Economy

On the roads

Will China regret its infrastructure binge?

Needed a bridge loan: Qingdao Jiaozhou Bay Bridge

‘Happy Birthday To Us’. At least, that’s how it seemed last summer during the Chinese Communist Party’s extensive 90th anniversary celebrations. Over the same period the opening ribbons were cut at three gargantuan infrastructure projects: the high-speed rail link between Beijing and Shanghai; the world’s longest sea bridge, a 26-mile structure connecting Qingdao with Huangdao; and the lengthiest gas pipeline yet, stretching 8,700 kilometres from Guangzhou in the southeast to Xinjiang in the northwest. The message wasn’t particularly subtle: the Party was delivering for the people once again.

By contrast, the news last week that the central government had ordered banks to rollover loans made to local governments for infrastructure spending under the 2008 stimulus campaign was handled in a low-key manner. Maturities on much of the debt have been extended by up to four years, as many projects are not generating the anticipated return on investment.

Of course, the announcement was far from unexpected. Loan rollovers have been up for discussion for months. Last summer, WiC reported on one of the first local governments to run into trouble (a municipality in Yunnan defaulted on a bank loan because the highway that it had built wasn’t generating sufficient income: see WiC113) and last week’s news seems designed to prevent others from suffering a similar fate.

The measures have been presented as stopgaps, designed to give the new projects time to pay their own way. Yet the announcement also raises broader questions about the longer term sustainability of China’s economic model, especially as investment’s contribution to GDP growth has increased substantially in recent years, from 36% in the 1980s to 50.5% in the most recent decade.

Similarly Chinese policymakers have sometimes been lauded for their farsightedness in allocating so much new capital to roads, railways and highways. Frustrated policy wonks in the US compare the speed and scale of the construction plans in hundreds of Chinese cities to the sense of political sclerosis hampering longer-term planning in Washington.

A typical gripe: how can Beijing add almost 200 miles of subway track since 2001 when the (much more limited) Westside subway extension in Los Angeles won’t be ready until 2036 at the earliest?

On paper, the benefits of investment in successful infrastructure projects are widely recognised, especially in creating employment, as well as boosting productivity and competitiveness.

But recent research from Bent Flyvbjerg at Oxford University has suggested that the real returns on infrastructure investment can often disappoint.

Why? Flyvbjerg’s study of 500 mega projects across 20 countries found that cost overruns are commonplace (in his sample, slightly more than half came in worse than budget). Average overspend in railways was 44.7%, bridges and tunnels cost 33.8% more than planned, and roads came in 20.4% over budget.

Further, Flyvbjerg contends that the benefits forecast for completed projects are often incorrect too. Again, transport projects are among the worst offenders, usually as a result of over-optimistic projections on passenger usage.

Flyvbjerg’s findings are not country-specific but he warns that the scope for error is greater in emerging markets. It also seems reasonable to suggest that Beijing’s nationwide stimulus package may have intensified risks in this regard, with a sudden shoehorning of thousands of new projects into an intense period of investment. In fact, Flyvbjerg suggests that China has spent more on infrastructure in the last five years than in the whole of the 20th century.

One of the more prominent Chinese critics of some of that infrastructure spend is economic geographer Lu Dadao, a member of both the Chinese Academy of Sciences and the National Planning Expert Committee. And in an interview with Caixin magazine late last year, Lu took aim at the expansion of the transport network. “It’s mainly about excessively big, redundant construction and unfair competition, as well as a lack of coordination between different modes of transport,” he warned.

Lu then described plans to expand the national expressway to 180,000 kilometres as “staggering”, especially as many of the newly- built roads in central and western provinces are “usually empty, simply basking in the sun”. He warned too that regional airports were being “built blindly” with plans for another 100 to open by 2020.

But Qu Hongbin, HSBC’s chief China economist disagrees with much of this gloomier picture. In a recent piece of research, he argues that the government shouldn’t be concerned about over-investment. In fact, Qu says China should be investing more as it is only “half way through” its transition to a fully urbanised, industrial economy.

A key data point is capital stock, which stood at about $10,000 per capita in 2010. This is about 8% of levels in the US and 17% of those in South Korea.

For Qu, that suggests there is plenty of room for additional investment. He also points out that China’s railway network (around 100,000 kilometres in length) is still only similar in size to the US network in the 1870s. Today, US railways are 226,000 kilometres in length. Again, Qu thinks it’s reasonable to assume that investment in Chinese track will continue to grow – and productively so.

In fact, other studies also suggest that more of the Chinese rail network will start paying its way. In a report released this month, the World Bank’s Beijing office has looked at the kind of journeys that people are taking on new bullet trains. For shorter trips, i.e. less than 1,000 kilometres, the new trains are competitive with air travel (something we first talked about in WiC107). High-speed rail is also encroaching on coach travel over similar distances.

But the more interesting finding is that around half the passengers on high-speed trains are travelling on the route in question for the first time.

“These trips… suggest that businesses and individuals are already modifying their behaviour to take advantage of this new mode of transportation,” the report concludes.

This looks like good news ­– offering evidence that high-speed trains are generating new demand for travel and also suggesting that the new network may be generating spillover benefits to the economy by linking new markets and boosting productivity.

Of more immediate interest to the Chinese banks, perhaps, is that ticket sales could soon be enough to start paying down more of the debt incurred to build the line in the first place.

The authors of the report were keen to stress that high-speed rail is only three years old and that it is too early to draw final conclusions.

And that points to the other challenge in assessing many of the larger infrastructure projects – that the effects could be substantial but that we may have to wait to see the true nature of their economic impact.

In many cases that might be a longer delay than the banks would like. But in the meantime, the wider debate will continue.


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