China's Biggest 'Ghost Town': A Microeconomic Perspective

Freshly built from government stimulus funding, the new district of Kangbashi in the city of Ordos in China is brimming full of sky high apartments and shiny new infrastructure.  Yet since its construction the town remains largely uninhabited and untouched.

It is known as ‘the ghost town,’ with only about 30,000 residents despite a housing capacity of one million.  Few residents have chosen to move from the thriving old city district in Dongfeng just 30km away.

Economists have frequently raised concerns about China’s unsustainable dependence on construction to boost economic activity. Much like the constructed roads that went nowhere in Japan after their housing bubble burst in the 90’s, economists have taken notice of the worthlessness of Kangbashi. The government is of course attempting to engineer the economic numbers, by using the quickest sure-fire way to generate ‘economic activity’: massive funding to construction.

It would be cliché to talk about derelict apartments and streets signifying a housing bubble. Many journalists and economists have discussed the challenge facing the Chinese Government to curb property speculation. Behind these macroeconomic concerns there is a hidden microeconomic issue at work keeping Kangbashi empty which will be the focus of this article.

The current residents living in the city are mostly construction workers who have moved to be closer to their job. Take them out of the picture and you have very few people living there. Housing prices could have been a huge factor in deterring potential residents. However the housing prices in the new Kangbashi district have plummeted, and at one point during 2012 were even cheaper than real estate in the old city of Dongfeng.  So why isn’t anyone moving in?

Put simply, people don’t want to move to a place where there is no economy, no jobs and no access to goods and services. Business entrepreneurs don’t want to start up shop in an empty city where there is no one to buy their goods and services. Even current residents need to take a 30km trip back to the old city to purchase their necessities.

In Microeconomics this type of situation is called ‘assurance’ and falls under the topic of ‘collective action’ in game theory subjects. The basics of this type of problem are as follows: if there are a lot of people taking one action, it is better for you to also take that action, and vice versa. An example would be that if there are many people on Facebook compared to Myspace, then you as an individual will ditch MySpace and sign up to Facebook. Your benefit would be higher on Facebook since social networking is better with more people.

The same principle applies in this scenario. Since there are very few people living in the Kangbashi area, there isn’t a proper functioning economy which can produce demand and supply for goods and services and ultimately jobs. There is no incentive to move to the new area, whilst everyone is living back in the Dongfeng district. The individual is better off living in Dongfeng, where there is an established economy. This is demonstrated in Figure 1.

When it comes to moving to a different place to live, there are many different incentives which would motivate people to relocate to another city. Examples include the gold rush, or an economic boom such as the shale oil boom in the US.

Where such drivers do not arise, there are a multitude of policies that the Government authorities could implement in order to create sufficient incentives to lure people into moving to the new city. For example, policies aimed at creating good job prospects by successfully fostering an industry in this area, providing good education or good healthcare services to residents, or targeting housing affordability. However these policies need to be carefully executed to be successful.  Moreover the level of intervention needed to reach the tipping point, where enough people to want to move so that others will follow, may be significant.  Unless either of these occurs, Kongbashi will remain empty, notable only for its status as China’s largest ghost town.