China's Ghosts Are A Future Property

Jul. 17, 2017 9:37 PM ETFXI, YINN, YANG, GXC, FXP, PGJ, MCHI, CHN
Jeffrey Snider profile picture
Jeffrey Snider

By Jeffrey P. Snider

The term "ghost city" is a loaded one, often deployed to skew toward a particular viewpoint. In the context of China's economy, it has become shorthand for perhaps the largest asset bubble in human history. While that may ultimately be the case, in truth, China's ghost cities aren't about the past but its future.

There is a great deal that is misunderstood about the country's path toward urbanization and modernity. A lot of it is simply the scale; it is incomprehensible that 300-500 million people could be removed from rural subsistence to urban industry, and to do so in such a short period of several decades.

These are no John Maynard Keynes' pyramids in the desert, or the stuffing of coal mines with sacks of gold to be dug up. In other words, strictly speaking, the ghost cities are not "stimulus" for a Chinese economy on the slowdown to get back up. They are the intersection of idiosyncratic factors with these enormous demographic challenges.

For example, only the government can own land in China. What is "owned" in the real estate market is the right to "land use." And it is a temporary one, typically only two years. Therefore, since the property is owned by the state, meaning there are no real estate taxes, and you only have a short period of time to do something, there is every incentive to build right now and wait for demand to catch up for however long that might take. In China, there is always a potential ocean of demand.

The real issue then is one of time. If your baseline is pre-2007 China "miracle", then rabid construction makes sense for rapid, sustained growth that will narrow the time frame considerably between construction and use. If the actual baseline turns out to be far

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Jeffrey Snider profile picture
As Head of Global Investment Research for Alhambra Investment Partners, Jeff spearheads the investment research efforts while providing close contact to Alhambra’s client base. Jeff joined Atlantic Capital Management, Inc., in Buffalo, NY, as an intern while completing studies at Canisius College. After graduating in 1996 with a Bachelor’s degree in Finance, Jeff took over the operations of that firm while adding to the portfolio management and stock research process. In 2000, Jeff moved to West Palm Beach to join Tom Nolan with Atlantic Capital Management of Florida, Inc. During the early part of the 2000′s he began to develop the research capability that ACM is known for. As part of the portfolio management team, Jeff was an integral part in growing ACM and building the comprehensive research/management services, and then turning that investment research into outstanding investment performance. As part of that research effort, Jeff authored and published numerous in-depth investment reports that ran contrary to established opinion. In the nearly year and a half run-up to the panic in 2008, Jeff analyzed and reported on the deteriorating state of the economy and markets. In early 2009, while conventional wisdom focused on near-perpetual gloom, his next series of reports provided insight into the formative ending process of the economic contraction and a comprehensive review of factors that were leading to the market’s resurrection. In 2012, after the merger between ACM and Alhambra Investment Partners, Jeff came on board Alhambra as Head of Global Investment Research. Currently, Jeff is published nationally at RealClearMarkets, ZeroHedge, Minyanville and Yahoo!Finance. Jeff holds a FINRA Series 65 Investment Advisor License.

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