The problem of overbuilding in the housing sector in China, while a source of concern to be watched, is often overhyped by reports about the country's so-called "ghost towns," says OECD China chief economist Richard Hern.  

China is expected to introduce measures this month to allow interest rates to respond more to market forces as part of a raft of coming reforms aimed at reducing the government’s role in the economy, the Organization for Economic Co-operation and Development’s chief China economist told Global Atlanta

Posting 7.8 percent growth in the third quarter of 2013, China is on a cyclical upswing spurred by loosening of tight monetary policies aimed at curbing inflation earlier in the year, Richard Herd said during a visit to Atlanta Nov. 4. 

But economists and analysts are hoping that President Xi Jinping will use the third plenum of the Chinese Communist Party starting Nov. 9 to unveil an ambitious slate of reforms that will set the stage for China’s next phase of long-term growth. 

On the government’s agenda are touchy economic and social issues like banking, fiscal and tax initiatives, land reform, household registration system (hukou) and more. 

Mr. Herd expects fiscal reforms to get the most immediate attention, while the more sensitive topics will have to be addressed gradually. 

For instance, reforming land-use rights has become a hot-button social issue in a largely rural and rapidly urbanizing country where the government technically owns all the land. 

Local governments often seize land from farmers for development purposes, and the systems for managing their compensation are underdeveloped. The resulting tension has led to civil unrest in places like Wukan, a village where thousands of protesters turned out to expel village leaders in 2011. 

“Most of these mass demonstrations are related to the discontent of local people seeing local officials taking too much money from redevelopment,” Mr. Herd said. 

Land use is also tied up in another challenge for China’s economy: local government debt. Worried that local governments were becoming overleveraged, the national government recently launched a nationwide audit, the results of which are expected later in November. 

Threat of a local government default is one thing, but more alarming is that the central government had no way of monitoring debt accumulation at the provincial and city levels. 

This is especially grave given that officials have an incentive to invest in major projects to goose GDP growth, often the metric most directly tied to career advancement. 

“Local governments are much more independent than one imagines. Really the bargain between the local governments and Beijing is, ‘You keep the economy moving in your area, and we’ll leave you alone.’ It really is a results-driven bargain,” Mr. Herd said. 

Mr. Herd wasn’t overly concerned about the risks of this model. The criticism of China’s so-called “ghost towns” has been overhyped by media outlets that continue returning to the same examples to belabor the story, he said. 

Overbuilding and speculation have occurred in some smaller cities. Some have miscalculated their own appeal in China’s grand urbanization scheme, while others in places like Inner Mongolia province have seen wealth evaporate after the prices of natural resources dropped. At the same time, demand for housing has picked up in larger cities.

“There seems to be only at the moment a limited number of areas where prices are actually falling,” Mr. Herd said. 

Some of the nation’s largest developers were able to shed excess inventory earlier in the year, which is one reason growth was slower even as home sales stayed stable – there wasn’t as much need to build.

Still, rebalancing growth from an investment- and export-led model to one that relies more on consumer spending is a stated goal of Chinese policy makers.

Mr. Herd said this problem is also overstated since home sales are left out of statistics that measure consumption as a percentage of China’s growth. The rate currently stands at 36 percent, lower than most developed economies. 

Rebalancing is still a long way off, Mr. Herd said, but the rate of spending as a percentage of the economy has stabilized after a period of decline, following the path of wealthier Asian markets like Japan, Korea and Taiwan

Mr. Herd was slated to give a talk on China’s economy at Kennesaw State University, where he was hosted by the India China America Institute after meeting with officials at the Federal Reserve Bank of Atlanta. 

For more on the ICA Institute, visit 

As managing editor of Global Atlanta, Trevor has spent 15+ years reporting on Atlanta’s ties with the world. An avid traveler, he has undertaken trips to 30+ countries to uncover stories on the perils...