Bankrupt Detroit provides a warning message for many Chinese cities

While former industrial giant's fall may be met with glee by some, there but for the grace of Beijing could go many of China's metropolises

PUBLISHED : Monday, 22 July, 2013, 12:00am
UPDATED : Monday, 22 July, 2013, 2:53pm

The news that Detroit filed for bankruptcy last week was not unexpected and to a certain extent seemed inevitable. But it still dominated headlines around the world as the city, once the symbol of US manufacturing prowess and the centre of the auto industry, finally succumbed to mismanagement and financial crisis with as much as US$20 billion of debt.

In China where the auto industry is booming, a certain glee can be easily detected in the state media's comprehensive reports of Detroit's bankruptcy, complete with pictures of abandoned buildings. For many mainland officials and nationalists, it is hard to find any better symbol of America's decline and the rise of China at a time when Beijing is trying to flex its muscles and play a more important role in the international community.

Interestingly, some enterprising mainlanders have seen Detroit's bankruptcy as a lucrative investment opportunity. Rumours of abandoned or foreclosed homes being sold for as little as one US dollar have spread like a prairie fire among mainlanders who feel priced out of their own booming property market. Well, such bargains may lose their appeal when they see Detroit's urban decay and crime.

Nor should mainland officials gloat too much. The symbolism may be great but that is about it. US carmakers are still going strong and, ironically, are starting to derive major revenue from the Chinese market.

Under the US federal system of government, American cities run mainly according to their own means and a number of them have filed for bankruptcy over the years without deeper and national implications.

Even bigger cities like New York, Philadelphia and Cleveland once teetered on the brink of financial ruin, although Detroit is the first major US city to succumb. Instead, mainland officials should view Detroit's slide into bankruptcy as a serious lesson as they try to build up the nation's manufacturing prowess through industrial restructuring and upgrades.

According to the media reports, Detroit's downfall was triggered by a number of factors, including a shrinking tax base, crippling pension and health care costs, and chronic mismanagement, to name just a few. But one underlying reason is that Detroit utterly failed to undertake sound and viable industrial diversification and transformation when the auto industry showed the first signs of decline.

It may be inconceivable that one of the mainland's biggest cities would declare bankruptcy (60 years ago Detroit was America's fourth most populous city), but dozens of smaller mainland cities in fact share a similar fate - with the only difference being that the central government is propping them up.

So far, China has announced a list of 69 cities designated as "resource-depleted cities", mostly located in the northeastern or western parts of the country where they were built around one or two particular resources that have been exhausted after decades of development. Those cities also suffer from falling revenues, with residents migrating to other cities for jobs. How to rejuvenate those cities has become a long-term headache for Beijing.

More importantly, bigger mainland cities are also heading for financial ruin after accumulating trillions of yuan in debt through the largely unregulated shadow-banking sector. A growing number of banking analysts have issued stern warnings of a looming debt crisis that could have serious impact on the mainland economy.

The central government has realised the seriousness of the issue and is starting to rein in the debt, but local officials know that Beijing will bail them out no matter how deeply indebted they are. Although there is still no sign of a national crisis, it will be only a matter of time before there is one if no effective measures are found to restrain the local officials.

Reminding them about Detroit's fate could be a good start.