"Any thoughts on the attached pictures sent to me by a broker friend. You probably have seen similar pics before.

"Have a happy festive season and thank you for all your great work."

Eoin Treacy's view Thank you for your kind words and also for these pictures some of which I have seen before. I suspect they will be of interest to subscribers. Real estate and infrastructure development have been some of the cornerstones of Chinese economic development over the last couple of decades. The result is that China now has infrastructure comparable, if not better than, most so-called developed countries. This building has both fuelled and facilitated impressive economic growth, but as with all good ideas taken to extremes, there have been some horrendous examples of overbuilding.

I have no way of corroborating whether the pictures in the above link are representative of reality today and would welcome feedback from anyone who has actually been to these cities. However, given the pervasiveness of concerns about ghost cities, I believe it would be unwise to dismiss them.

Most of the photos are for parts of in Inner Mongolia, and Henan. Inner Mongolia has abundant coal reserves and therefore revenues. Its population however is comparatively small by Chinese standards. Henan is a landlocked, high population province in the Chinese heartland. In both cases building on this scale was probably justified as helping to diversify the economy, promote further economic growth, They all fall into the same category as the Japanese bridges to nowhere.

Future economic growth could see these cities prosper, but they would probably require some highly favourable tax designation to encourage companies to occupy them. China has a massive population so the size of these developments while troubling also need to be measured against the available population. Prices will need to come down to spur demand for residential properties. In the meantime they offer examples of the effects of bribery, simony, nepotism and a host of other abuses that become evident when there is no effective system of checks and balances for political office holders.

This note by Jun Ma for Deutsche Bank dated December 13th, kindly forwarded by a subscriber while I was in Germany, is directly relevant to this issue is posted in the Subscriber's Area along with some additional commentary.

The National Economic Work Conference concluded and published a policy statement today. Specific targets for GDP, inflation and monetary growth are not mentioned in the press release, but they will likely be discussed in the coming days by senior officials. Instead, the press release focused on the broad objectives for next year's macro policies and reforms. While most of the press release is simply repeating what has been said before, we think the following few points are worth noting for investors:

1) "Greater policy emphasis should be given to price stability." This, in our view, is the official endorsement for continued tightening of monetary policies, including via further rate and RRR hikes and slowdown in credit growth.

2) "Resolutely prevent [local governments] from blindly launching new projects in the name of implementing the 12th Five Year Plan". It means that the central government is fully aware of the incentive of local governments to pursue excessive investment growth, and measures such as project approvals and credit controls will be employed to mitigate this trend.

3) "Accelerate the growth of the service industry, especially modern services." In particular, the press release mentioned the need to study and promote the pilot program of VAT reform in service sectors, which will reduce the effective tax rates.

4) "Gradually improve the personal income tax system." We think this indicates a broad consensus to simplify the tax brackets of the personal income tax regime, which will also reduce the effective tax burden on households.

5) "Raise the proportion of direct financing". This means, in our view, loan growth will decelerate over the medium term, while bond financing will probably grow at 30-50% per annum in the coming years.

Overall, we think the Work Conference has reinforced the message that anti-inflation measures will be the main policy focus in the near term, while at the structural level, policies will provide strong support for consumption, services, new energies and higher-end manufacturing.

The Chinese authorities are well aware of the problems developing in less developed provinces due to a concentration on GDP growth at any cost. I suspect that many outside observers overestimate the power the central government has in swaying the policies of regional administrations. The fact that regional governments have a large degree of autonomy in how they spend state funds helps to explain the concentration of policy measures on raising bank reserve requirements and on inhibiting the availability of credit generally. One could argue ad nauseum about the balance of China's achievements versus the threats to growth but from an investment perspective there are a number of points that need to be kept front and centre.

Chinese infrastructure development is in large part a story of the last decade and is unlikely to play as central a role in the domestic economy in the next 10 years although it is still likely to be significant. Following incredible investment to date, most of which has been well spent, government capital will now be more productively employed in fostering domestic demand. Policies are in place to improve healthcare provision and to establish a better social safety net. Both of these are aimed at helping to release Chinese consumers' much vaunted savings.

Many will wonder if this means that commodity demand growth is peaking but in a global economy China is not the only country building infrastructure. The global per capita consumption of industrial and agricultural commodities continues to rise. Supply is still struggling to catch up and as a number of commodities hit new multi-decade highs the secular bull market remains intact.

The Shanghai A-Shares Index has underperformed over the last year, at least in part because it is heavily weighted by banks, infrastructure and heavy manufacturing. All of these sectors benefitted enormously over the last 10 years but are currently being outshone by healthcare, information technology, consumer staples and consumer discretionary. These latter sectors are the most likely drivers of Chinese domestic growth over the next decade.

There is no argument that the Chinese economy faces challenges just like every other, but there is no reason to believe that China is any less capable of dealing with its problems than those in the so-called developed world.