Geopolitics

Giant Ghost Town Reflects What's Wrong With China's Economic Model

Giant Ghost Town Reflects What's Wrong With China's Economic Model
Massive construction in Lanzhou New Area
Simon Denyer

LANZHOU NEW AREA This city is supposed to be the diamond's 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. The 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. They'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.

China launched an ambitious campaign at the turn of the millennium, aiming to narrow the income gap between the booming eastern seaboard and the remote west, essentially by building modern infrastructure and exploiting the west's natural resources.

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 is 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.

Struggling for investors

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 â€" 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."

Even Xu admits to " to a problem."

"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."

Gansu has a per capita annual income of just $4,000 and little trade with the outside world. Its growth was driven by metals and other minerals, as well as by real estate, but it is suffering the ill effects of China's slowdown and a global slump in commodity prices.

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% in nominal terms, while the ratio of loans to gross domestic product expanded to 200%, up from less than 90% 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's an economic belt running through Central Asia to Europe and a "Maritime Silk Road" hugging Asia's southern coastlines seem to trump economic sense.

"It is 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"

An old idea

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 Nature magazine 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 the contractor's costs mounted, it was restarted without the assessment.

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% of gross domestic product, from 135% 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."

Keep up with the world. Break out of the bubble.
Sign up to our expressly international daily newsletter!
Future

7 Ways The Pandemic May Change The Airline Industry For Good

Will flying be greener? More comfortable? Less frequent? As the world eyes a post-COVID reality, we look at ways the airline industry has been changing through a pandemic that has devastated air travel.

Ready for (a different kind of) takeoff?

Carl-Johan Karlsson

It's hard to overstate the damage the pandemic has had on the airline industry, with global revenues dropping by 40% in 2020 and dozens of airlines around the world filing for bankruptcy. One moment last year when the gravity became particularly apparent was when Asian carriers (in countries with low COVID-19 rates) began offering "flights to nowhere" — starting and ending at the same airport as a way to earn some cash from would-be travelers who missed the in-flight experience.

More than a year later today, experts believe that air traffic won't return to normal levels until 2024.


But beyond the financial woes, the unprecedented slowdown in air travel may bring some silver linings as key aspects of the industry are bound to change once back in full spin, with some longer-term effects on aviation already emerging. Here are some major transformations to expect in the coming years:

Cleaner aviation fuel

The U.S. administration of President Joe Biden and the airline industry recently agreed to the ambitious goal of replacing all jet fuel with sustainable alternatives by 2050. Already in a decade, the U.S. aims to produce three billion gallons of sustainable fuel — about one-tenth of current total use — from waste, plants and other organic matter.

While greening the world's road transport has long been at the top of the climate agenda, aviation is not even included under the Paris Agreement. But with air travel responsible for roughly 12% of all CO2 emissions from transport, and stricter international regulation on the horizon, the industry is increasingly seeking sustainable alternatives to petroleum-based fuel.

Fees imposed on the airline industry should be funneled into a climate fund.

In Germany, state broadcaster Deutsche Welle reports that the world's first factory producing CO2-neutral kerosene recently started operations in the town of Wertle, in Lower Saxony. The plant, for which Lufthansa is set to become the pilot customer, will produce CO2-neutral kerosene through a circular production cycle incorporating sustainable and green energy sources and raw materials. Energy is supplied through wind turbines from the surrounding area, while the fuel's main ingredients are water and waste-generated CO2 coming from a nearby biogas plant.

Farther north, Norwegian Air Shuttle has recently submitted a recommendation to the government that fees imposed on the airline industry should be funneled into a climate fund aimed at developing cleaner aviation fuel, according to Norwegian news site E24. The airline also suggested that the government significantly reduce the tax burden on the industry over a longer period to allow airlines to recover from the pandemic.

Black-and-white photo of an ariplane shot from below flying across the sky and leaving condensation trails

High-flying ambitions for the sector

Joel & Jasmin Førestbird

Hydrogen and electrification

Some airline manufacturers are betting on hydrogen, with research suggesting that the abundant resource has the potential to match the flight distances and payload of a current fossil-fuel aircraft. If derived from renewable resources like sun and wind power, hydrogen — with an energy-density almost three times that of gasoline or diesel — could work as a fully sustainable aviation fuel that emits only water.

One example comes out of California, where fuel-cell specialist HyPoint has entered a partnership with Pennsylvania-based Piasecki Aircraft Corporation to manufacture 650-kilowatt hydrogen fuel cell systems for aircrafts. According to HyPoint, the system — scheduled for commercial availability product by 2025 — will have four times the energy density of existing lithium-ion batteries and double the specific power of existing hydrogen fuel-cell systems.

