A 'Sense Of Crisis' Now In A Chinese Boomtown Gone Bust
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.
"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.
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.
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.
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.
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.
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Transcript
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. Transcript provided by NPR, Copyright NPR.
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