AUDIE CORNISH, HOST:
China's economy is a mixed bag. Consumers keep spending, but growth is slowing. And the country's old industrial base is in big trouble.
ROBERT SIEGEL, HOST:
To explain what's really going on, we're going to take you to a Chinese boomtown that went bust. Government leaders doubled down on coal mining, road construction and real estate until overcapacity crashed the local economy, which is now among the worst in China. As NPR's Frank Langfitt reports, cities like this are dragging down the country's growth.
FRANK LANGFITT, BYLINE: This was supposed to be the new city of Luliang. It was going to be a $5 billion project, a financial and business district. It was supposed to open next year. But right now, as I look around, all I can pretty much see are cornfields. The mayor who is behind this project - he got sacked for corruption. The economy of the city is now in recession and this project is dead. In fact, right now, I'm on what was going to be the main boulevard for this new city. And basically, it's a road that goes nowhere.
The government destroyed the homes of thousands of farmers to make way for this failed project, farmers like Liu Yihu, 63. Today, he's sitting by the side of the road in a worn suit coat selling tomatoes and peppers.
LIU YIHU: (Through interpreter) There used to be irrigation ditches here, but those were blown up for the construction of the new city. Without water, ordinary people can't go crops. The yield isn't even half of what it was in previous years.
LANGFITT: The collapse of the planned business district had ripple effects far beyond farmers like Liu. The Chuandong cement plant had banked on lots of orders to help build the new city. I stopped by the factory, which sits along a river, to see how business was doing.
I'm walking inside the office building, and the place just looks abandoned. No one has swept the floors, it looks like, in a very long time. They're just covered in dust and mud. (Foreign language spoken).
UNIDENTIFIED MAN #1: (Foreign language spoken).
LANGFITT: I find a low-level manager named Gao. He's sitting in a factory dorm room, watching a rerun of a recent huge military parade in Beijing. Gao said when the project collapsed, his plant, like others in town, was caught with way too much capacity.
GAO: (Through interpreter) The economic situation now is very bleak. The construction industry, the entire real estate industry is bankrupt. Our company can't survive, so the workers were laid off. They went home to plant crops.
LANGFITT: When coal prices were high and the government poured money into infrastructure, Luliang's economy boomed. Just five years ago, in 2010, GDP growth was a staggering 21 percent, and Gao's factory was pumping out 700,000 tons of cement a year. Last year, though, GDP here shrank by 2 percent. And this year, Gao's cement plant only produced 30,000 tons while 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.
GAO: (Through interpreter) We didn't worry. We felt in our hearts that things would always be good and that there would be no problem. Now we have a sense of crisis.
LANGFITT: Gao blames government officials for ignoring the basic laws of supply and demand.
GAO: (Through interpreter) They didn't consider the possibility that once something is in oversupply, it will no longer be valuable.
LANGFITT: Instead, Gao says, officials pushed for more coal mines and housing developments to boost GDP numbers on which their promotions were based. Those projects also generated a lot of bribes.
GAO: (Through interpreter) For example, when applying for a business license, a company needs to go through layers of bureaucracy for approval. Officials took kickbacks, so this is why there are so many coal companies. Actually, some shouldn't even have opened.
LANGFITT: Many of the empty apartment towers that now litter Luliang's skyline - they shouldn't have been built either. I went to take a look at one called China Culture Garden.
So I'm walking into this compound, and there are six huge apartment blocks. They're probably about 18-stories high. There must be maybe 800, 900 apartments here. If you look inside the windows, there's no furniture. There are no people. And also, if you look around, there aren't any buyers. I'm like the only person in here. (Foreign language spoken).
UNIDENTIFIED MAN #2: (Foreign language spoken).
LANGFITT: Inside, I ask a manager named Liu how many apartments they've sold.
LIU: (Foreign language spoken).
LANGFITT: He says it's a mimi. That's Chinese for secret.
in the me that is Chinese for secret. The rental market doesn't seem much better. I walk the halls of the city's best luxury compound
(SOUNDBITE OF MUSIC)
LANGFITT: And all the doorbells were programmed to play this. I met a guy who was renting a 2000-square-foot penthouse on the 32nd floor. His monthly payment - 156 bucks. Yes, you heard that right - $156.
To understand how this housing glut is affecting the economy, I went to see a real estate agent named Wu, whose downstairs neighbor likes to play saxophone. Wu didn't want his full name used. Luliang's economic collapse is politically sensitive. Lots of officials have been detained for corruption and have dented the Communist Party's reputation for managing the economy well. In fact, nobody in the government wanted to talk to us about this story. So Wu says overcapacity's led to job and salary cuts, and nobody seems to have any spending power. Luliang's caught in a vicious cycle.
WU: (Through interpreter) There are many people in this city just sitting around. They have nothing to do. People have no place to work. There are more homes under construction than the number of buyers. How can they sell? They can't.
LANGFITT: As income shrink, other sectors are getting hammered too, like restaurants and retail.
(SOUNDBITE OF PHONE RINGING)
LEI LILI: (Foreign language spoken).
LANGFITT: Lei Lili owns a home appliance store downtown. Business is bad - so bad she's on the phone right now with a customer, and she's telling him, if you buy a TV set, I'll throw in a fridge. Lei says businesses like hers depend on big sectors like housing.
LEI: (Through interpreter) I am definitely worried. If the people can't make money, they will certainly not have money to buy my home appliances, right? If the big river has water, small streams will have water too. If the big river dries up, what can fill the small streams?
LANGFITT: 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 means lower coal prices and more money-losing mines. Wang Wenliang says many coal operations here just need to close. Wang's a manager at the city's Big Earth River Coal Company.
HANSI LO WANG, BYLINE: (Through interpreter) Some companies will definitely die. I think for this industry nationwide, a death rate of one-third is rational.
LANGFITT: But Wang doesn't think the government's going to allow anything that dramatic.
WANG: (Through interpreter) The government will prop you up, not let you go bankrupt. It would not dare to let so many workers go. To put it simply, everybody needs to feed themselves. If people have no place to feed themselves, the society will have problems.
LANGFITT: In other words, Wang thinks the government will choose political stability for now over fixing an old industrial economy that no longer works, a move many people fear will be an even bigger drag on China's already slowing growth. Frank Langfitt, NPR News, Shanghai.