Meanwhile, Rolls-Royce is looking to smash the speed record of electrical flights with a newly designed 23-foot-long model. Christened the Spirit of Innovation, the small plane took off for the first time earlier this month and successfully managed a 15-minute long test flight. However, the company has announced plans to fly the machine faster than 300 mph (480 km/h) before the year is out, and also to sell similar propulsion systems to companies developing electrical air taxis or small commuter planes.

New aircraft designs

Airlines are also upgrading aircraft design to become more eco-friendly. Air France just received its first upgrade of a single-aisle, medium-haul aircraft in 33 years. Fleet director Nicolas Bertrand told French daily Les Echos that the new A220 — that will replace the old A320 model — will reduce operating costs by 10%, fuel consumption and CO2 emissions by 20% and noise footprint by 34%.

International first class will be very nearly a thing of the past.

The pandemic has also ushered in a new era of consumer demand where privacy and personal space is put above luxury. The retirement of older aircraft caused by COVID-19 means that international first class — already in steady decline over the last decades — will be very nearly a thing of the past. Instead, airplane manufacturers around the world (including Delta, China Eastern, JetBlue, British Airways and Shanghai Airlines) are betting on a new generation of super-business minisuites where passengers have a privacy door. The idea, which was introduced by Qatar Airways in 2017, is to offer more personal space than in regular business class but without the lavishness of first class.

Aerial view of Rome's Fiumicino airport

Aerial view of Rome's Fiumicino airport

commons.wikimedia.org

Hygiene rankings  

Rome's Fiumicino Airport has become the first in the world to earn "the COVID-19 5-Star Airport Rating" from Skytrax, an international airline and airport review and ranking site, Italian daily La Repubblica reports. Skytrax, which publishes a yearly annual ranking of the world's best airports and issues the World Airport Awards, this year created a second list to specifically call out airports with the best health and hygiene standards.

Smoother check-in

​The pandemic has also accelerated the shift towards contactless traveling, with more airports harnessing the power of biometrics — such as facial recognition or fever screening — to reduce touchpoints and human contact. Similar technology can also be used to more efficiently scan physical objects, such as explosive detection. Ultimately, passengers will be able to "check-in" and go through a security screening anywhere at the airports, removing queues and bottlenecks.

Data privacy issues

​However, as pointed out in Canadian publication The Lawyer's Daily, increased use of AI and biometrics also means increased privacy concerns. For example, health and hygiene measures like digital vaccine passports also mean that airports can collect data on who has been vaccinated and the type of vaccine used.

Photo of planes at Auckland airport, New Zealand

Auckland Airport, New Zealand

Douglas Bagg

The billion-dollar question: Will we fly less?

At the end of the day, even with all these (mostly positive) changes that we've seen take shape over the past 18 months, the industry faces major uncertainty about whether air travel will ever return to the pre-COVID levels. Not only are people wary about being in crowded and closed airplanes, but the worth of long-distance business travel in particular is being questioned as many have seen that meetings can function remotely, via Zoom and other online apps.

Trying to forecast the future, experts point to the years following the 9/11 terrorist attacks as at least a partial blueprint for what a recovery might look like in the years ahead. Twenty years ago, as passenger enthusiasm for flying waned amid security fears following the attacks, airlines were forced to cancel flights and put planes into storage.

40% of Swedes intend to travel less

According to McKinsey, leisure trips and visits to family and friends rebounded faster than business flights, which took four years to return to pre-crisis levels in the UK. This time too, business travel is expected to lag, with the consulting firm estimating only 80% recovery of pre-pandemic levels by 2024.

But the COVID-19 crisis also came at a time when passengers were already rethinking their travel habits due to climate concerns, while worldwide lockdowns have ushered in a new era of remote working. In Sweden, a survey by the country's largest research company shows that 40% of the population intend to travel less even after the pandemic ends. Similarly in the UK, nearly 60% of adults said during the spring they intended to fly less after being vaccinated against COVID-19 — with climate change cited as a top reason for people wanting to reduce their number of flights, according to research by the University of Bristol.

At the same time, major companies are increasingly forced to face the music of the environmental movement, with several corporations rolling out climate targets over the last few years. Today, five of the 10 biggest buyers of corporate air travel in the US are technology companies: Amazon, IBM, Google, Apple and Microsoft, according to Taipei Times, all of which have set individual targets for environmental stewardship. As such, the era of flying across the Atlantic for a two-hour executive meeting is likely in its dying days.

Keep up with the world. Break out of the bubble.
Sign up to our expressly international daily newsletter!
THE LATEST
FOCUS
TRENDING TOPICS
MOST READ