Stimulus breeds fears of wasted resources
The mainland's much-praised 4 trillion yuan (HK$4.54 trillion) stimulus package could have nasty side effects. Among them are environmental damage, financial risks and wasted resources.
In the nine months since Beijing rolled out the package to kick-start the world's third-largest economy, the spending has delivered robust growth and hopefully left a lasting legacy of world-class infrastructure.
But in the rush to build wide and high, there are growing concerns about wasted resources and misallocated funds.
'When the stimulus package was announced late last year, we looked carefully at it and considered what sectors and projects we could get involved in,' said Mark Lomas, transport services managing director at Hyder Consulting, a consultant to infrastructure projects around the world. 'We came across an awful lot of aspiration projects.'
As an example, Mr Lomas said Hyder was working on a bridge project in one second-tier city that could break world records in terms of the length of its single suspension.
'This is a client who wants to make a statement, but when or whether the bridge will be built remains to be seen,' said Mr Lomas. 'However, there are enough second-tier cities in China with large enough populations that can afford such a bridge.
'The aspiration to be world-class is there, even among the second- and third-tier cities, and many Chinese cities can deliver that.'
China is becoming a showcase of impressive infrastructure. The Beijing-Tianjin high-speed rail, which runs at 350km/h, is already in operation while a high-speed rail linking Beijing with Guangzhou and Hong Kong is under construction.
But Mr Lomas says that not all cities have the funding needed for state-of-the-art construction, and that is where the viable projects are separated from those that are mere hype.
To counter the global downturn, the biggest portion of the stimulus pie - 38 per cent or 1.5 trillion yuan - has been allocated to infrastructure, mostly rail.
Stimulus money has already resulted in a 33.5 per cent surge in capital investment in plant and infrastructure in the first half of the year. Investment in rail construction leapt 155 per cent to 201.46 billion yuan in the same period, according to the Ministry of Railways.
In June alone, the annual growth of fixed-asset investment in infrastructure skyrocketed to about 60 per cent from 20-odd per cent in the fourth quarter last year, according to Morgan Stanley's Wang Qing.
Despite being headline-grabbing, the growth numbers have a limited effect on the broader economy, says John Greenwood, chief group economist at Invesco. He said the country's monetary stimulus had a bigger impact.
'China is simultaneously creating a large amount of money and credit so the expansionary effects will likely be large from the monetary expansion,' Mr Greenwood said. 'But China needs to be careful not to overdo it.'
New loans tripled from a year earlier to 7.37 trillion yuan in the first half of this year, intensifying concerns about speculative asset bubbles.
More worrying though is that much of the money is reportedly going to state-owned enterprises and local governments.
'Without a strong system of corporate governance or checks and balances, the spending is vulnerable to corruption,' said a financial analyst who requested anonymity. 'Some entities may push forward previously rejected projects for new funding.'
Banks were also likely to be more lenient in lending to government projects and pay less attention to economic viability. A case in point was the overheating cement sector.
In tandem with the many infrastructure projects being started across the nation, new cement plants are also springing up, according to Wu Chien-hua, a financial manager at Asia Cement (China) Holdings Corp, a Hong Kong-listed cement producer. 'A lot of cement projects that should not be approved were approved and the Chinese government has recognised there is an oversupply of cement,' he said.
Jay Zhou, an analyst at Sinopac Securities, said investment growth in the cement sector had surpassed that of fixed assets by more than 20 percentage points.
While fixed-asset investment accelerated to 36 per cent in the second quarter from 23 per cent in the fourth quarter of last year, investment in cement production soared 78.6 per cent in the past five months, according to official data.
'The situation will be very bad in 2011, when the 4 trillion yuan stimulus ends,' warned Mr Zhou. 'Many small cement plants will go bankrupt and larger cement producers may only break even.'
One foreign businessman who recently returned from a trip to Yunnan province and Tibet said 'construction was everywhere'.
'They are building dams and monstrous tourist traps. Small businesses are blooming all around. That is the good side [of the stimulus],' he said.
'The bad side is the environmental damage. Poor planning combined with low efficiency leads to shoddy construction.'
The businessman said roads were being built so fast that landslides were occurring. 'Centuries-old farms and farm houses are bulldozed,' he said. 'It is not only physical structures that are destroyed but the way of life. Perhaps this is progress but one also loses one's heritage.'
Aggressive infrastructure spending spurred gross domestic product growth in the second quarter to 7.9 per cent, implying 19 per cent annualised growth over the first quarter.
However, quarter-on-quarter growth will start to slow in the third quarter as stimulus investments start to taper off, said Joyce Poon, a senior analyst of Hong Kong-based consultancy Gavekal.
Morgan Stanley expects China's GDP growth to peak in the first quarter of next year and slow after that.
Stimulus money has resulted in a surge in construction projects
Capital investment in plant and infrastructure in the first half grew: 33.5%