Why you cannot see how well China is doing, and why the country is undercrowded

by on May 21, 2015 at 12:45 am in Current Affairs, Economics | Permalink

Since I’ve been in China, a number of you have written me and asked me how “conditions on the ground” are looking for a Chinese hard or soft landing.  But in fact visual inspection of the country does not answer this question in any simple way.

I recall being in Madrid in 2011 with Yana and seeing everything slow and all the people looking depressed; it was obvious that the country was in a deep recession.  But a comparable inference cannot be made from looking around China.

There is a visual feature of China which is incontestable, namely the country has a lot more buildings and structures than it is currently using.  If you take the train through the countryside, or out West, this is especially noticeable.  But does it have to be bad or fatal news?  Well, no.

At the very least it is possible that migration from the countryside will fill and validate those structures and other apparent over-extensions of capital investment.  Under both the optimistic and pessimistic views, China today evidences some extreme in-the-moment overcapacity.  That is what you would expect from a rapidly growing economy — “build for the glorious future!”, but it is also what you would expect from a rapidly malinvesting economy.

(By the way, those who have never visited often think that China is “crowded.”  But relative to facilities, the country is quite undercrowded; for instance it is easy enough to dispense with dinner reservations most of the time.)

How long will this excess capacity last?  How much time will the Chinese future need to “catch up” to this infrastructure?  Will that validation come too late?  We all may have opinions (or not), but the visuals themselves do not tell any specific tale.

So to a China pessimist and a China optimist, the world looks more or less the same.  For now.

1 Bob May 21, 2015 at 1:01 am

Are you on vacation or is this work related?

2 Charlie May 21, 2015 at 6:47 am

Nobody cares

3 Estelle May 21, 2015 at 6:52 am

So mean!!!

4 Tiesto May 21, 2015 at 6:54 am

On the chat

5 philosophking May 21, 2015 at 1:19 am

“At the very least it is possible that migration from the countryside will fill and validate those structures and other apparent over-extensions of capital investment. Under both the optimistic and pessimistic views, China today evidences some extreme in-the-moment overcapacity. That is what you would expect from a rapidly growing economy — “build for the glorious future!”, but it is also what you would expect from a rapidly malinvesting economy.”

This FT article seems to suggest that migration to cities is nearing its end:

http://on.ft.com/1E0YJKG

6 anon May 21, 2015 at 9:10 am

“And this, too, shall pass away.”

7 Anthony May 21, 2015 at 1:26 am

Does the oversupply of housing result in low rents, or is the market distorted by other factors?

8 Andao May 21, 2015 at 8:34 am

My rent went up 20% this year, and I hear the same from others. Something very fishy is going on, and its not that there is suddenly huge inflation or leap in demand

9 anon May 21, 2015 at 9:11 am

So move.

10 meets May 21, 2015 at 10:07 am

Blame the victim. Nice.

11 Jeff Forstall May 21, 2015 at 1:34 am

The 4 biggest provinces in China have empty dwellings for 200 million people. Their concealed bad debt is 70-140% of GDP, a decent size liability. They are not building homes because of natural economic demand. They are building them because China is a hybrid planned economy (basic stuff, sorry). China’s own economists have referred to it as the most wasteful building project in economic history. Underutilized roads, airports, bridges to nowhere. This building program is contributing to their growth numbers. China’s capital output ratio is 3 times worse than it was in 2005.

I saw a lovely talk from two Australian Economists last month on youtube. They taught many insights on China’s growth, and if it can maintain it. https://youtu.be/_AvNT3vyzr0

12 Nathan W May 21, 2015 at 5:00 pm

When you comment on “bridges to nowhere” in China, keep in mind that “nowhere” in China is often a medium or large city by the standards of many other countries.

13 Philipp May 21, 2015 at 1:35 am

I beg to differ on the undercrowded question. At least here in Bejing were I am most of the time it looks and feels very croweded indeed. Try taking the subway or any bus at 5 or 6 pm, or try to get out of the city on a weekend. Try to by a train ticket for one of the cheaper trains (not the bullet train) one or two days before you want to leave.
Try to get a seat at one of the more popular restaurants at dinner time at any day of the week. You will definitely have to wait.
Or go to go on holidays during a national holiday.

