What’s the biggest challenge facing China’s cities?

The endless articles about Chinese overbuilding leading to ghost cities, I find way overblown. Almost all of the articles refer to the same one or two locations and fail to create a coherent picture of China overall out of the narrow specific examples.

In fact, if we are sticking with the dramatic titling, I think they are missing the point. There is a much greater chance of the emergence of zombie towns and cities in China than of more ghost cities.

What is a “zombie town”? It is a town where 50, 60, 70% of economic output and tax derives from one industry. And that industry is now entering decline. It could be coal mining, steel production, textile production. The skill base in the town is all focused on this industry, the tax base pretty much all comes from this industry or from property sold on the back of incomes generated in this industry.

The talented and moderately wealthy may be able to leave and find work in other cities, despite not having a residential permit to be based there. This is one area in which Shanghai continues to grow so robustly as it sucks in talent from cities that offer fewer opportunities.

Western economies have seen many single industry cities decline over time, often also in mining and heavy industries. We have all seen how hard it is to turn such declines around. One of the few examples I can think of in China is Dongguan, which has shifted from the lowest-end electronic assembly to becoming a dynamic center for China’s robotics industry (but that was more of an evolution than a reinvention).

While intellectually government officials are aware of the reinvention challenge, I believe not enough is being done. Local government has very limited options. They are likely already heavily indebted and they find their finances even more strained as the property cycle ends with no developers willing to buy land from them anymore (they may even own the leading local property developer).

It will take extensive central government support to repurpose an entire city’s economy.

Expect to hear more about zombie cities and less about ghost towns in the future.

This article is published in collaboration with LinkedIn. Publication does not imply endorsement of views by the World Economic Forum.

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Author: Gordon Orr is Director and Chairman of McKinsey & Company, Asia.