Why China’s ghost towns are good news

Construction in the inner Mongolian city of Ordos.
Ed Jones | AFP | Getty Images
Construction in the inner Mongolian city of Ordos.

Worries over China's economic risks - from ghost towns to slowing growth - may keep market watchers up at night, but at least one analyst believes many of the bugbears are reasons to be bullish.

"The single greatest aspect of conventional wisdom about China today that we don't understand is the near-universal concern about under-utilized infrastructure… ghost cities, empty airports, and deserted highways," Bernstein Research said in a note dated Tuesday.

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But at the beginning of their life, infrastructure assets should be poorly utilized, the report noted.

"No sensible economic planner approves, no sensible banker finances and no sensible builder constructs Just-in-Time infrastructure," Bernstein said. "On a 30-year view of fixed asset investment, low levels of utilization (and poor ROIC) in the early years is a necessary part of the process."

Indeed, with that burst of infrastructure investment now ending, China's economic growth rate is likely to slow, especially as the mainland rebalances toward services, Bernstein said.

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"A long-term 7 percent GDP (gross domestic product) growth rate in China is unnecessary, inadvisable and – given the return on incremental capital today in China – unlikely to be achieved," it said, forecasting GDP would grow at a compound annual rate of "just under" 5 percent through 2020.

"We see growth coming largely from services and from the 'peace dividend' from a combination of lower investment, rising utilization on existing infrastructure and lower energy and commodity prices," it said. "It is not clear to us why allowing GDP growth to drop 100bps annually in coming years while household income and consumption growth accelerate would be anything but positive."

Bernstein is also skeptical of claims that China risks a financial crisis from any repeatedly cited fears of a collapsing property market, extravagant state-owned enterprises, wasteful investment or sudden financial liberalization.

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"The current leadership continues to confound expectations by doing pretty much the right thing," Bernstein said, adding it believes there is little urgency to complete financial liberalization, noting that in many economies, it actually heralds a crisis.

China risks 'not that scary?' This expert disagrees
China risks 'not that scary?' This expert disagrees   

"The fact that most Chinese debt is borrowed by Chinese SOEs from Chinese SOEs is one of the strengths of the system," it said.

To be sure, many analysts still see China's economy as rife with risks.

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It's "worse than scary," Richard Jerram, chief economist at Bank of Singapore, told CNBC on Monday, referring to a speech by China President Xi Jinping at the Asia Pacific Economic Cooperation CEO Summit in Beijing Sunday.

"There are indeed risks, but it's not so scary," Xi said.

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But Jerram is unconvinced.

"The IMF (International Monetary Fund) rule of thumb is if your credit-to-GDP ratio goes up 40 percentage points in three years, the probability is you've got a bad debt crisis. China's is up 75 percent in five years, so it's faster and it's longer and it's a very high probability they've got a massive amount of bad debts buried in the system," Jerram said.

With credit still growing faster than GDP, it's likely difficult to find productive investments, Jerram said.

"Probably they're just writing new bad debts even as they're trying to work through the old bad loans."

—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1