Ghost town stands out in China's hot property market

What if they put up a city in Inner Mongolia and no one came?

BEIJING // With more than 1.32 billion citizens China is the world's most populous nation, but visitors to Kangbashi, a new town in the Chinese autonomous region of Inner Mongolia, could be forgiven for thinking otherwise. This centre in the prefecture of Ordos, located within a prosperous coal-mining region, has been designed for 300,000 people but is thought to be home to fewer than one tenth that number.

A frenzied construction boom since 2004 has seen the creation of tens of thousands of apartments, while the authorities have spent the equivalent of hundreds of millions of dollars on theatres, arts centres and even a library designed to resemble a stack of books for the new admistrative centre for Ordos. Stephen Green, Standard Chartered's head of research for greater China and the author of a report on Ordos released in May titled "Coal and Cows in Inner Mongolia", says Kangbashi is the product of "huge government ambition" fuelled by revenue from coal mining.

The area is home to a sixth of China's coal reserves and this year the industry is expected to generate 240 billion yuan (Dh130.18bn). Despite the investments in Kangbashi, most of the Ordos government workers whose jobs were transferred to the new town four years ago do not live there but commute from a neighbouring district. Yet the local people, for all their apparent indifference towards Kangbashi as a place to live, have not been shy about putting their money there. Local media reports have suggested that a lack of facilities including schools, hospitals, entertainment and high-speed internet have put Ordos residents off from moving to Kangbashi.

Most properties in the new town had been bought by locals rather than outside speculators, Mr Green says, and many have purchased several from the windfall created by coal. The surrounding area contains thousands of independent mines. While most of the apartments in the town are empty, Mr Green says few are unsold. What is more, prices have remained buoyant. The government-controlled China Daily newspaper reported last month apartment purchase prices averaged 7,000 yuan a square metre - almost double the figure of a year earlier.

While the signature buildings such as the library are "probably a waste of public resources", he says he believes Kangbashi's empty apartments will find tenants eventually. "Given the amount of coal and China's growth, it's hard to see it as a bubble," Mr Green says. Demand for rental apartments will likely be increased by government plans to relocate schools to Kangbashi. In China as a whole, property prices have soared in the past year, driven up by investors seeking alternative investments as the country's stock market lags.

Nationwide, price rises averaged 12.4 per cent in the year to May and the authorities have become concerned enough about overheating to introduce measures to cool the market. Starting in April, they told banks not to lend money for second homes, clamped down on developers who hoarded land, ended tax breaks on the sale of homes and increased down payments. The results have been dramatic: prices grew just 0.2 per cent in May from the previous month and the number of transactions in Beijing and Shanghai slumped 70 per cent over the same period.

Kris Li, a property analyst with Shenyin Wanguo Research and Consulting, says she expects prices to start falling significantly in the current quarter. With the market slowing, many developers had held over the release of new projects this quarter, but Ms Li believes liquidity issues will eventually mean "they cannot wait longer" and will start putting them on the market at lower prices. "We'll see more and more promotions or even price cuts," she says.

A property tax, to be levied on those holding properties rather than as a transaction tax, could cool the market further. Major cities such as Shanghai have already submitted plans for such a tax to the central government. Ms Li, who is based in Shanghai, says the authorities are "in a dilemma". Prices and sales could continue to rise if a property tax is not introduced, but the apparent slowdown now under way could get worse if such a tax is imposed.

But some analysts doubt this will work. Jianmao Wang, a professor of economics at the China Europe International Business School in Shanghai, says a property tax would be "insufficient" to deter the speculators and proposes a capital gains levy.