Key sectors limiting economic growth potential

PUBLISHED : Thursday, 26 May, 2005, 12:00am
UPDATED : Thursday, 26 May, 2005, 12:00am

A report says China should step up investment reform to attract private capital

China desperately needs to open up to private infrastructure investment or risk limiting its economic growth, a new study says.

Die-hard central planners, inefficient bureaucracy and unrealistic price controls are hampering investment in crucial sectors, says a 200-page report, The Dragon Constrained, released yesterday by Australian-based industrial consultancy Urandaline Investments.

As a result, the development of China's power, rail and water sectors has lagged the rest of the economy, creating shortages and bottlenecks that threaten to slow economic growth.

In contrast, China's ports, first opened to private investment and management 20 years ago, are a model of efficiency, able to compete on even terms with any in the world, says Michael Komesaroff, Urandaline managing director and a 25-year veteran of China's metals and mining industries.

'Where the state has handed responsibility for management and capital raising over to the private sector, China has done very well,' Mr Komesaroff said. 'Where it hasn't, there are big problems.'

Worst of all is China's water sector, which remains almost entirely in state hands. 'I don't think people have woken up to water. It is an absolute disaster,' he said.

Urandaline's report argues that China's water scarcity has been exacerbated by official policy, which sets charges artificially low, deterring investment and encouraging wastage.

Although many cities increased water rates by between 50 per cent and 200 per cent last year, average prices in China are still less than a third of the international average.

While private commercial users in Beijing now paid market rates of between 40 yuan and 45 yuan a tonne for their water, heavy industrial consumers still paid a subsidised rate of only five yuan a tonne, Mr Komesaroff said.

Low prices have led to inefficient water use. Chinese paper mills use between 400 and 500 tonnes of water to produce one tonne of paper, in contrast to mills in developed economies which can use as little as five tonnes of water per tonne of paper, the report says.

The impact on business is severe and the government has estimated that 230 billion yuan worth of industrial production is being lost every year because of the resulting water shortages. In Shaanxi province, mining companies only have enough water to wash about a third of their coal before transporting it, worsening pollution and costing nearly five billion yuan a year in lost production, according to Mr Komesaroff.

As many as 400 cities are currently suffering water shortages, which would take investment of 800 billion yuan to correct, according to the State Environmental Protection Administration.

Reform is under way, with some local authorities introducing incentives for businesses to conserve water, and others privatising state-run water works. Private sector investors have taken stakes in water companies in Fuzhou and Shenzhen, among others, while Shanghai has discussed selling a 50 per cent stake in Shanghai Waterworks Shibei to foreign investors.

But liberalisation must be stepped up for growth to be maintained. 'The only way to solve the problem is to cut free from the government and get in private sector money and management skills,' Mr Komesaroff said.

China's rail and electricity sectors must also open further to private capital, the report says. Investment in the railway system has trailed other sectors of the economy, causing painful bottlenecks in the transport of goods and raw materials. Although current plans envisaged investment of two trillion yuan to upgrade the network, China's Ministry of Rail would struggle to finance even a fifth of that from its own resources and borrowing, Mr Komesaroff said.

China has encouraged foreign investment in its electricity sector, but state support for what the government considers strategic industries has distorted the power sector, aggravating electricity shortages.