China's infrastructure investments 'threaten its economic growth'

[Nilgiri]

http://www.scmp.com/news/china/econ...ture-binge-may-be-doing-more-harm-good-oxford

China’s infrastructure binge may be doing more harm than good: Oxford study

For all the roads, bridges and railways that China builds every year in an effort to keep the economy humming, the massive splurge may not be having the desired effect.

That’s because more than half of China’s infrastructure investment has destroyed economic value instead of generating it, according to a study from the University of Oxford’s Saïd Business School.

“The evidence suggests that for over half of the infrastructure investments in China made in the last three decades, the costs are larger than the benefits they generate,” according to Atif Ansar, one of the study’s co-authors.

What’s more, unless China shifts its focus to fewer and higher quality types of public works that leave a positive legacy “the country is headed for an infrastructure-led national financial and economic crisis, which is likely also to be a crisis for the international economy,” according to the analysis that’s published in the Oxford Review of Economic Policy.

China spent more than US$10.8 trillion in infrastructure in the last decade alone, according to Bloomberg calculations based on official data of investment in categories such as transport, storage, power supply and water conservation.

The Oxford study’s findings jar with views that China’s aggressive government-led infrastructure spending is vital to keep growth on track. Researchers examined 21 large rail projects and 74 road projects whose starting dates ranged from 1984 to 2008. They then compared the economic value of those to 806 transport projects built in rich democracies.

Instead of finding a long lasting, positive economic legacy, the Oxford study found that 75 per cent of the transport projects in China exceeded budget. While one third of the roads built were congested, 41 per cent of them have low usage.

Both extremes are equally undesirable because “large unused capacity equals waste, as does too little capacity,” according to the paper.

The buildup has also exacerbated China’s swelling debt as cost overruns equal about a third of the nation’s US$28.2 trillion debt mountain, according to the paper.

To be sure, proponents can argue that without massive infrastructure spending after the 2008 global financial crisis, the world’s second largest economy would have sunk into a deep trough, taking global trade with it.

Still, the evidence from the Oxford study is that, when it comes to China, sometimes less can be more.

“China’s infrastructure investment model is not one to follow for other countries but one to avoid,” the researchers wrote.

============================

Full study available here:

https://arxiv.org/ftp/arxiv/papers/1609/1609.00415.pdf

@Bilal9 @Syed.Ali.Haider @PARIKRAMA @anant_s @Rain Man @farhan_9909 @Shotgunner51 @ahojunk @Gibbs @Godman et al.
and all members interested in economic matters.

Please share your views on this study. No trolling please.

 

[PARIKRAMA]

There are some who believe Chinese infra projects have seen a little too much investments, cost over runs being hidden , benefits over stated and in fact most are due to political benefits to elite class with migration of many folks.

Now this might be in general a western view. We do require a unbiased view from Chinese folks and from people whether they believe such a development is giving them benefit or not.

I firmly believe that govt is overplaying the investment infrastructure to continuously keep the economic engine running. The result is debt being increased and long gestation period for the project to generate enough cash back into the system. I sincerely believe the whole economy needs to move from expansion to more of re orientation of all governmental investments by emphasising on increasing efficiencies of all existing components of the economy especially the long infra projects and see how incurred debt by SEC can be reduced and make finanical position much better. And using less elaborate measures like government spending on big infra projects is a pre requisite.

But then I would still want a Chinese scholar to comment and say bcz they know about their country and economy better .. western beliefs and theory most times are colored and critical. Let's see if we hear from a inside country source.

 

[AndrewJin]

There are some who believe Chinese infra projects have seen a little too much investments, cost over runs being hidden , benefits over stated and in fact most are due to political benefits to elite class with migration of many folks.

Now this might be in general a western view. We do require a unbiased view from Chinese folks and from people whether they believe such a development is giving them benefit or not.

I firmly believe that govt is overplaying the investment infrastructure to continuously keep the economic engine running. The result is debt being increased and long gestation period for the project to generate enough cash back into the system. I sincerely believe the whole economy needs to move from expansion to more of re orientation of all governmental investments by emphasising on increasing efficiencies of all existing components of the economy especially the long infra projects and see how incurred debt by SEC can be reduced and make finanical position much better. And using less elaborate measures like government spending on big infra projects is a pre requisite.

But then I would still want a Chinese scholar to comment and say bcz they know about their country and economy better .. western beliefs and theory most times are colored and critical. Let's see if we hear from a inside country source.

The media is also hyping about China's "ghost town" when they specifically chose the project which is still under construction or in the first 1-3 years of operation. In China, we always eye the future. Some project you will probably think it is underused in the first or second year, it will eventually become congested....During 1990s, we built a lot of 4-lane expressway in my province when at that time very few people owned a private car....How about now??? My province's first expressway is now famous for traffic jams and upgrading projects are everywhere....Who should be responsible for the short-sighted plan? Media? Or people influenced by the lunatic media?

Have a look at China's high-speed railways.
It's the same corporate media which sensationally uses photos of a 5am or 6am train to show how unpopular HSRs are in China....And I have read indian media intentionally used biased data, such as the ticket price in China, they only mentioned first class ticket price when first class seats account for less than 10% of a train...
@anant_s @TaiShang @cirr

Prestituation. No better word to describe it....
I hope indians would not fall in their trap....

