remained off. The city itself was lit up like a fun park, with apartment towers illuminated with spotlights and government buildings flashing with coloured LEDs, but no one was there to appreciate the spectacle other than bored traffic cops. as we trudged along outside rows of empty shop fronts, the only footprints in the early spring snow were my colleague’s and my own.
In most parts of the world, a ghost town is a place where the community simply got up and left.
In China, however, the idea of a ghost town has been turned on its head. Dotting the Chinese landscape are places that weren’t abandoned but rather barely had any population in the first place. And to call them towns doesn’t do justice to their scale. A city of villas and apartment buildings that were built to one day accommodate a million people rises from the inner Mongolian steppe, but it remains largely empty years after a local financial crisis ended the construction boom. A city of a few dozen office towers that bills itself as China’s Manhattan sits pretty much empty on the outskirts of Tianjin. An ecocity built on reclaimed land dredged from the sea is a shell looking over the heavily polluted Bay of Bohai, the roofs of the villas built on its outskirts having been blown off by the wind.
Blind pursuit of growth
There are no hard-and-fast rules that define what makes a ghost city, but their common characteristic is not that they’re entirely empty – local planning agencies almost always have a way of getting at least some people to move in – but that the population is a mere fraction of what they were built for. The government doesn’t publish numbers on housing vacancy rates, so it’s difficult to know just how many there are.
Regardless of the actual number, ghost cities are routinely dismissed by economists as not relevant to China’s economic big picture. After all, it is argued, they’re the product of unconnected local planning decisions, and despite their proliferation, the national economy hasn’t seemed to suffer for it. But to think of them as simply a glitch in the matrix is wrong. They’re part of the code, and they represent how the urbanisation process has been hijacked by local governments in their blind and endless pursuit of growth.
Few places have handled rapid urbanisation as well as China. It’s avoided the favelas and shantytowns that plague other developing nations, despite having needed to accommodate the greatest migration in human history. Between 2000 and 2015 alone, more than 270 million people – equivalent to the combined population of Germany, France, Britain, and Spain – have moved from the countryside to China’s cities. The consulting firm McKinsey forecasts that by 2030, China will have an urban population of 1 billion, up from about 730 million in 2013. After having been a rural society and economy for millennia, China is on track to achieve in just 50 years a level of urbanisation that took the United States a full century.
The key to China’s success lies in the scale and speed at which it’s been able to build infrastructure. The sort of growth China has enjoyed for three decades could too easily have been brought to a shuddering halt if the construction of new roads, ports, and power plants hadn’t been able to keep up with what the economy needed, as has been the case in India and Brazil. It’s hard to imagine that Shanghai, a city without even one subway line 20 years ago, could have absorbed the 10 million people it’s added in that time without building the world’s longest subway system, one which is almost 60 per cent bigger than New York’s.
There was a time when China’s power grid couldn’t keep up with the demands of the economy, so much so that some parts of the country suffered from rolling brownouts. By 2012, the country was opening three new power plants a week. People, freight, and coal once had to compete for space on the country’s railroads – with people routinely losing out – but China has since spent hundreds of billions of yuan building a high-speed rail network from scratch, an investment that was once dismissed as an expensive boondoggle but is today celebrated globally as the crown jewel of China’s transportation system.
China will unquestionably need even more infrastructure if it’s to accommodate all the additional migrants McKinsey anticipates. But just because China needs things that haven’t yet been built, that doesn’t mean that everything that gets built is truly needed. Even the casual observer driving around China can see that something is wrong. You can see it in the industrial parks that are empty except for a small handful of factories, and in the government buildings that are so large it seems impossible that they will ever fill in with civil servants, and in the airports that only sporadically host an arriving plane, and in the glut of exhibition centres and museums that every town seems compelled to build.
Urbanisation – the construction of new housing and infrastructure – has been the driving force behind the Chinese economy for close to two decades. It has created demand for massive volumes of steel, cement, and glass; for the ships that bring iron ore from overseas; for the power plants and coal mines needed by the steel mills; and for the machinery that is needed on construction sites.
But this constant and nonstop building has become an addiction for local governments. it’s a way of stimulating the local economy and maintaining growth, all loosely justified by the needs of migrants. The World Bank calls urbanisation an “enabling parallel [process] in rapid growth”; in other words, urbanisation can support growth, but it can’t drive it. China has put the cart before the horse, and the result is waste on an epic scale. Tieling’s story is one of how ambition and a lack of restraint by local governments, masquerading as planning for the future, have laid the foundation for financial problems that have been replicated throughout China – and how the promise of further migration isn’t going to fix them.
