Stimulus or not, it's the quality of new investment that matters

What Beijing really needs to do is invest in infrastructure projects that boost future productivity rather than in more white elephants

PUBLISHED : Tuesday, 11 September, 2012, 12:00am
UPDATED : Wednesday, 12 September, 2012, 7:37am


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Last week Beijing approved 60 major new infrastructure projects together worth 1 trillion yuan (HK$1.22 trillion), or around 2 per cent of China's gross domestic product.

Since then, professional China-watchers have been busy debating whether the new projects amount to an economic stimulus package.

They are having the wrong argument.

Whether or not Beijing chooses to call the new projects a stimulus effort, or whether they had been planned long before last week's announcement isn't desperately important.

The fact is that new infrastructure investment ground to a halt towards the end of last year as local governments responded to instructions from Beijing to rein in their spending on new projects.

That slowdown hit a range of different sectors including construction, building materials and the iron and steel industries, and weighed heavily on China's overall growth.

With last week's approvals, Beijing is now flashing a different signal: that it wants local governments to step up their investment in infrastructure once again.

Whether you call this stimulus or not doesn't greatly matter. If planned projects had been put on hold, and are now going ahead again, the investment will still help to support China's growth rate over the next couple of years.

What's more important in the long run is not the amount of the investment so much as the quality of the projects.

Enthusiasts point out China's capital stock - the value of its roads, bridges, electrical distribution systems and other similar stuff - is low relative to the size of its population.

China badly needs more infrastructure, they argue, in order to improve productivity and boost incomes. As a result, investment in new infrastructure is a good thing. For the most part sceptics agree that China needs more infrastructure. However, they doubt that the country is getting the right projects: the infrastructure it really needs.

They have good grounds to worry. Following the infrastructure spending boom of 2009 and 2010, anecdotes abound of glittering new highways with no traffic, bridges leading nowhere, and high speed rail lines with no passengers.

Francis Cheung, head of China strategy at brokerage house CLSA, cites the example of the 10 billion yuan Jiaozhou Bay Bridge in Qingdao. Built with dramatic curves, at 36 kilometres it is the world's longest marine bridge (although if built in a straight line it wouldn't hold the record).

As a piece of engineering the bridge is undeniably impressive. However, it triplicates the routes of both an older highway and an existing tunnel.

As a result the new bridge carries just 14,000 vehicles a day, just a little more than a tenth of the numbers that use the Brooklyn Bridge or the Golden Gate Bridge in the United States.

There are plenty of examples of other dubious trophy projects, from Shanghai's ruinously expensive Maglev train to Sichuan's spectacular, and spectacularly empty, Yaxi mountain expressway.

In an effort to determine how much of China's recent infrastructure investment has been wasted in this way, Cheung and his colleagues have assessed the usefulness of new projects in five different areas.

Their conclusions are sobering. Consider airports. With 230 scheduled for completion by 2015, China will have fewer than half as many airports as the US. But the ones it has built are too big, and often too close together. As a result, most lose money, and will continue to do so even with the expected expansion in air travel.

Similarly, China has too many new expressways, high speed rail lines and ports, all of which are underused.

Meanwhile, badly needed small-scale investments have been neglected in comparison. For example, water infrastructure investment has concentrated on the giant South-North diversion project, which is running massively behind schedule and over budget, at the expense of encouraging efficient local irrigation projects.

Happily, however, not all the news is bad. In recent years around 20 per cent of China's infrastructure investment has gone into the health and education sectors, where it should prove highly productive.

What's more, the new investments announced last week include more urgently needed local metro railway projects and fewer unnecessary high speed lines.

As a result, Cheung believes that the lessons of the recent infrastructure boom have sunk in, and that the current round of investment will include fewer white elephants and more of the projects that China really needs to boost its future productivity.