China's "Planned Capitalism" Kills Wealth - Politics Forum.org | PoFo

Wandering the information superhighway, he came upon the last refuge of civilization, PoFo, the only forum on the internet ...

Political issues in the People's Republic of China.

Moderator: PoFo Asia & Australasia Mods

Forum rules: No one-line posts please. This is an international political discussion forum moderated in English, so please post in English only. Thank you.
#14689832
https://fee.org/articles/chinas-planned ... m=facebook

Sometimes, prosperity is an illusion. The massive building boom in the People’s Republic of China is creating outer signs of affluence, but there isn’t enough demand — or enough money — to put residents in the new homes.

As in many similar urban projects across the country, the Chinese government has been pouring billions of dollars into Gansu Province to build a new city called Lanzhou New Area. The Washington Post reports,

This city is supposed to be the “diamond” on China’s Silk Road Economic Belt — a new metropolis carved out of the mountains in the country’s arid northwest.

But it is shaping up to be fool’s gold, a ghost city in the making.

Lanzhou New Area, in Gansu province, embodies China’s twin dreams of catapulting its poorer western regions into the economic mainstream through an orgy of infrastructure spending and cementing its place at the heart of Asia through a revival of the ancient Silk Road. Hundreds of hills on the dry, sandy Loess Plateau were flattened by bulldozers to create the 315-square-mile city. But today, cranes stand idle in planned industrial parks while newly built residential blocks loom empty. Streets are mostly deserted. Life-size replicas of the Parthenon and the Sphinx sit surrounded by wasteland, monuments to profligacy.

Spontaneous Cities

China’s central planners haven’t even begun to appreciate, let alone practice, the lessons of the great urbanist Jane Jacobs, who viewed cities and the socioeconomic processes that go on in them as largely the result of spontaneous, unplanned entrepreneurial development. As an economist quoted in the Washington Post article points out,

Urbanization and modernization are processes that naturally take place.… You can’t force it to happen or have 1,000 places copy the same model.

Construction of these so-called ghost cities is likely financed by artificial credit expansion. In other words, people aren’t necessarily saving to buy a home in the future; the government is simply printing money. As a result, when the houses are finished, people haven’t saved enough to buy them all. This kind of construction doesn’t contribute to prosperity; it is the illusion of prosperity.

If you build it, they may not come.

When production is involved — say, a builder constructs a new house — whether that house adds to prosperity depends on whether there is someone who values the house for consumption and is willing to offer the builder more than the minimum she is willing to accept (that is, enough to cover her opportunity cost). If so, then in the eyes of the ultimate consumer, the house’s value is greater than its price, giving him a net gain, and to the builder, the value of that payment is greater than the cost of construction, giving her a net gain as well.

Only when both parties to a transaction gain in this way does the transaction add to overall prosperity.

What Is Wealth?

Planners in the People’s Republic of China have fallen for the illusion of prosperity — the belief that wealth consists of things, in the outer signs of affluence. To say that economic value is subjective may sound abstract, but the idea that well-being is purely objective can lead to economic disaster.

Economics teaches us that success is ultimately determined by the person who subjectively experiences it, not by an outsider or a third party. What an outsider thinks she sees may be quite different from the way a person actually perceives his well-being. And it doesn’t really influence the way that person feels if the outsider says that he ought to feel differently.

Prosperity, then, is the cumulative result of myriad additions to net value, as experienced by those who ultimately use the things that are produced — the final consumers. This is, in fact, how Adam Smith conceived of wealth in The Wealth of Nations:

Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to only so far as it may be necessary for promoting that of the consumer. The maxim is so perfectly self-evident that it would be absurd to attempt to prove it. But in the mercantile system the interest of the consumer is almost constantly sacrificed to that of the producer; and it seems to consider production, and not consumption, as the ultimate end and object of all industry and commerce.

Production Is Not the End Game

Like those Smith criticized, too many people still believe that production is an end in itself.

The millions of people employed in China’s construction boom are being paid with money that the government has created out of thin air. Yes, they will spend their new incomes and add to current aggregate demand. But if the construction has not been financed through real saving, then down the road, the cost of those resources will inevitably overwhelm people’s willingness to pay for them. If you build it, they may not come. So unless China can somehow find hundreds of millions of willing and able buyers, we may see an economic collapse beside which the Great Recession would pale in comparison.