Seemed like a good plan at the time
In 2010, Mayor Zhang’s plan for Tieling must have seemed like a success. For a time, Tieling had the fastest-growing economy of any city in Liaoning, driven by the sheer amount of construction required to build an entirely new city. Tax revenue soared on the back of all the business created for developers, construction companies, and their suppliers. The city won an award from the UN for building affordable housing. And new Tieling had been selected as the only city to be put on display inside China’s pavilion at Shanghai’s 2010 World Expo, an event that aimed to re-create the prestige of the world fairs of the 1950s and 1960s.
The Expo, themed “Better City, Better Life,” was about showcasing ways to improve China’s generally soulless, polluted, and blandly similar cities, a phenomenon widely lamented as “one thousand cities, one face”. What earned new Tieling national attention was Zhang’s radical decision to prioritise livability over utilitarian, cookie-cutter urbanisation.
Zhang’s concern with the urban environment was part of a deliberate strategy. If people liked living there, so the thinking went, then that would encourage migrants to settle there, particularly the more affluent kind who might be looking for a second apartment for weekend getaways. only an hour’s drive from Shenyang, the polluted provincial capital, Tieling, as Zhang spoke of it, would become “Shenyang’s backyard”.
To realise the dream, Zhang drafted Hu, the landscape architect. Hu felt that Chinese cities had lost their distinctiveness. He wanted to make them more uniquely Chinese by incorporating elements of classical art, like mountains and running water. Hu had studied and worked in the United States for 15 years, but he had returned to Beijing to help with the face-lift that city was undergoing in preparation for the 2008 Olympics. Hu was building a park twice the size of New York’s Central Park, a little to the north of the main Olympic facilities. After visiting Beijing in 2007, Zhang grilled Hu on every aspect of his Olympic Forest Park, from the lake shaped like a dragon, to the grey water used to feed the ecosystem. Zhang then asked the expatriate landscaper to apply his vision to Tieling.
That vision hasn’t come cheap. Since the first wave of development – which included building a water-treatment plant, a power substation, a central heating plant, and the planting of almost 200,000 trees – the spending has been unrelenting. Today, hulking, quasi-brutalist government office buildings made from concrete and glass line one side of the lake, overlooking a town square dotted with giant-sized red lanterns. There are two major high schools and a vocational-training centre; a tennis centre, built for the 2013 National Games – a kind of low-rent, domestic Olympics – hosted by Shenyang, which outsourced the event; two glass office towers for the local banks, which have their own lakefront location; a tram line that goes from downtown out to a nearby logistics park; and a high-speed rail station that connects the city with the rest of China’s north-east.
Initially, the frenetic investment paid off. Tieling outstripped the national economy for years, peaking in 2007, when it grew by 20.8 per cent, which was fast enough for the local economy to double in size within three-and-a-half years, and significantly faster than the 13 per cent growth for China as a whole. But the growth was built entirely on public works that weren’t generating any income.
The city government first acknowledged that something was wrong in 2013, when tax revenue fell by 10 per cent. The following year, tax receipts fell a further 15 per cent. By 2015, the Tieling economy was barely growing at all. The city – or, specifically, city-owned companies – had borrowed heavily and now didn’t have the resources to repay what it had borrowed. For local officials, the flip side of what they’d done was starting to sink in. “The government debt burden is heavy,” the municipality said in its 2015 state-of-the-city report. “It seriously lacks resources to repay interest and principal, and the repayment burden is immense.”
Over the last decade, building new cities – and adding entire new “districts” to the outskirts of existing cities – has become business as usual in China. A survey of 12 provinces in 2013 by the China Centre for Urban Development, an in-house think tank for the central government’s national Development and Reform Commission, found that the capital cities of those provinces were each building an average of 4.6 new districts (which are often indistinguishable in size and ambition from new cities) or new cities in their immediate orbit. The sample’s 144 prefecture-level cities (China has more than 300 prefectures, which are the next administrative level down from provinces) were building, on average, 1.5 each. And the centre found that many new cities and new districts – a jumble of central business districts, resort strips, ecocities, and administrative zones – were being built to house populations “basically equal” in size to the original cities they were attached to.
