No Need To Panic Over Ghost Cities In China

The authors are Standard Chartered’s economists Stephen Green and Lan Shen

Activity in China’s 200 or so small, lower-tier cities is a key factor in determining the impact of the real-estate sector on economic growth this year. Although we have data on construction, transactions and apartment inventories in China’s biggest 30 cities, understanding what is going on in the next 200 or so cities is much harder.

There is very little data. There are stories of real estate-market collapses in places like Ordos (in the new city area of Kangbashi and the old town of Dongsheng) in Inner Mongolia and Changzhou in Jiangsu, but we wonder how representative such cities are.

After scrutinizing the limited data available, we conclude that China’s supply problem may be concentrated in the second-tier cities. The rule of "the smaller the city, the worse the inventory problem" certainly does not appear to hold.

Some 650 cities exist on an administrative basis in China, of which probably 300 drive the national residential real estate market. In such a large universe, all kinds of events and activity will occur, including situations like Ordos.

However, despite a few other "ghost city" stories, the picture in smaller cities looks resilient. Ordos is not representative of the real estate market of China’s small cities.

Inventories are high in some cities, but land market activity suggests that developers have enough cash and confidence to buy more land. Moreover, floor space available for sale suggests overall stable market dynamics in lower-tier cities.

(The article has been edited for clarity)