Monday 2 December 2013

Build it and they will come (because that's how China rolls!)

Quiet: Despite claims on its website that tourists can be spirited away to far-flung locations including Sydney, Dubai and Cologne, no airlines actually appear to offer services to or from any of these cities

This story, asking: "Will China's new hi-tech airport prove to be a flight of fancy?" popped on my Google News Feed this weekend and it just got me to thinking about the western world's fascination with China's ghost anything.

The article seemed odd, because the new terminal had literally just opened (the day before this article) and is replacing existing terminals that in 2012 handled over 29 million customers, with the capacity to handle 45 million. According to Wikipedia (citing the CAAC) this airport ranks 6th in total passengers, 5th in total aircraft, and 4th in cargo.

Despite having neighbours in Guangzhou, Macau, and Hong Kong that carry the bulk of the international traffic, it is worth noting that the Pearl River Delta (effectively one big city) has population around 120 Million. Yes, 120 MILLION. With Shenzhen proper home to around 10 million (not sure about the source from this wikipedia graph).

Having been to the Delta region (mostly just walking around Guangzhou) and explaining to people back home where I was (and seeing how few people had even heard of Guangzhou and Shenzhen) I wonder if the scale of these places is lost on people.

As this article in the Economic Times points out in it's comparison to Terminal Five in Heathrow Airport:
It can handle 45 million passengers a year, 30 per cent more than Terminal Five. It cost $1bn (£612m), just one-seventh the cost of the Heathrow project — which was Europe's biggest construction project up to its opening in 2008. And while the Heathrow facility had been 20 years in the making, the full Shenzhen project took only five.
So it has a greater capacity, cost much less, and took way less time to build. The article continues:
Neil Taylor, who pioneered travel to the People's Republic with his company, Regent Holidays, said: "One has to wonder who will fly here from outside China, given the choice of flights to Hong Kong and to Macau, both actively promoted in the UK, both nearby and both visa-free. Shenzhen had its appeal as a small village when China first opened up in the late 1970s, but tour operators will find it hard to promote now."
Shenzhen is a business hub with 10 milllion local residents and this airport is one of four major ones servicing a region with 120 million residents; many of whom are in the growing middle class market that would be good candidates for some foreign and domestic tourism. I  might be wrong, but I would assume that this market would entice foreign carriers.

This 60 minutes report (video below) on Ghost Cities, ironically shot in front of the former 'Ghost City' of Pudong, is part of a growing fascination with these massive infrastructure projects that aren't being used, or are under utilized.

It just reeks of survivorship bias (talking about the ones that didn't pan out without recognizing the ones that did pan out). Milton Friedman called that city in the background, "a statist monument for a dead pharaoh on the level of the pyramids".

Pudong in more recent times:

Should this not give us pause to refer to the Shenzhen airport as a white elephant? I'd never suggest that it won't fail. Or that Ghost cities don't exist. I just believe there is a more relevant context that needs to be explored when discussing them.

Shenzhen's airport is already servicing about 29 million customers annual. Is it out of this world to suggest they reach 45 million (the new airport's capacity) in the future? Plans are in place to build a bridge connecting the 'boroughs' of the Pearl River Delta to enhance the integration of Hong Kong, Shenzhen, Guangzhou, and Macau.

With Hong Kong's airport nearing capacity (an 11 year and 17 Billion dollar expansion is being discussed) and integration forth coming, does this $1 Billion dollar Shenzhen expansion not seem quite reasonable?

Scott Sumner, a monetary policy focused blogger (who might also provide some of my favorite insight on China), also describes the weakness in the secondary cities of China. Again, I don't doubt that mis-allocation of resources has, and will continue to happen.

My hope is that linkages and network externalities created by China's expanding infrastructure will help create the economic conditions that would then justify them (and create a situation where us westerners don't find them fascinating). Will this happen? Who knows.

Remember, because of China's rapid growth, building infrastructure that best supports the economic reality of today, might be vastly outdated or simply be over capacity rather quickly. Currently servicing 29 million passengers, would increasing that to 35 million have made more sense?  40 million?

Sure the airport could have been put up in a more box like utilitarian manner, but then we'd be bashing China's lack of creativity (yes, I know it was designed by an Italian firm, but you know what I mean).

Check out this website where the author actually explores some of China's ghost cities. Some are real, some are not, but all are fascinating (to me). My favourite article is this one on Changzhou: How a 4.5 Million Person City was Named a Ghost Town.

There have been recent reports about the development of some famed 'Ghost Cities' like this blog post in the Wall Street Journal. That points out:
In a report on her findings, Ms. Wong notes that buildings completed between 2008-11 in Zhengzhou, Ordos and Wenzhou—often cited as instances of an overly frothy property market—have typically seen tenants move in over a three-year period. Among such buildings, Ms. Wong’s survey found an average of 48% take-up in the first 12-18 months, another 19% in the next year, and then yet another 15% in the year after that.
In the case of Henan’s Zhengzhou—frequently dubbed China’s “largest ghost city”—Ms. Wong notes that a number of media portrayals of the city’s newer areas have used photographs taken between 2010-12, before the metro system connecting the district to the city’s more established neighborhoods was completed
The high speed rail network, also described as a white elephant (and arguably is in other countries), is starting to stand on it's own to feet economically, but may also be a key component of China's development strategy of developing poorer inland regions (as described here by me, and here by Yichuan Wang on Quartz).

I don't doubt that the push inwards to develop the inland provinces will produce a few, if not many, bridges to no where. But if you throw up 100 bridges to nowhere, and 5 years later you're left with 5 or 10 bridges to no where. Then those 90-95 bridges that developed a somewhere at the end of them might just prove worth while. It's probabilistic thinking that requires us to consider how ALL of the similar situations turned out.

Next time you see a 60 Minute clip on the many ghost cities of China, at least consider the possibility (or if you are the host take a look at Shanghai's Pudong district over your shoulder) that maybe the story hasn't quite closed yet.

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