This is but one example, a big one for sure, of the sort of pseudoprosperity that politicians and economic charlatans routinely offer their constituents and supporters. When bust follows boom, they try to pin the blame on what they call the “free market” and “neoliberalism.”
#14690882
I think the Chinese have the right idea here. Right now, people can't afford the homes but after the inevitable economic correction, many people will lose a lot of money, but the price of the homes will go down. They aren't going to just disappear. After the price goes down, possibly to unheard of low levels, there are going to be a lot of happy people. I just wouldn't want to be holding the bomb when it goes off...
#14690883
The problem with this analysis is that from a capitalist perspective, these cities are a complete success. It is exactly the same problem that occurred in Spain prior to the 2008 crisis or with California City. These houses may be uninhabited, but they are not unowned. They are built by developers who sell the apartments to individual investors. The individual units are thus owned and financed by investors and speculators who may be misreading the market, but who invest in these new apartments in the hope of collecting rent at some point in the future. In some cities, this works out, which spurs investment into these other cities. The role of the central government is largely in providing infrastructure for these cities which helps give investors hope that the city will succeed - planning high speed rail lines, and the like. But it is usually the Chinese government responding to private forces operating in the area, ie: Beijing isn't building power plants or sewer lines in the desert in the hope a city will emerge, but working with private developers to provide infrastructure for the city they are already building.

At the very least, for now, credit in China is low, so the construction is not leading to a major crisis as many small private investors use their savings rather than loans to purchase these houses from developer. But ultimately, the physical apartment buildings are being built by private actors making an investment, so I fail to see how any reasonable person can blame politicians and economic charlatans for what is ultimately a market problem.
#14690885
If no one can afford the shiny new houses, then why not just give them away?

It's because investors would lose money. And, as we all know, it is much better for actual newly built housing complexes to go to waste than to let investors lose any money.

Seriously, only someone with an IQ less than 80 could possibly think capitalism has anything at all to do with efficiency.
#14690899
Saeko wrote:If no one can afford the shiny new houses, then why not just give them away?

It's because investors would lose money. And, as we all know, it is much better for actual newly built housing complexes to go to waste than to let investors lose any money.

Seriously, only someone with an IQ less than 80 could possibly think capitalism has anything at all to do with efficiency.

Capitalism is the reason this much stuff was built, to the point where they will some day have to be given away well below market value.
#14690911
Brother of Karl wrote:It's not below market value if that's all people are willing to pay for it. :D

Yeah, it gets semantic after awhile. My point though is that capitalism giveth, capitalism taketh away. China is basically headed for a giant bait-and-switch that will end with the rank and file getting cheap homes while whoever ends up holding the hot potato goes broke.
#14690998
Hong Wu wrote:I think the Chinese have the right idea here. Right now, people can't afford the homes but after the inevitable economic correction, many people will lose a lot of money, but the price of the homes will go down. They aren't going to just disappear. After the price goes down, possibly to unheard of low levels, there are going to be a lot of happy people. I just wouldn't want to be holding the bomb when it goes off...

It's still a lot of lost value. They're using taxpayer money to do it, money that taxpayers could currently use for other purposes (such as, given that this is an upper-middle income country... eat, for instance).
#14691003
Saeko wrote:If no one can afford the shiny new houses, then why not just give them away?

Saeko makes a rare good point.

These boondoggles were financed with stolen money. They should be given back to the taxpayers.

The problem though, is that these ghost cities are ghosted because there's nothing of value in them. No one will want to move in.
#14691010
Dr House wrote:It's still a lot of lost value. They're using taxpayer money to do it, money that taxpayers could currently use for other purposes (such as, given that this is an upper-middle income country... eat, for instance).

The thing to understand here is that China is weird. I'm not Chinese but I'm learning the language and have lived there for a period of time, so I have some understanding of them.

First, they don't want more people. Which is why the money doesn't go towards feeding people. There's guys whose job is to pull people out of subway cars because they're wedged in due to over-crowding. YouTube it, it's kind of hilarious.

Second, they love to crowd together. That's why the PRC built these ghost cities, but being Chinese, no one wants to move out of the overcrowded cities. So instead they decide that there's too many people. It's pretty weird but then western people arguably do stranger things...
#14691016
Hong Wu wrote:The thing to understand here is that China is weird. I'm not Chinese but I'm learning the language and have lived there for a period of time, so I have some understanding of them.

First, they don't want more people. Which is why the money doesn't go towards feeding people. There's guys whose job is to pull people out of subway cars because they're wedged in due to over-crowding. YouTube it, it's kind of hilarious.

Second, they love to crowd together. That's why the PRC built these ghost cities, but being Chinese, no one wants to move out of the overcrowded cities. So instead they decide that there's too many people. It's pretty weird but then western people arguably do stranger things...

