[About
$10 billion is being invested to clear Lanzhou New Area and build infrastructure
that includes roads, railways and an expanded airport. Water is being diverted
from a branch of the Yellow
River and stored in
three new reservoirs to create a city that a promotional video shows as awash
with lakes and rivers.]
By Simon Denyer
In Lanzhou New Area, recently
completed apartment buildings await residents.
(Gilles Sabrié/For The
|
LANZHOU
NEW AREA , China —This city is supposed to be the “diamond” on China ’s Silk Road Economic Belt — a new metropolis
carved out of the mountains in the country’s arid northwest.
But
it is shaping up to be fool’s gold, a ghost city in the making.
Lanzhou
New Area, in Gansu province, embodies China ’s twin dreams of catapulting its poorer
western regions into the economic mainstream through an orgy of infrastructure
spending and cementing its place at the heart of Asia through a revival of the ancient Silk Road .
Hundreds
of hills on the dry, sandy Loess Plateau were flattened by bulldozers to create
the 315-square-mile city. But today, cranes stand idle in planned industrial
parks while newly built residential blocks loom empty. Streets are mostly
deserted. Life-size replicas of the Parthenon and the Sphinx sit surrounded by
wasteland, monuments to profligacy.
The
project epitomizes what is wrong with China ’s economic model, foreign experts say — in
particular, how debt is rising to alarming levels as the government tries to
prop up a slowing economy with projects that make little or no commercial sense.
“Where
Gansu goes, China goes,” said Rodney Jones, founder of Wigram
Capital Advisors in Beijing . “You’ve had massive credit growth and
investment in projects that don’t generate an economic return.
“Now
you’re facing two shocks — you’ve got to stop credit growing and deal with the
bad loans, and you’ve also got to see how the economy expands once this credit
boom is over.”
The
initiative got a huge push as China launched a nationwide economic stimulus
after the 2008 global financial crisis. And President Xi Jinping’s plans to
revitalize the Silk
Road , the ancient
desert trade route between East and West, have provided a further boost.
About
$10 billion is being invested to clear Lanzhou New Area and build infrastructure
that includes roads, railways and an expanded airport. Water is being diverted
from a branch of the Yellow
River and stored in
three new reservoirs to create a city that a promotional video shows as awash
with lakes and rivers.
A
free-trade zone and logistics hub are meant to ensure that the city benefits
from its location on a new Silk
Road , while
industrial parks dedicated to auto and equipment manufacturing, petrochemicals
and traditional Chinese medicine are supposed to create the jobs that will
sustain a city of 1 million by 2030.
On
a recent trip organized by the provincial government, journalists were shown
around a heavy-machinery plant run by the state-owned Lanzhou LS Group and the
privately owned Scisky factory, which makes a water-based polymer resin. Scisky
executives said they hoped to take advantage of local raw materials and export
to Central Asia and Europe .
Xu
Dawu, deputy Communist Party secretary for the New Area, says 150,000 people
live here, along with 40,000 temporary construction workers — but those numbers
seem at odds with the largely empty vistas that visitors see.
The
reality is that despite cheap land, tax holidays and large subsidies, the New
Area has struggled to attract both investment and people. Yan Yuejin at E-House
China R&D Institute in Shanghai looked at vacancy rates and concluded that the venture has been
“very unsuccessful.”
“Lanzhou is a very important town on the Silk Road , but it is sandwiched between two mountains
with a river running through it,” he said. To draw more industries from the
south, he said, “we need to jump out of Lanzhou and seek a larger space.”
If
that doesn’t work, he said in what sounded like a tacit admission of defeat, “we
can at least develop modern agriculture here.”
Chinese
economists said Gansu is making basic economic missteps, investing
in heavy industry at a time of global overcapacity and building infrastructure
when it should be reducing its debt.
“This
is just copying the old development model without taking local reality into
consideration,” said Ding Wenfeng, a professor of economics at the Chinese Academy of Governance, urging the government to
apply an “emergency brake.”