Rather than build incrementally, adding infrastructure if and when it becomes necessary, officials across the country have, herd-like, embraced the if-you-build-it-they-will-come model of urban planning. Ubiquitous as you hit the city limits of towns everywhere, new cities and districts come in all shapes and forms. In Luoyang, an industrial town in Henan Province, the new city – a cluster of large government buildings and office towers topped with the logos of state firms – is built around a lake that draws huge crowds of locals in summer for a laser show performed nightly to a recording of Carmina Burana. Outside of Lushan, a town in western Sichuan that was hit by an earthquake in 2013, an entirely new tourist district – built loosely in the area’s traditional architectural style – has taken form around a huge exhibition centre dedicated to showcasing ebony, a type of wood that grows locally. In Qufu, the birthplace of Confucius, a new district caters to resurgent interest in the sage, with exhibition and conference centres and dozens of new apartment towers.
All this construction is a pre-emptive strike of sorts, a way for cities and towns to accommodate their share of future migrants before they’re inundated. But the scale and cost involved are completely out of proportion to the likely scale of migration. According to Qiao Runling, the deputy head of the China Centre for Urban Development, in 2013, plans for new cities and new districts were sufficient to house about 3.4 billion people, more than twice China’s total population. Moreover, China has already passed the peak of migration. While plenty more people are expected to migrate, the pace of internal migration has been slowing since mid-2010. Yet local governments’ enthusiasm for construction still hasn’t cooled at all. The People’s Daily warned in an opinion column that such mindless expansion comes at a cost: “[At first] China’s new cities and new zones . . . like Shenzhen and Shanghai’s Pudong . . . were a node of economic growth . . . however, the new cities and new zones that are now blooming everywhere . . . are moving in the opposite direction . . . They create massive financial waste, they burden local government with heavy debt, and they make the ‘development disease’ of relying on investment to drive the economy worse and worse.”
Better living through urbanisation
Historically, China treated urbanisation as something to be avoided. Soon after taking control of the country, in 1949, the Communists took the system of household registration that had been around since Imperial times and redesigned it such that it tied people to one location for life. Under what was labelled the hukou system, a person, once registered in a certain place, be it village, town, or city, had little scope to move anywhere else. The fear was that, if given the choice, people would migrate from the countryside in great numbers, putting pressure on urban resources and threatening stability. In 1978, on the eve of economic reform, only about 18 per cent of Chinese lived in urban areas.
As China’s export machine slipped into gear in the 1990s, migrants moved in ever greater numbers to the cities, attracted by factory jobs and tolerated by officials who recognised that industrialisation and urbanisation went hand in hand. Still, the hukou system was kept in place as a prophylactic against what China’s leaders sometimes referred to as “urban diseases”.
“When I was in Rio and São Paulo, I was able to look down and see vast, vast slums. In South Africa, some cities are surrounded by stretches of tin shacks,” said President Jiang Zemin in 2001, at a time when about 38 per cent of Chinese were living in cities. “This has created great social problems.” In contrast, China made it difficult for migrant workers to put down roots in the cities. They had to leave if they couldn’t find work, and if they wanted to access public services like health and education, they had to return home. Still, Jiang saw urbanisation as a way to help reduce rural poverty by getting people out of agriculture. Industrial jobs pay better than farming, but those jobs cluster in cities. If China was to become more prosperous, then the cities had to accommodate migrants. “Reducing the rural population is something that we can’t avoid,” he said.
When Li Keqiang became China’s premier, early in 2013, more than half the country was living in urban areas. Since Jiang, leaders had often spoken of how China needed to urbanise. Li had gone a step further, building his career around that idea, beginning with the thesis he wrote in 1991 for his economics doctorate, in which he argued that faster urbanisation could help support what was then the early stages of China’s industrialisation. He believed not only that urbanisation had to go hand in hand with industrialisation and agricultural modernisation – the former creates the jobs that pull migrants into cities, and the latter creates migrants by pushing people off farms that no longer need them – but also that it could be an essential part of development, not just something that gets dragged along in its wake. He started to apply his ideas in the late-1990s, when he was promoted to party secretary, first of Henan and then of Liaoning, where he moved in 2004.
In 2005, Li He visited Tieling. “Tieling’s population . . . is too small. you need to develop into a big city, build yourself into a regional centre, and use the city to develop the surrounding rural areas,” he said during his tour. “Expanding the size of the city is an important step in Tieling’s development, and the province should support it.”
With almost half a million people, in absolute terms the original Tieling wasn’t exactly small. However, its reliance on agriculture meant that, relative to the rest of the province, a disproportionately large number of people lived in the surrounding countryside. Tieling’s officials took Li’s comments to heart. after he left, they set about designing their 15-year plan. They presented it to Li the next year.
