NPR logo

A 'Sense Of Crisis' Now In A Chinese Boomtown Gone Bust

  • Download
  • <iframe src="https://www.npr.org/player/embed/440822077/440914160" width="100%" height="290" frameborder="0" scrolling="no" title="NPR embedded audio player">
  • Transcript
A 'Sense Of Crisis' Now In A Chinese Boomtown Gone Bust

Markets

A 'Sense Of Crisis' Now In A Chinese Boomtown Gone Bust

A 'Sense Of Crisis' Now In A Chinese Boomtown Gone Bust

  • Download
  • <iframe src="https://www.npr.org/player/embed/440822077/440914160" width="100%" height="290" frameborder="0" scrolling="no" title="NPR embedded audio player">
  • Transcript

Luliang is in recession, but developers continue to build apartment blocks even though demand for real estate is drying up. Frank Langfitt/NPR hide caption

toggle caption
Frank Langfitt/NPR

Luliang is in recession, but developers continue to build apartment blocks even though demand for real estate is drying up.

Frank Langfitt/NPR

A $5 billion business and financial district for the coal city of Luliang was scheduled to open next year. But today, the area, which was to house at least 300,000 people, remains mostly grass and cornfields. A few workers are trying to finish what would have been the district's main boulevard — which is now a road to nowhere.

What went wrong?

The mayor who pushed for this new district was fired for corruption — a common fate in Luliang — and the government ran out of money.

China's economy is a mixed bag these days. Consumers keep spending, but overall economic growth is slowing. The rise and fall of Luliang helps explain why.

Luliang is a modest-sized city by Chinese standards. It's located in Shanxi province, southwest of Beijing, and is home to 3.6 million people spread over more than 8,000 square miles. Government leaders here doubled down on the country's old industrial model that emphasized investment in things like coal mining, infrastructure and mile after mile of apartment buildings. Eventually, overcapacity so outstripped demand that it crashed the local economy, which is now among China's worst.

The failed new district has had ripple effects across the city, beginning with thousands of farmers like Liu Yihu, whose house was demolished by the government to make way for the now-failed project.

The home of farmer Liu Yihu, 63, was among thousands destroyed to make way for a new business and financial district that was shelved after the mayor was fired for corruption and the city ran out of money. The government says it will house some of the farmers in apartments, but Liu is skeptical. Frank Langfitt/NPR hide caption

toggle caption
Frank Langfitt/NPR

The home of farmer Liu Yihu, 63, was among thousands destroyed to make way for a new business and financial district that was shelved after the mayor was fired for corruption and the city ran out of money. The government says it will house some of the farmers in apartments, but Liu is skeptical.

Frank Langfitt/NPR

"There used to be irrigation ditches, but those were blown up for the construction of the new city," says Liu, 63, who wears a worn suit coat as he sells tomatoes and peppers by the side of a road. "Without water, ordinary people can't grow crops. The yield isn't even half of what it was in previous years."

About an hour's drive from where Liu hawks his vegetables sits the Chuandong cement plant. The factory had banked on orders to help build the new district. Today, it's largely abandoned. Workers' dorm rooms are strewn with trash, bunk beds sit empty and dust and mud blanket the floor of an office building.

Among the survivors is a low-level manager named Gao, who's sitting on a bed in a dorm room, watching a rerun of a huge, recent military parade in Beijing. Gao says when plans for the new business district collapsed, his plant – like others in town — was caught with way too much capacity.

"The economic situation now is very bleak," says Gao. "The construction industry, the entire real estate market is bankrupt. Our company can't survive, so the workers were laid off. They went home to plant crops."

When coal prices were high and the government could still afford to pour money into infrastructure, Luliang's economy boomed. As recently as 2010, GDP growth was a staggering 21 percent, more than twice the national rate, and Gao's factory was pumping out 700,000 tons of cement annually.

The Chuandong cement company is nearly abandoned. When the bottom dropped out of the cement market, most workers left their dorms and returned home to the countryside to plant crops. Frank Langfitt/NPR hide caption

toggle caption
Frank Langfitt/NPR

The Chuandong cement company is nearly abandoned. When the bottom dropped out of the cement market, most workers left their dorms and returned home to the countryside to plant crops.