14 prior_approval May 21, 2015 at 2:06 am

‘You will definitely have to wait.’

If you are one of those people who have no place in the much better world as presented here – note that the time of people like the chairman and general director of the Mercatus Center is far too valuable to be using anything but the bullet trains. In the same fashion that Prof. Cowen is extremely unlikely to have made his own travel arrangements within China. At least if he is like a German trade rep I know that travels in China, Vietnam, Indonesia (arranging deals/inspecting facilities to supply chains like Toom/Obi/Hornbach with garden furniture, for example) – domestic Chinese travel services are only offered in Chinese, and he lets those he is doing business with make the arrangements.

15 Andao May 21, 2015 at 8:35 am

If you look at the data, Seoul is vastly more crowded than any Chinese city

16 anon May 21, 2015 at 9:15 am

Was there more than 25 years ago as part of a university delegation, and we traveled by train and bus. What was very striking to me was that even in very rural areas, there was rarely a vista that did not have at least a few people in it.

17 v May 23, 2015 at 9:59 am

Trains are crowded in Beijing because of bad design of lines. If you don’t believe me, just count how many times you change lines going anywhere. Nowhere actually goes where you want to go and so you are spending all your time changing trains and moving around stations just like a million other people.
Roads are similar. You don’t go in a straight line from A to B, but in a circle. Add a extra 10km to your daily travel, multiply it by 1 million cars and you have 10 million unnecessary km of travel per day.

18 prior_approval May 21, 2015 at 1:58 am

‘But relative to facilities, the country is quite undercrowded; for instance it is easy enough to dispense with dinner reservations most of the time.’

Wait, your definition of undercrowded is the lack of a consistent need to make dinner reservations?

Best satire site on the web, in a truly average is over fashion.

19 Axa May 21, 2015 at 6:44 am

Of course, suffering and having problems is “reality”. Everything else is just people isolated in a cozy bubble 😉

20 MOFO. May 21, 2015 at 9:09 am

Do you see the words “for instance’ there in that portion you quoted? Did you know that these words have meaning?

https://www.google.com/search?client=opera&q=for+instance+definition&sourceid=opera&ie=UTF-8&oe=UTF-8

for instance
phrase of instance
1.
as an example.
“take Canada, for instance”

So, no, this is not his “definition of undercrowded” You know how I know? Because those words also have meanings:

https://www.google.com/search?client=opera&q=for+instance+definition&sourceid=opera&ie=UTF-8&oe=UTF-8#safe=off&q=definition+definition

def·i·ni·tion
ˌdefəˈniSH(ə)n/
noun
1.
a statement of the exact meaning of a word, especially in a dictionary.

Just because you dont understand something does not make it satire.

21 Mike in Beijing May 21, 2015 at 2:31 am

The fundamental question is whether the marginal product of marginal migrants from the countryside can justify the housing that has been built for them in the new cities. In the past, Beijing could at least pretend that it was the case. Robotics, 3d printing, and deep structural mismatch of skills are going to make it more difficult to maintain this belief.

22 Mike in Beijing May 21, 2015 at 2:45 am

Tyler, Beijing has recently announced a strategy of “capacity exports” by which it intends to solve its overcapacity problems by relocating (and or expanding) glass, steel, and cement factories overseas. Is Austo-Chinese theory about to go global?

23 maile May 21, 2015 at 2:53 am

I have to chime in, too, and say that Prof. Cowen is totally off on the crowded point, at least in Beijing. I double dog dare him to go shopping at a Carrefour on a Sunday afternoon, get dinner reservations at Da Dong, get a beer at Great Leap in the evening (and that’s mostly a foreign joint, though it’s becoming very mixed these days), visit a university dormitory (where it’s common to see 6-8 students crammed in together) or take any form of public transportation between 8 a.m. and 9:30 a.m. or 5 p.m. and 6:30 p.m. (Extra points if he changes subway lines at Guomao in afternoon rush hour… Anyone who survives that would never feel like “China’s not that crowded”, even “relative to services”.)