My view of it is that what the government wants shouldn't matter. People are not supposed to be their government's playthings.

Also, this is all still, inherently, parasitic. Contractors and administrators over-benefited from projects that were overpaid from taxpayer money. This is kind of how the government creates inequality.
#14691017
Dr House wrote:My view of it is that what the government wants shouldn't matter. People are not supposed to be their government's playthings.

Also, this is all still, inherently, parasitic. Contractors and administrators over-benefited from projects that were overpaid from taxpayer money. This is kind of how the government creates inequality.

That's fair, I think I agree with you. I also think though that it is what it is. China will make use of these houses sooner or later, capitalism made them and it may be one of the things that it has done right, although sometimes I quibble about whether or not capitalism really exists since I don't see a coherent alternative.
#14691021
I think China is one of the few countries that would benefit from democracy. 75% of the population supports laissez-faire capitalism (probably due to living with the alternative), and I suspect that governing policy in a democratic China would in a lot of ways mirror Switzerland.
#14691034
My opinion on that is I have no idea. There were a lot of divisions between the Chinese before the communists took over, for example, there are like 7 Chinese languages still spoken today. Mandarin was enforced by the PRC and is now called "Chinese" but it was originally just one of many languages, albeit the one of the largest ethnic group (Han Chinese).
#14691060
I feel the need to say again that the government isn't literally building these cities - private investors are, in response to government investment into, in this case, the Silk Road project and high speed rail line alongside it.

I could make an identical post blaming Washington DC for California City and it would make as much sense as your central thesis in this thread.

Beijing financed capital for infrastructure and economic projects in the region. Gansu Province approved a plan for a new city, and recognized it as a municipality. The empty ghost cities, however, the buildings that no one lives in, are built by private investors, and the empty apartments are sold to speculators. Not the government. The government isn't building a city - the government is building a bunch of industrial infrastructure (a high speed rail line, an airport) and a city is being born from speculation surrounding that.
#14691084
I agree what you're saying but Beijing has also been pushing out economic stimulus through provincial and local/municipal govt. who have taken on the debt and often used much of it to provide infrastructure for new residential areas.


Sure, but a large part of that is not motivated by economic concerns but rather security and broader national development. Spreading key industries across multiple provinces keeps local authorities relatively dependent on central government to maintain ties and help govern the country, and prevents specific authorities from becoming far too powerful relative to the others or the central government itself. This is a common tactic in many broad nations or nations with separatist inclination to sort of force the central government to keep it together - Franco put heavy industry into the Basque country rather than Castille to both incentivize local authorities to remain loyal to Madrid and to prevent a future government from being as willing to recognize Basque sovereignty, and Britain put its nuclear Trident program in Scotland for similar reasons.

Ultimately, Beijing is working with Gansu province to solidify its control over what is a peripheral region, not out of economic concerns. The ghost city is a consequence of that, not an intention - so blaming central planning for ghost cities is erroneous. Beijing isn't "killing wealth" by building uninhabited cities, private speculators are.
#14691091
It's true. And China ever since Deng's reforms started to consolidate has been trying tho find ways to spread things inland from the east coast, to maintain control over what could be very disgruntled provincal populations if they get left too far behind. South Korea under Park CH pumped a lot of development money into South Gyeongsang, Busan, Ulsan, Daegu and this translated into these regions being conservative party (they've changed names every decade or less) loyalists to this day. Mind you, Beijing pumped a lot of funds at one stage into Chongqing which allowed Bo Xilai to mix it with foreign investment and gain the financial clout to create his own fiefdom.

But, yes, essentially it's private speculation which is the real driver behind this kind of thing.

The new Silk Road project is pretty interesting tho., the extension into Pakistan has the potential to really change the economic dynamics there and possibly impact upon the social/religious dynamics there over the long term.
#14691118
One more problem is eye-watering sums of money that Chinese investors are pouring in foreign property markets. At first it seems a good thing, but on second thought you find out that these investments are destroying housing market for middle-income residents. Look at English-speaking countries which are the most popular with Chinese property investors https://tranio.com/canada,new_zealand,australia,united-kingdom,usa/analytics/top_five_countries_for_chinese_property_investments_5131/ Canada is the fifth most popular country with Chinese investors who are interested in purchasing condos for their children near universities. As a result, single-detached homes move further into luxury budget territory leaving first-time buyers with funds enough for a condo.

Hell yeah Maz, lean into the "YouTube commen[…]

I honestly have not experienced any of these thing[…]

Election 2020

It doesn't really matter what we think. It only m[…]

Trump's Dumb Economics

It looks like China's leader is playing Chinese c[…]