First, the coal industry, a pillar of this Mongolian city’s economy, lost momentum. Then the bubble in the local real estate sector burst. Many buildings in the city are vacant at present, and now Ordos has a new nickname, “the ghost city.”

Ordos

Ordos in inner Mongolia has regularly been cited as the quintessential example of China’s unsustainable construction-led economy.

Posters of the Chinese character for good luck adorn shops bolted shut in the northern city of Ordos, where cranes stand silently above half-finished developments and doors on workers’ dormitories creak in the wind.

Ordos enjoyed blistering growth to 2012, then imploded

In 2003, the Chinese government started awarding coal rights to mining and real estate development companies that agreed to build housing, office buildings, and roads. The plan was to prepare a thinly populated section of Ordos called Kangbashi for up to 1 million people.

And during the build-up between 2003 and last year – a period marked by high coal prices – Ordos recorded blistering growth. The city’s GDP rose 15 percent year-on-year to 322 billion yuan in 2011.

Only 1/3 of Ordos area mines in operation

Delivering a separate but more serious blow to the government’s treasury has been a recent slowdown for the coal industry. Coal sales accounted for more than 60 percent of the city’s GDP and 50 percent of government revenues in 2008. Coal prices have been falling since April, and hundreds of area mines have been affected.

An industry analyst said only 101 out of the area’s 306 coal mines were operating normally this summer. Many had cut back production. Other mines closed, leaving behind more empty space in Ordos.

Companies, jobs and people never arrived to fill Kangbashi’s industrial parks and apartment complexes. In addition, central government real estate controls in 2010 curtailed the speculative investment that encouraged development. And mining enterprises at the foundation of the local economy have watched revenues dwindle in the face of overseas competition and a slowing domestic economy.

Local economy prey to vicious, self-feeding investment cycle

A large part of the wealth accumulated through the coal industry over the past 10 years has gone to the real estate sector. Money gained from property investment went back into the coal industry or was re-invested in the real estate sector, forming a vicious cycle. So when the local economy cooled, the real estate bubble also burst.

Today, the local economy is suffering and the city government is struggling to arrange banks loans, issue bonds and attract private investors to continue growth.

The government has fueled the boom through borrowing schemes and by attracting investments, betting that any public money spent on building projects would yield handsome returns in the future in the form of tax receipts.

The economic crisis has spilled over into other areas, such as the services sector. Media reports said that local restaurants and the retail sector have been hit hard by the city’s economic problems.

Local officials haven’t abandoned hopes for Ordos, population 600,000. Nor have they stopped betting that investment will eventually pay off as government revenues rise.

Indeed, Mayor Lian Su said in April that the city government plans to “do everything possible to expand credit (and) guarantee new loan issues top 50 billion yuan in 2012.”

Ordos’ implosion stands at one extreme of a national slowdown that a government report on July 15 signaled may deepen this quarter, with industrial output gains last month matching the weakest since the 2009 global recession. The challenge for Li’s administration is to assure growth is resilient enough for the world’s second-largest economy to weather busts in local finance and industries ridden by overcapacity.