China’s rapid ascent to the world’s second-largest economy has been a defining feature of the early 21st century. Among the most striking phenomena in this development are the so-called “ghost cities”—vast urban areas built to accommodate future growth but remaining largely uninhabited. This phenomenon casts a shadow over the Chinese economic miracle, revealing the pitfalls of unchecked development and speculative real estate investment. By the end of this century, as China keeps on aging rapidly its overall population will be cut in half. Fewer people will be around, and this mass of seniors will have very different housing needs. Ten years ago, it was easy to argue that China’s rapid urbanization would bring more than enough migrants to cities, effectively cancelling out the effects of aging. Today, less so.
Abandoned residential complexes in the Chenggong district, Yunnan (Source: Chinaunderground; CC BY-SA 4.0)
This article explores several prominent examples of ghost cities in China, delving into the reasons behind their creation, their current states, and the broader implications for China’s economy and society.
Economic Drivers Behind Ghost Cities
1. Rapid Economic Growth
China’s ghost cities are a product of the country’s aggressive investment-driven economic strategy. Following the global financial crisis of 2008, China embarked on a stimulus program that emphasized infrastructure and real estate development. The government’s goal was to sustain economic growth and urbanization. This led to a surge in construction, in the early stages of its economic boom, the country focused on developing infrastructure—roads, bridges, airports, and railways—which provided substantial returns. However, as the “easy targets” for profitable investment dwindled, China began undertaking riskier projects, including constructing entire new cities.
2. Real Estate as a Preferred Investment
For China’s burgeoning middle class, real estate has been perceived as a safe, lucrative & one of the few reliable investment avenues. With stringent capital controls limiting overseas investments, property has become the preferred vehicle for preserving and growing wealth. This has driven speculative investments, where many apartments are purchased but left empty in anticipation of future value appreciation. The homeownership rate is among the highest in the world — 90% — to much of the developed world’s mid-60s, and the trend extends to owning multiple properties with the majority of recent purchases have ben 2nd and 3rd homes. If everyone owns two or three homes, who is left to live in all of them? Thus vacancy rates in China vary considerably by city size, but remain high, in absolute terms, across the board. Furthermore, home ownership in China is seen as a status symbol and a prerequisite for marriage.
3. Local Government Financing
Local governments in China have played a pivotal role in the proliferation of ghost cities. Facing the responsibility of funding social services while remitting most tax revenues to Beijing, local authorities have turned to land sales and development projects to generate revenue. These Local Government Financing Vehicles (LGFVs) have become critical tools for funding local budgets, often resulting in the over-construction of urban areas.
Case Studies
Ordos, Inner Mongolia
In northern China, Ordos stands as a testament to speculative overreach. Built during a coal mining boom in the early 2000s, Ordos was envisioned as a bustling metropolis for a million residents. However, a decade later, the city remains largely uninhabited. The proximity of Ordos New Town to the already thriving Ordos Old Town disincentivized migration.
Most residents of the Old Town were migrant workers and government officials, who had little reason to move. The city’s infrastructure is underutilized, with 80-90% of apartments owned by investors hoping for long-term profits. High taxes and poor construction quality further deterred potential residents. By 2016, only 100,000 people lived in Ordos New Town, far below the revised target of 300,000.
Thames Town & Tianducheng
Thames Town in Shanghai replicates the aesthetics of London, with red telephone boxes, fish and chip shops, and English pubs. However, the town is largely abandoned, with most streets empty and many shops closed. Designed for students and university workers, the high property prices have made it inaccessible, leaving it as another ghost town. Similarly, Tian Du Cheng, near Shanghai, aimed to replicate the charm of Paris. Complete with replicas of the Arc de Triomphe and the Eiffel Tower, the city was intended to house 10,000 residents. By 2021, it had achieved only 10% of this target. The high cost of property, mirroring that of Paris, has made it unaffordable for many, resulting in an empty replica city.