24 wiki May 21, 2015 at 4:35 am

But isn’t that like judging the US by how crowded Manhattan and San Francisco are? Any foreigner who only visited those cities would have no idea of how spread out most normal, even dense suburbs are.

It is a characteristic of partial development that China’s people are heavily crowded into a handful of cities when most of the country is relatively rural, empty, and backwards. In that sense it is undercrowded. But the way in which they try to fix things — central planning, internal passport system “hukou,” etc. tends to exacerbate the malinvestments and make it harder to see a smooth transition to more even development. Hence, the whole point of Tyler’s agnostic post.

It is possible for the current structures to be bad investments AND for there to not be enough infrastructure to handle the full amount of development we would see if the economy were to become more efficient and grow in a way that included the two-thirds of the population that is nowhere near enjoying the benefits seen by the richest one third.

25 E. Harding May 21, 2015 at 5:12 am

America is extremely uncrowded by world standards, with Manhattan being the only widely known place in America to go above 100 persons per acre.
“and grow in a way that included the two-thirds of the population that is nowhere near enjoying the benefits seen by the richest one third.”
-This has been happening since the beginning of the China boom, and continues to this day:
http://www.gallup.com/poll/166565/one-five-worldwide-living-extreme-poverty.aspx

26 Adrian Ratnapala May 21, 2015 at 1:36 pm

America is uncrowded in the sense that most people live in countries with higher population density. But that’s only one point of view. Most patches of land are located in countries with lower population densities. So really, America is quite mediocre with regard to population density.

27 JWatts May 21, 2015 at 4:33 pm

Really, that just translates to: Russia, Canada, Australia and the US all have low population density, but the US is the most crowded of the lot.

28 Nathan W May 21, 2015 at 5:03 pm

But most Americans live in cities of high population density. I would think it would be most accurately (from the perspective of what it means to actual people) measure by the average population density experienced by individuals at the municipal level, or some such thing.

29 jseliger May 21, 2015 at 11:32 am

I wrote here that I don’t find Manhattan crowded; if anything I find other places empty, excepting L.A. freeways. The initial set level may be the most important question here.

30 anony May 21, 2015 at 2:55 pm

It’s hard to consider San Francisco to be that crowded when its neighborhoods primarily consist of single family homes with yards.

31 Peter Akuleyev May 21, 2015 at 6:55 am

I have to agree with Tyler. I was just in Shanghai and Beijing, and I was surprised how uncrowded Shanghai feels compared to Hong Kong or any major Japanese metropolis. I had expected much worse. Everything is relative – compared to the US, China is unpleasantly crowded but compared to the rest of urbanized East Asia the PRC is no worse and sometimes better.

32 v May 23, 2015 at 10:06 am

Beijing feels crowded because everyone is doing everything in the same place at the same time.

33 BC May 21, 2015 at 4:41 am

How long into the future are we talking about compared to how long it takes to actually build the particular structure? If it takes 1-2 yrs to construct a building, does it really make sense to build it in anticipation of demand farther out than that instead of waiting to see existing buildings start to fill up at least a little bit? For stuff that requires “tearing up roads” (utilities, widening roads, etc.), it makes sense to build before there is actually traffic on those roads. For buildings though, the conditions on the ground test is whether Tyler would invest his own money now to build one more building in an area given the occupancy that he sees in the existing buildings? Remember Milton Friedman’s four ways to spend money [https://www.youtube.com/watch?v=5RDMdc5r5z8]. Who decided to build all these buildings, private investors risking their own money or government or state sponsored entities risking Other People’s (taxpayers’) money?