“The concept is sound, it’s innovative, it’s unique, and it’s in line with the future direction of urban development,” the future premier said, signing off. According to the plan, by 2010, the new city would have 60,000 residents. By 2020, that number would increase to 200,000. Mayor Zhang spoke of its one day having a million inhabitants. Within Liaoning, the plan was soon being touted as the Tieling Model. Other towns in the province were exhorted to learn from the approach. At least at first, seeding the city with people proved relatively easy.
Finding ‘instant tenants’
The government managed to arrange for “instant tenants” by closing down schools in the old city and the surrounding county and reopening them in new Tieling. Relative to the civilian population, there was now a disproportionately large number of students wandering around in their blue-and-white polyester uniforms. One elderly resident described new Tieling as “the city of children”. In the countryside, people complained that middle school students now boarding at the new schools were under-supervised, and villagers gossiped about teenage pregnancies and high school dropouts. Meanwhile, rounding out the roster of insta-tenants, government officials were encouraged to move into the new city and were given subsidies to buy apartments near their new offices, which had been relocated from the old city.
Such measures amounted to little more than shuffling around Tieling’s existing population. For the new city to be a success, it needed to do more than just siphon people from old Tieling. It needed migrants, and that required jobs. A logistics park in the suburbs was one of Tieling’s great hopes for generating employment; it was supposed to turn Tieling into a trading hub for China’s north-east. It’s best described as a drive-in wholesale market. The first time I visited the park, its identical orange-colored blocks of three-storey buildings, divided by narrow streets and broad avenues, were near empty. “Where are the people? There’s no one here,” said Bo Yuquan, a Tieling native who had started a flooring store in the park when it first opened. Now, he said he wished he’d opened a store in the old city instead. “I’ll be out of business soon. My staff and I are discussing moving to Beijing to find work.”
One might think that the failure to create employment and attract migrants anywhere near the scale that the city anticipated would prompt a reassessment of the building plan. Instead, the construction of public works continued. Hu Jie, the landscaper, said that after Mayor Zhang stepped down, in 2011, the incoming mayor asked if Hu had any thoughts on how to help fill the city with people. Hu said that he didn’t. But rather than cut his losses, the new mayor doubled down and went looking for more things to build. He made plans to spend a further $US1.3 billion on new projects, including an art gallery, gymnasium, and indoor swimming pool.
I revisited new Tieling almost three years after my first trip. I was met at the train station by the same taxi driver who had driven my colleague and me around the first time. Not much had changed, he said, although his wife had a new job. She’d previously worked as a building manager for what had been the most well occupied housing development in the new city, but there were so few people living there that the only thing that kept her busy was the constant complaints from tenants about how badly constructed their apartments were. She’d recently started work at a different management company, but the development she was posted to was even more empty than the last one.
Nonetheless, new Tieling seemed to have more people than I remembered. Most of the city was still empty, but a new shopping centre, inexplicably built to resemble a ship, had a mini fun park on the third floor for children under five that was packed with delighted kids. And the shopping strip that had sprung up around where the farmers had been housed seemed longer and busier than before.
But the actual numbers told another story. Tieling was losing people. At the end of 2012, Tieling’s combined cities were home to 441,000 people. Two years later, that number was down to 438,000. So much for the city’s plans to add 60,000 by 2010 and 200,000 by 2020.
Subprime mortgage crisis
The legacy of Tieling’s city-building experiment isn’t simply empty buildings. Regardless of how many people move in or leave, the sheer scale of investment that went into creating new Tieling is such that local authorities will likely be crippled by this financial burden for years to come. according to the Chinese press, in 2013, after seven years of construction, Tieling had spent 26 billion yuan ($US3.8 billion) building its new city.
Tieling’s financial problems are replicated throughout China. “In the last two or three years we have been all over the country investigating, and almost every new district has debt problems,” said Li Tie, from the planning authority’s urbanisation think tank, early in 2015. “And the size[s] of the debts aren’t small. They far exceeded anything we had imagined.”
Foreigners typically look upon China’s urbanisation achievements with envy. The world’s top architects flock to China to realise their most creative impulses on government-sponsored opera houses, libraries, and office buildings. Yet the perception that China has managed to do all this without financial constraint is a serious illusion. “Debt repayment pressure on some local-government debt is massive, and is a hidden danger,” Liao Xiaojun, the director of the Budgetary Affairs Commission for the National People’s Congress’ standing committee, wrote in an essay in the People’s Daily late in 2015. “If we let debt risks continue to accumulate, they will be bound to transmit to the financial world, triggering systemic financial risk.”