Tianducheng, China (Source: By MNXANL; CC BY-SA 4.0)
Yujiapu Financial District, Tianjin
Yujiapu, envisioned as a Chinese Manhattan, exemplifies the failure of such ambitious projects. Bloomberg reported empty streets, unfinished buildings, and closed amenities during visits in 2015 and 2021. The city’s gleaming skyline conceals unused office space and absent residents.
Operational since 2009, Yujiapu was planned to become a financial hub within ten years, aiming to be northern China’s economic center. Across the river, Xiangluowan, under construction since 2007, was to host enterprises, government offices, and research centers. Both areas were dubbed “China’s Manhattan” during planning.
Yujiapu Financial District (Source: By Amazingloong; CC BY-SA 4.0)
However, growth has been sluggish. After a decade, while the skyline mirrors Manhattan, the expected influx of high-end enterprises and talent has not materialized. These hollow shells now serve as a cautionary tale about the pitfalls of engineered economic cities in Tianjin and beyond.
Chenggong, Yunnan Province
Not all ghost cities remain empty. Chenggong, initially a failed development, has found a new lease on life. Transformed from farmland in 2003, it was nearly empty by 2013. However, the establishment of seven colleges has brought students to the city, reviving its economy and social life. International brands like H&M and Zara have opened stores, indicating a slow but steady recovery.
Pudong, Shanghai
Pudong, Shanghai’s financial district, serves as a counterpoint to the ghost city narrative. Initially criticized as a “status monument for a dead Pharaoh” by economist Milton Friedman, Pudong has transformed dramatically. By 2022, its annual GDP exceeded $400 billion, with occupancy rates higher than Midtown Manhattan. This success was driven by government intervention, relocating banks and incentivizing international businesses to set up operations there.
Pudong, Shanghai, China (Source: King of Hearts; CC BY-SA 4.0)
Additionally, China has exported the phenomenon of ghost cities to other countries. Forest City, constructed on an artificial island in the Straits of Johor, Malaysia, is now nearly abandoned. The empty streets, silent boulevards, and vacant shops and flats pose a problem for the financially troubled Chinese developer Country Garden. Forest City exemplifies China’s property crisis, highlighting the gap between ambition and reality. Local factors, such as former Malaysian Prime Minister Mahathir Mohamad’s restriction on visas for Chinese buyers due to his objection to a “city built for foreigners,” may have contributed to the current situation. However, this underscores that building tens of thousands of apartments in remote locations is insufficient to attract residents. You can also view the spatial distribution of several other ghost cities across China, here.
Economic & Social Implications
China’s ghost cities are a symptom of broader economic strategies and challenges. The country’s economic growth has relied heavily on investment, particularly in real estate. The construction of these cities was fueled by speculative investment, with property seen as a safe asset amidst limited investment options. High homeownership rates and the cultural importance of property ownership have further driven this trend. However, the sustainability of this model is questionable. China’s population is aging, and urban migration is slowing. The demand for housing is expected to decline, potentially leading to a collapse in property prices. Real estate directly contributes 15% to China’s GDP, and indirectly up to 30% when considering related industries. A downturn in this sector could have severe repercussions for the broader economy. It’s estimated that a 20% fall in real estate activity could lead to a 5-10% drop in GDP. The IMF, meanwhile, estimates a 1% drop in China’s demand would decrease global GDP by .25%. The proliferation of ghost cities underscores significant economic imbalances. Real estate development has driven GDP growth, but it has also led to misallocation of resources. The high levels of debt accumulated by property developers, such as Evergrande, pose significant financial risks. With the real estate sector contributing substantially to China’s GDP, a downturn in this sector could have widespread repercussions, potentially leading to a banking crisis if developers’ default on their loans.
