China’s communist government prevents its citizens from investing their savings overseas, as well as preventing currency transfers. As a result, China has seen a construction boom unprecedented in human history. In China, entire cities have been built replete with skyscrapers, shopping malls, highways, parks and other facilities, but which are entirely empty of people.
Chinese investors, many of whom live on but $2 per day, have invested as much as three generations’ savings on apartments that they themselves are unable to live in because of the distance of the ghost cities from China’s active economic centers. Many of them have wagered on the continuous growth in housing values and cannot afford to live in the homes they have purchased as investments. Observers see this as clear evidence of over-building on the part of China’s command economy: a housing bubble consisting of empty housing.
Economist Stephen Roach of Yale University is, however, more sanguine in his analysis. For Roach, the modernization of China is "the greatest urbanization story the world has ever seen," and that these ghost cities will soon become "thriving metropolitan areas." The construction industry not only employs hundreds of thousands of Chinese, but it has displaced hundreds of thousands of others who have been forced off their land and homes to make way for construction projects.
Risks of an evolving housing bubble appear to be high despite alleged efforts by Chinese officialdom to rein in developments. In Spain, for example, under the previous governments, a housing boom produced neighborhoods and urban centers that remain unsold. The boom, which brought in millions in European investment, meant a booming economy and plenty of employment. Many construction workers came from Muslim North Africa, forcing Spain to give many immunity from deportation since they have been living in Spain for as long as a decade or more. Owners of properties in Spain have been unable to sell or forced to do so at fire sale prices as new foreign investors swoop in to buy up bargains.
As for China, a new report by "60 Minutes" entitled "China's real estate bubble" offers a tour of the Asian giant's ghost cities. The video report provides stark evidence of these brand-new 'Potemkin' cities where empty shopping malls display the signs of American franchises such as Kentucky Fried Chicken and Starbucks and European brands such as Piaget where there are no businesses and no customers. 'Potemkin' was the name of a village in Czarist Russia where foreign visitors were led on their way to Moscow where houses were brightly colored and apparently well-fed and friendly peasants waved to the foreigners passing through. The reality was that Potemkin was that it was akin to a Hollywood movie set, beautiful from the outsider's gaze but empty within.
Gordon Chang of Forbes Magazine recently reported that China’s State Council is calling for higher down payments for second homes in cities and demanding both the collection of taxes on secondary sales and the enforcement of existing regulations intended to curb property buys. This is part of Premier Wen Jiabao’s efforts to put the brakes on the runaway housing sector. Both Beijing’s National Bureau of Statistics and private surveys, however, show an acceleration of residential prices all across China.