Even worse, China’s cities and towns have amassed a mountain of debt in near-record time. at the end of 2008, China’s local governments owed about 5.6 trillion yuan in debt. Eight years later, the amount had tripled to 16.2 trillion yuan, or $US2.5 trillion. True, that’s less than the $US3.1 trillion worth of debt that US states and local governments are re- sponsible for, but the US economy is almost 50 per cent larger than China’s, and America’s governments have spent 200 years building up to that level. Many of China’s local governments simply don’t have the resources to repay what they’ve borrowed, and many will need to borrow even more in order to support growth with further public works. “Local-government debt is our subprime,” said Cheng Siwei, an economist and former vice-chairman of the Standing Committee of the National People’s Congress. “Banks give loans to local governments that don’t meet lending standards, the local governments then have trouble repaying the debt, and the banks either roll them over or end up with bad loans.”
Beijing isn’t blind to the risks. In fact, it’s been acutely aware of them since the 1990s, when it banned local governments from borrowing money. yet local governments have been getting around that rule for almost 20 years by setting up companies that borrow on their behalf. These local-government financing vehicles (LGFVs) have allowed local governments to deliver growth by borrowing money when they weren’t supposed to, and have made possible the construction of projects ranging from high-speed railways to decorative fountains and everything in between.
LGFVs were first used in the late 1990s but really took off in 2008, when Beijing turned a blind eye in the interest of stimulating the economy. By one count, there are more than 10,000 LGFVs across the country, owned by provinces, cities, prefectures, and counties. Many are incredibly opaque and massively indebted.
In 2015, it looked as though Beijing had finally managed to get things under control. It overturned the moratorium on local governments’ directly borrowing, allowing some to sell bonds in an effort to introduce some degree of transparency to the whole process. And it imposed hard caps on how much local authorities could borrow, both directly and indirectly.
But by mid-2017, it was clear that local government had continued to balloon, as local authorities came up with new ways to evade the caps and avoid Beijing’s oversight. In August of that year, Xi Jinping said that local-government borrowing was one of the financial system’s two great vulnerabilities (the other was the debt at state-owned firms).
Chasing private investment
In Tieling, Zhang’s successors have attempted to make the best of a difficult situation. They’ve tried to stimulate tourism with an annual lantern festival during Chinese New Year. in 2016, the theme was Chinese literature, with ornate lanterns the size of trucks inspired by Journey to the West and Dream of the Red Chamber arranged around Tieling’s human-made hill. But the festival can do only so much for the economy, and old habits die hard. in 2015, the city announced plans to develop a further 550 hectares of land around the wetland, at a cost of 4-5 billion yuan. This time, however, they wanted private investors to pay for it.
Tieling seems to have avoided default because the loans it has taken out from commercial banks have been transferred to the China Development Bank, one of China’s policy banks responsible for acting explicitly at the behest of the government. It’s a kind of black box where Tieling’s financial troubles can be hidden away from public view. Assuming that Beijing can continue to shuffle around local-government debt in a way that allows bad loans to remain hidden, the biggest risk is not that of a financial meltdown but that at some point, local governments will simply no longer have the financial resources to keep on building. Sure, so much of what they’ve already built is incredibly wasteful, but it’s also a vital component of growth. The risk to the economy is that local governments won’t be able to fund new projects
Tieling managed to grow as long as it did because developers were able to keep selling apartments. Even though Tieling is largely empty, much of the housing that fills the city blocks in between government offices, schools, and the tennis centre has nonetheless been bought and paid for. Between 2007 and 2013, almost all the newly constructed housing space in both old and new Tieling – roughly enough space to accommodate the existing population of Tieling once over – was sold. In effect, the lack of migrants from the countryside didn’t matter. People bought housing in Tieling anyway – perhaps as an investment, or as a place to retire, or because they thought they’d move there once the city filled up. But at some point, reality took hold and people soured on the idea of buying a home in an empty city. Yet up until the point they stopped buying, the local government remained solvent, because property developers were willing to keep buying more and more land.
In most of the world, infrastructure typically gets paid for in one of two ways. First, it can pay for itself. A road can charge a toll; an airport receives landing fees; a stadium sells tickets. China does some of that. The country is riddled with toll roads – a particular source of public discontent – but not all public works generate revenue. So, to build things like new offices, city streets, and sewers, local governments in most parts of the world raise taxes. But China’s local governments don’t have the discretion to raise taxes. Moreover, their existing tax base is already stretched thin. But these governments do have a source of funding independent of taxes over which they have total discretion: land. Land lies at the heart of China’s investment-led boom – and it’s why the country’s economic boom is so fragile.
This is an edited extract from China’s Great Wall of Debt by Dinny McMahon, published by Hachette Australia