“Urbanization
and modernization are processes that naturally take place,” he said. “You can’t
force it to happen or have 1,000 places copy the same model.”
Bao
Cunkuan, an environmental science professor at Shanghai ’s Fudan University , agreed, saying that the poorer northwestern
provinces such as Gansu have typically survived by exporting people
to richer parts of China , not by attracting people.
“People
will vote with their feet,” he said. “If the place is not good enough, nobody
will come no matter how many houses you build. Where people go, the allocation
of capital and resources should follow.”
The
province’s attempt to spend its way to prosperity has only aggravated its
problems. Last year, total credit expanded by about $50 billion, in an economy
worth just $100 billion, Wigram Capital calculates. Despite the huge injection
of credit, the economy shrank 1 percent in nominal terms, while the ratio of
loans to gross domestic product expanded to 200 percent, up from less than 90 percent
in 2009.
Andrew
Polk at Medley Global Advisors in Beijing visited Lanzhou New Area recently and noted
its “desolate” location. “You can just sense from being there it’s not a
commercially viable place,” he said.
Yet
the eagerness to support Xi’s hallmark Silk Road initiative — an economic belt
running through Central Asia to Europe and a “Maritime Silk Road” hugging
Asia’s southern coastline — seems to trump economic sense.
“It’s
just another example of government priorities being at odds with each other,”
Polk said. “There is a desire to do the belt and road program, and there is
also a desire to de-leverage. You can’t do both at the same time, but we have
seen time and time again in China which tends to win out.”
Indeed,
Gansu is far from an isolated case. The idea of
building new cities around China caught on after the success of Pudong in the
1990s, as skyscrapers replaced farmland on the east bank of the Huangpu River facing old Shanghai .
But
Shanghai ’s success remains an exception.
“Everyone
wanted to build new cities — they thought they could replicate Pudong all over China ,” said Jones of Wigram Capital. “Provinces
didn’t have a strategy built around their comparative advantages. Building a new city in Gansu just doesn’t make any sense.”
There
are other problems with a project on the scale of Lanzhou New Area. Writing in
Naturemagazine in 2014, three Chinese scientists warned that the environmental
impacts of this and similar “mountain-moving” undertakings had not been
properly considered, likening them to “major surgery on the Earth’s crust.”
The
Lanzhou project was halted in 2013 because of
problems with air pollution, pending an environmental assessment, Peiyue Li, Hui
Qian and Jianhua Wu wrote. Four weeks later, as contractors’ costs mounted, it
was restarted — without the assessment.
[Air
pollution in China is killing 1.6 million people a year, researchers
say]
Gao
Ying of the Shanghai Academy of Environmental Sciences told China Business News
in November that petrochemical plants planned for the new city could cause
serious environmental and air pollution and would use vast amounts of water in
a fragile and arid zone.
In
China , debt has ballooned to 280 percent of gross
domestic product, from 135 percent in 2009, Wigram Capital calculates. Bad
loans are soaring, and new debt is increasingly being used to pay back old
loans.
It
now takes 4 yuan of debt to generate 1 yuan of economic growth, up from 1 to 1
at the time of the financial crisis.
The
Economist magazine warned this month of China ’s “coming debt bust,” arguing that these
trends are unsustainable and recommending that the government plan for “turmoil.”
The
central government talks of reducing industrial overcapacity, cutting debt and
transitioning to a new, innovation-driven economy, but provincial leaders, under
pressure to meet economic targets, seem unable to abandon the old playbook.
“You
can see why they keep returning to the well, because it did work for a long
time — it was extremely successful,” Polk said. “That’s the core of the issue
right now. People are grappling with the changing nature of the economy. Old
tricks don’t work.”
The
old tricks could even be making matters worse: Fudan University ’s Bao compares the approach to “drinking
poison when you are thirsty.”
Gu
Jinglu and Xu Yangjingjing contributed to this report.
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