34 rayward May 21, 2015 at 6:39 am

My best friends’ son, a rising high school senior, will be spending this summer in China. He speaks fluent Mandarin and has been to the far east with his father before, so it shouldn’t be a difficult adjustment. His mother told me that her son was cautioned not to go out in the city alone, not because the city has a high crime rate but because he is obviously an American. Why is that? I attended my nephew’s high school graduation this past Saturday. The valedictorian, we were told, speaks fluent Mandarin. I don’t know her travel plans and didn’t ask, but I found it striking that these two, who attend (private) schools in different states, would study Mandarin. My best friend is multilingual, including Spanish (his parents are from Spain), French (I’m told that the Romance Languages are essentially the same), and some Japanese (he lived and worked in Japan for over a year), so it’s not surprising that his son would be multilingual. But his choice and the valedictorian’s choice, Mandarin, speaks volumes about China’s place in the world in the minds of today’s young adults. I will also mention something else about cultural influences. My best friend has an unusual (and very appealing) writing style. I’ve described it to him as writing backwards. It’s very much like Christopher Hitchens’s writing style (for those who remember his style). My friend’s explanation is that, for him, it is the Japanese influence: the action words are typically the subject of the sentence. We tend to think of America’s culture affecting the rest of the world, but the culture of the rest of the world, especially the far east, is having more and more influence on our culture. I think it’s a good thing. And from Cowen’s posts from China, I can tell that China is having an influence on him. That too is a good thing, as insularity dulls one’s mind to different ideas.

35 Nathan W May 21, 2015 at 5:05 pm

I’m surprised. Very few Chinese cities have any reputation for being particularly unsavoury (by world standards) at night. Far more likely he will meet a stranger eager to have him join in on imbibing lots of beer.

36 Charlie May 21, 2015 at 6:51 am

I agree and I think I’m right

37 Bob May 21, 2015 at 6:51 am

Nobody cares

38 derek May 21, 2015 at 7:39 am

A coworker was in shanghai a bit more than a year ago. Took the bullet train and was amazed how empty it was. I took that as an invitation that China was hitting a rough patch.

An anecdote. After a busy winter, April was slow. For a three week period it was as if the phone was unplugged. They are already talking about an economic down turn. Empty restaurants, trains and things like that are as valid and probably more accurate signals than the official statistics. If it looks slow, with empty places, it is slow.

I understand Detroit has many building lots for a good price. A land of opportunity!

39 A Definite Beta Guy May 21, 2015 at 9:52 am

“I understand Detroit has many building lots for a good price. A land of opportunity!” – Pretty much what I was thinking. Excess capacity is not necessarily an indicator of easy expansion options.

40 Nathan W May 21, 2015 at 5:05 pm

I once took the metro in London from the airport to downtown, but the fact that there weren’t many people on the train did not lead me to the conclusion that the entire country must be doing poorly.

41 derek May 22, 2015 at 1:11 am

What year was that? One data point is simply that, one data point. But there are many data points out of China right now, and empty trains and streets would seem to go along with the news.

42 Nathan W May 23, 2015 at 11:30 pm

I’ve taken the train a few dozen times in China, and only once were there lots of extra seats. And the streets are far from empty. There are so many cars on the road that many cities only allow certain license plate numbers to drive on certain days. But mos cars are only licensed for driving in a certain municipal area, so traffic on highways outside of the cities is almost always not bad (many exceptions in areas not far from Shanghai).

43 collin May 21, 2015 at 8:05 am

This sounds like migration migration will fill up the infrastructure until it won’t. Could be tomorrow, could next year, or could be 2022. When in history did a growing economy ever get up in the morning and suddenly realize, we need to stop building?

44 William May 21, 2015 at 11:11 am

They have enough empty domicile for the next 20 years. Enough to accomadate over 200 million more people. That it approaching the population of the U.S. So yes infrastructure should keep building, but it should also have an idea when to stop.

45 collin May 21, 2015 at 12:53 pm

My point is in the moment with all this economic activity, it is very hard for the economy to simply say “Stop!” China sounds like New York in 1927 or Japan 1988 or Dotcoms in 1999 or the US housing in 2004.

The really big historical busts don’t come from poorly run economies, but from the fastest growing, most productive economies that don’t know when to stop.

46 The Anti-Gnostic May 22, 2015 at 9:40 am

They don’t know when to stop because their central bank, like ours, obscures the signals that say when to stop.

47 derek May 22, 2015 at 1:13 am

You do know what would happen to a building if it wasn’t occupied until 2022. It would probably need an interior renovation and substantial repairs. And there are substantial operating costs even if unoccupied. As well as the financing costs.

48 Andao May 21, 2015 at 8:46 am

I guess its possible that a lot of these developments get filled someday, but isn’t it just as likely a good portion of these cities end up deserted? I’m quite happy that the federal gov didn’t think it wise to construct a China sized development in Detroit during the 1960s

49 jseliger May 21, 2015 at 11:30 am

By the way, those who have never visited often think that China is “crowded.”