Frank Langfitt/NPR

Last year, though, GDP here shrank by 2 percent. And this year, Gao's cement plant only produced 30,000 tons. The company's employment fell from a high of 1,000 workers to just 100. Gao says no one seemed to see the crash coming.

"We didn't worry," says Gao, whose wages have been decimated and had to borrow money to pay his son's college tuition, room and board. "We felt in our hearts that things would always be good and there would be no problem. Now we have a sense of crisis."

Gao is a low-level manager at a cement factory. He says a slowdown in government infrastructure spending and an over-supply of apartments have devastated the cement business. The company he works for went from a high of 1,000 employees to about 100. Frank Langfitt/NPR hide caption

toggle caption
Frank Langfitt/NPR

Gao is a low-level manager at a cement factory. He says a slowdown in government infrastructure spending and an over-supply of apartments have devastated the cement business. The company he works for went from a high of 1,000 employees to about 100.

Frank Langfitt/NPR

Gao blames government officials for ignoring the basic law of supply and demand. Instead of managing supply, Gao says, officials pushed to open more coal mines and build more housing developments to boost GDP numbers on which their promotions were based. Those projects also generated lots of bribes.

"When applying for a business license, a company needs to go through layers of bureaucracy for approval," Gao explains. "Officials took kickbacks. So this is why there are so many coal companies. Actually, some shouldn't even have opened."

Many of the empty apartment towers that now litter Luliang's skyline shouldn't have been built, either. One residential development, China Culture Garden, has just been completed — but there is no sign of tenants, furniture or potential buyers.

When I ask a manager how many of the 800-plus apartments he's sold, he refuses to answer, saying it's a "secret." The rental market here doesn't seem much better. Walking the halls of the city's top luxury compound, I found many empty apartments as well. A man renting a 2,000-sq.-ft. penthouse on the 32nd floor said he's paying just $156 a month.

The city's skyline is littered with empty apartment complexes like this one. One real estate agent said none of the compound's 800-plus apartments have been sold. Frank Langfitt/NPR hide caption

toggle caption
Frank Langfitt/NPR

The city's skyline is littered with empty apartment complexes like this one. One real estate agent said none of the compound's 800-plus apartments have been sold.

Frank Langfitt/NPR

Wu, a real estate agent, says overcapacity has led to job and salary cuts and nobody seems to have much spending power these days. Luliang is trapped in a vicious cycle.

"There are many people in the city just sitting around. They have nothing to do," says Wu. "People have no place to work. There are more homes under construction than the number of buyers. How can they sell? They can't."

Wu didn't want his full name used because the city's recession is politically sensitive. Many officials in addition to the former mayor have been detained for corruption, and Luliang's industrial collapse has dented the government's reputation for strong economic management. Not surprisingly, Luliang officials declined to discuss the city's woes with NPR.

As incomes shrink, other sectors of the economy are getting hammered as well, including restaurants and retail. Lei Lili, who owns a home appliance store, says business is so bad she's offering a free refrigerator to each customer who buys a TV.

"I am definitely worried. If the people can't make money, they certainly will not have money to buy my home appliances, right?" says Lei. Businesses like hers depend on big sectors such as housing. "If the big river has water, small streams will have water, too," she says. "If the big river dries up, what can fill the small streams?"

Perhaps the biggest river in Luliang is coal. China consumes more of it than any other country in the world. But as the government spends less on infrastructure like roads and bridges, it needs less coal, which is crucial for steel production. That leads to much lower coal prices and more money-losing mines.

A manager at the city's Big Earth River Coal Company says demand for coal has fallen so much that one-third of the coal companies nationwide need to shut down. Frank Langfitt/NPR hide caption

toggle caption
Frank Langfitt/NPR

A manager at the city's Big Earth River Coal Company says demand for coal has fallen so much that one-third of the coal companies nationwide need to shut down.

Frank Langfitt/NPR

Wang Wenliang, a manager at the city's Big Earth River Coal Company, says about one-third of the nation's coal operations need to close. But he doubts the government will allow anything so dramatic.

"The government will prop you up, not let you go bankrupt," says Wang. "It won't dare to let so many workers go. If people have no place to feed themselves, the society will have problems."

In other words, Wang thinks the government will chose political stability for now over fixing an old industrial economy that no longer works. Many fear delaying that reckoning will create an even bigger drag on China's already slowing growth.