Rail & Infrastructure

Too much stimulation?

The stimulus package saved China, but its infrastructure binge may sour

Too much stimulation?

Top gear? The fastest rail network in the world, built in the fastest time

When it comes to deciding whether something has a beneficial impact or a negative one, perhaps we could all take a leaf out of the book of former Mississippi representative, Noah ‘Soggy’ Sweat.

Almost 60 years ago the politician was asked how he felt about whisky. His reply began: “If when you say whisky you mean the devil’s brew, the poison scourge, the bloody monster, that defiles innocence, dethrones reason, destroys the home then certainly I am against it…”

Soggy then added: “But if when you say whisky you mean the oil of conversation, the philosophic wine, the ale that is consumed when good fellows get together, that puts the song in their hearts and laughter on their lips then I am certainly for it…”

A similar sense of equivocation should apply to any discussion of China’s 2008 stimulus plan. In the wake of the global financial crisis Beijing acted quickly, putting together an impressively expansionary Rmb4 trillion package. It was designed to boost infrastructure spending and to help the economy avoid recession.

For the global economy it was also a welcome and perhaps essential move. When first announced the stimulus amounted to $586 billion (at today’s exchange rate the figure looks bigger at $633 billion). But adding to the firepower was a massive bout of new bank lending. New loans in 2009 doubled to Rmb10 trillion; and a similar tsunami of credit would wash over the domestic economy for much of the following two years.

WiC has been reporting on the impact of this stimulus effect since its inaugural issue. Our first Talking Point explained why we thought 2009 would be the “year of the train”. That was in large part thanks to the major investment plans – accelerated by the stimulus – for high-speed railways. The Railways Ministry announced that it would spend Rmb700 billion on laying track that year, creating 6 million jobs. The Beijing-to-Shanghai bullet train line alone would cost $30 billion, making it the single-most expensive construction project since 1949, reckoned the China Daily.

The whole exercise was gargantuan. The broader plan was to increase the rail network from 78,000km to 120,000km. This feat would require 20 million tonnes of steel and 120 million tonnes of cement. To put that in perspective, you could construct 200 replicas of the Taipei 101 skyscraper with similar quantities.

Beijing’s aim was to build the world’s fastest and largest bullet train network, and at a speed no other country could match. In fact, the project predated the stimulus plan, with the first high-speed track laid as early as 2005. But the Railway Ministry saw the crisis as an opportunity to speed ahead. By 2011 it had put down 10,000km of high-speed rail, four times more than Japan (which had been building its own Shinkansen network for almost half a century).

The goal was to increase this to 18,000km and the ministry touted the wider benefits of trains that could travel at 350km/h. The high speed rail line between Beijing and Tianjin, for example, had cut the journey time from two hours to 30 minutes. This had positive outcomes such as an increase in tourism (mostly from wealthier Beijing visitors, upping Tianjin’s tourist numbers by an estimated three to five times). Just over 100 days after the line was opened, a survey revealed that Tianjin’s 48 biggest commercial enterprises had seen their sales rise 35% over the same period the previous year.

Over its first three years, WiC returned to high-speed rail again and again. But slowly, the focus began to shift to the problems related to such massive spending.

One gripe from a group of foreign manufacturers – that Chinese trains had borrowed technology owned by others – was swatted aside. But there were growing concerns too that the high-speed railways would never be able to pay for themselves. Academics warned that fares were too expensive and seats would be empty. In WiC113 even the Ministry of Railways admitted that its flagship Beijing-Shanghai line wouldn’t break-even “in the short term”. And that line was expected to enjoy the some of the highest passenger traffic.

The next concern was performance. Trains on that flagship route were soon breaking down or experiencing lengthy delays. As reported in WiC116, heavy rains were blamed for a power outage that saw 19 trains delayed in Shandong for several hours. A second malfunction saw more passengers delayed.

But the biggest blow of all was to come in July last year, when a crash in Wenzhou killed 39 passengers and injured 192 (see WiC117). Not only did this bring train technology into question (Chinese manufacturers had insisted it was all their own design, after all), it also got netizens talking about whether over-hasty construction had seen corners cut on safety.

Inevitably, the issue of corruption arose. In February last year, Liu Zhijun, the Railways Minister, was detained for economic crimes. Having run the ministry for eight years, he was thought to have amassed Rmb1 billion as his ‘take’ on the contracts awarded. Suddenly questions were being asked much more openly about how much of the stimulus spending had been siphoned off by corrupt officials or through dodgy procurement practices.

Other evidence of construction shortfalls arose – and in the same month as the Wenzhou rail crash – when a road collapsed in Kunming (just two days after it was opened). A busy bridge in Hangzhou had also given way the previous week.

Netizens began questioning the scale of the stimulus and the infrastructure spend. It might have saved China from recession, but had it served as the greatest get-rich-quick scheme yet for officials and their local business cronies?

The financing of high-speed rail also became a touchstone topic. By last year the Ministry of Railways had run up debt of Rmb2 trillion, an unprecedented amount. But a greater worry was the local governments, whom Beijing had expected to bear much of the burden of the stimulus package.

In WiC48 we first reported on commentary in the Chinese media about little-known entities called local government financing vehicles. For most of our readers this was probably the first time that they had read about the LGFVs, as the international media would pick up on the problem only later. These platforms had been set up by local governments to borrow from state banks in order to finance local infrastructure spend. It was a classic off-balance sheet exercise.

The central bank eventually concluded that local governments were on the hook for at least Rmb14 trillion of financing vehicle debt (much more, say others). And the wider concern was that much of the infrastructure would not make sufficient returns to repay the debt, and as much as $463 billion would go bad for the banks. In WiC113 we reported on news of the first default, a local government financing vehicle supporting the Yunnan Highway Investment and Development Company. It owed banks $14 billion.

The issue remains a thorny one and the current solution is only a stopgap: Beijing has told banks to roll over most of the loans. There will need to be a lot of rolling over: Ben Flyvbjerg of Oxford University calculates that China has spent more on infrastructure in the last five years than in the whole of the 20th century. And in a comprehensive study of infrastructure spending around the world, Flyvberg says their returns often disappoint, especially when a lot of projects get approved simultaneously.

In short, the legacy of all those new roads, railways and airports is likely to be a lot of bad debt.

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