People also often say this about New York City, and I’ve now lived here for two years and change. I don’t find it crowded, excepting perhaps the 4 / 5 / 6 lines at rush hour, and if anything it seems like much of the city could have more people.

When I lived in Seattle I found the environment dense, urban, and fun. When I visited there a year ago expectations had been re-calibrated and I wondered where the hell all the people were. Capitol Hill and Downtown were empty on weekdays! Where was everybody?

50 Michael May 21, 2015 at 2:24 pm

“for instance it is easy enough to dispense with dinner reservations most of the time.”

This is evidence of undercrowding? Seriously? How the fuck can someone this stupid be a professor of economics–anywhere, even the Mercatus Center? Just amazing.

51 Nathan W May 21, 2015 at 5:07 pm

If you build a thousand airports, don’t be surprised if a few dozen end up underutilized.

I was once in a rather empty airport in Hamilton Ontario, for example, but did not conclude that the Canadian economy was going to bust because I observed an empty airport.

52 May 21, 2015 at 6:57 pm

With a bad Canadian airport, Trump adds another to his bankrupt tally.

面子工程 or face projects are a huge cost on Chinese society. Our life and economy are molded, adjusted, and focused on quick construction.

53 derek May 22, 2015 at 1:15 am

Hamilton Ontario and an empty airport would go together. Hasn’t Hamilton had a pretty rough patch for a number of years as it de industrialized?

54 Nathan W May 23, 2015 at 11:32 pm

There are still a lot of jobs in industry in Hamilton, but yes, it is less, and they are generally lower paying than they used to be.

55 Chuck May 21, 2015 at 11:42 pm

You say that “China” is not crowded, when what you really mean is that urban China has underused capacity. This is misleading, as China is one of the most overcrowded countries in the world. It has a population density of 368.03 per square mile (against the United State’s 84 persons per square mile). If you correct for the fact that a third of the country is desert, we are talking about 500 persons per square mile. That is nuts. Half of this immense population inhabits rural areas, the result of which is that too many people divvy up agricultural lands and the size of the average farm is far too low. And, of course, all of this contributes to China’s looming environmental crises. If we look at the country holistically then the overcrowding is obvious, which explains the importance of the country’s controversial family planning policies.

56 Bob May 22, 2015 at 12:51 am

Smaller average farm size is actually generally better for crop yields and development. Smaller farms owned by farmers have higher yields per hectare. The higher yields generate the surplus savings necessary to go into manufacturing. The problem with larger farm sizes or with feudal style land tenure or plantation style farming is that the farmer-proprietors are effectively landowners collecting rents. They don’t have the same incentives as farmers on modest plots to increase yields which are profits or wages rather than rents to the farmer, and to plow surplus savings into other industry.

57 Chuck May 22, 2015 at 4:06 am

This is not an accurate assessment of the Chinese agricultural sector. According to the FAO the average farm in China is 0.6 hectares. That is far too low, and falls significantly short of the optimal farm size for rice (downwards of 1.7 hectares), China’s least land-intensive staple crop. Take into account other major staples in China such as maize, corn, wheat, etc., and you have some idea of how overcrowded the Chinese countryside is. The result? Families allocate the entirety of their land to the production of staple crops in order to meet the needs of household consumption. All their land being allocated to the production of staples for household consumption, they lack land for the production of cash crops. They therefore lack the cash income necessary to participate in the cash economy, which itself inhibits productivity. The sons and daughters escape the overcrowded countryside to find work in Shenzhen. This is the best example of rural overcrowding one could possibly imagine. The allocation of land is extremely sub optimal.

A spectacular book that touches in this topic is “China Along the Yellow River” by Cao Jinqing.

58 Larry May 22, 2015 at 8:03 pm

Let’s discuss the obviously most important part of this: the ease of getting restaurant reservations.

The reason, as related to me by various locals last October, is the corruption crackdown. In one city, dozens of private clubs closed on a single day after most of their members quit. It was no longer acceptable to be dined (and wined) by favor seekers.

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