Ghost cities reflect deeper social and demographic challenges. Investments in unoccupied properties do not generate returns, leading to wasted capital and potential financial instability. The obsession with property investment diverts funds from other consumption and productive investments. Additionally, the housing market’s dynamics exacerbate social inequalities. Young men, particularly in rural areas, face difficulties in finding marriage partners due to the high cost of housing, which has become a prerequisite for marriage. Chinese consumers only have so much money, and by spending it all on empty 3rd homes, they don’t spend it on more productive alternatives.
Remedial Actions and Potential Solutions
1. Policy Adjustments
To address the issue of ghost cities, China must undertake several policy adjustments. Reducing the emphasis on real estate as a primary economic driver is crucial. This can be achieved by promoting alternative investment opportunities and relaxing capital controls to allow more overseas investments.
Policies to encourage occupancy of existing properties could help. Incentives for businesses and individuals to move to these areas, such as tax breaks or subsidies, could stimulate local economies. Additionally, improving infrastructure and public services in these cities can make them more attractive to potential residents.
2. Managing Supply and Demand
Better regulation of the real estate market is necessary to prevent oversupply. This includes stricter controls on new construction projects and ensuring that developments align with actual demand. Implementing property taxes on vacant units could discourage speculative investments and reduce the number of empty homes.
Future urban development in China should be more closely aligned with actual demographic and economic needs. Diversifying the economy away from overreliance on real estate is also essential.
3. Regulatory & Financial Reforms
Implementing regulatory reforms to improve the transparency and efficiency of the real estate market is critical. This includes better oversight of local government financing practices and more stringent controls on speculative investment. Encouraging investment in other sectors, such as technology and green energy, could also help balance economic growth.
Reforming the financial system to mitigate the risks posed by over-leveraged developers is also vital. This involves increasing transparency in the financing of real estate projects and ensuring that banks have adequate safeguards against defaults.
China needs to address the overcapacity in its real estate market and the associated debt burdens. This may involve allowing market corrections to occur, even at the risk of short-term economic pain. Policies to reduce speculation, such as higher taxes on second and third homes and stricter lending standards, could help cool the overheated property market.
The Road Ahead
Addressing the issue of ghost cities requires delicate policy interventions. The Chinese government has historically shown the ability to implement strict measures to control the economy, but the complexity of the real estate market presents unique challenges. Local governments rely on land sales for revenue, creating conflicting incentives that complicate efforts to curb speculative building. To prevent a collapse, China may need to shift towards a consumption-led growth model. Currently, consumption accounts for only 32% of GDP, far below that of developed economies. Strengthening social security, reducing income tax burdens, and encouraging consumer spending are potential strategies to rebalance the economy.
Many developments initially criticized as ghost cities did materialize into economically vibrant areas when given enough time to develop, such as Pudong, Zhujiang New Town, Zhengdong New Area, Tianducheng. While many developments failed to live up to initial lofty promises, most of them eventually became occupied when given enough time. Even if numbers of ghost cities are decreasing across China, we must realise that they themselves are the symptoms of a much larger problem i.e. the declining property market, and despite Beijing’s recent measures to boost the housing market, such as relaxing mortgage rules and funding local governments to buy surplus inventory, prices have continued to fall. This failure is attributed to households’ high debt levels and a lack of speculative demand, as falling prices deter investment in real estate.
While declining property prices might seem beneficial for affordability, they pose significant risks. Overleveraged households face negative equity, suppressing consumer spending and potentially leading to bankruptcies. This scenario mirrors Japan’s ’90s property crash, which resulted in prolonged economic stagnation.
In conclusion, China’s ghost cities reflect the complexities and contradictions of its rapid economic development. While some cities like Pudong have managed to overcome initial failures, others remain stark reminders of speculative excess and unsustainable growth. The future of these ghost cities will depend on China’s ability to navigate demographic shifts, economic transitions, and policy challenges. The story of China’s ghost cities is not just about empty buildings, but about the evolving trajectory of one of the world’s most dynamic economies. And to find any potential solutions to this phenomenon, the Chinese government will have to acknowledge it exists at all.