 

[anant_s]

I would want to know a bit more here.

1. In last one decade Chinese government led funding of infrastructure project as a means of stimulus package after global recession. we must note here that infrastructure sector and associated construction sector keeps several support industries going. For example when you build large rail roads, you are automatically help cement, steel, heavy construction equipment, electrical equipment too. Similar analogy for roads and marine industry (ports etc) can also be given. Now if you ask results, in the years (2008-2015), when whole world was struggling with recession, China was still logging strong growth and a large credit of this must go to central bank assisted massive investment in infra sector.
   
   
2. Several infra projects do not yield immediate results and while return on investments might be low, we need to take into account socio-economic parameters as well into account. Example, we build a railway line in far flung areas, that might not generate immediate passenger or freight revenue, but if it allows industry to spread in that remote area will bring in long term benefits of avoiding population movement and uniform distribution of employment opportunities, keeping real estate prices in check. I discussed a similar thing with @WAJsal on his CPEC tread. This i believe remain true anywhere in the world.
3. Third is problem that China might face. I think the real threat lies in Chinese manufacturing overcapacity and if world remains in slow down era for another 5-6 years, there could be a real problem for export dominated Chinese economy.
4. In continuation of (3) above, ex RBI chief Dr. Rajan once wrote that economies need to evolve constantly based on what their core strengths are. For example, India rode heavily on Agriculture for several decades, before benefits of good education for generation after independence brought in an opportunity for manufacturing, engineering and later IT and service sector. He further opined that economies based on using natural resources (minerals, fossil energy etc) at some point in time will find themselves in trouble. This looks more and more true with Oil exporting economies feeling the heat of low crude prices.
5. To move ahead and prepare for an economic future, we cannot predict accurately, the only solid bet is development of human skills and education.
6. To summarize, measures like low interest rate regime, economic stimulation, preferential investment in certain sectors do help, but only in short term. The effects of these measures tend to saturate and then unless there is a willingness and preparedness to change path, we find ourselves in a vicious cycle, like world finds itself in that of a very low growth.

Tagging experts for more on this

@Levina @Rain Man

Have a look at China's high-speed railways.

That's a very good example to show, how persistent investment can lead to creation of business opportunities hitherto unknown.

Today China's HST network stands at an amazing 20000 kms.
There is a huge growth in passenger revenue as well, with more people migrating from Air to HST travel.
However if somebody asked 15-20 years ago about such a massive investment in a relatively risky (economically) public transport technology, most economies would not have dared to take a plunge. But today we see obvious benefits of a consistent policy.

 

[Offshore]

The media is also hyping about China's "ghost town" when they specifically chose the project which is still under construction or in the first 1-3 years of operation. In China, we always eye the future. Some project you will probably think it is underused in the first or second year, it will eventually become congested....During 1990s, we built a lot of 4-lane expressway in my province when at that time very few people owned a private car....How about now??? My province's first expressway is now famous for traffic jams and upgrading projects are everywhere....Who should be responsible for the short-sighted plan? Media? Or people influenced by the lunatic media?

Have a look at China's high-speed railways.
It's the same corporate media which sensationally uses photos of a 5am or 6am train to show how unpopular HSRs are in China....And I have read indian media intentionally used biased data, such as the ticket price in China, they only mentioned first class ticket price when first class seats account for less than 10% of a train...
@anant_s

Prestituation. No better word to describe it....
I hope indians would not fall in their trap....

Let the western and India have their opinion..
We as a Chinese will always have our own way.. Foreign people will never reach our point of view..
That's because we are born with superior IQ..
In the end of time, history will tell whether Chinese investment on infrastructure is bad or not.

 

[AndrewJin]

Let the western and India have their opinion..
We as a Chinese will always have our own way.. Foreign people will never reach our point of view..
That's because we are born with superior IQ..
In the end of time, history will tell whether Chinese investment on infrastructure is bad or not.

It's a big picture.....
It's very hard for outsiders to gauge what's really happening on the global stage.
Just like the battery explosion news, better to look at the background using a big history perspective.


Wuhan

Pearl River Delta

 

[Gibbs]

I think you cant compare, infrastructure growth modules are not uniform globally, Remember china is still a developing nation with massive capacity to still grow, while in the West it has somewhat become stagnant, Like @AndrewJin mentioned similar hue and cry was made about ghost cities and multi lane highways in china some years ago, Only to see those arguments been turned upside down in couple of years time

Got to admit though i haven't read the whole study yet

 

[Levina]

In continuation of (3) above, ex RBI chief Dr. Rajan once wrote that economies need to evolve constantly based on what their core strengths are. For example, India rode heavily on Agriculture for several decades, before benefits of good education for generation after independence brought in an opportunity for manufacturing, engineering and later IT and service sector. He further opined that economies based on using natural resources (minerals, fossil energy etc) at some point in time will find themselves in trouble. This looks more and more true with Oil exporting economies feeling the heat of low crude prices.

True.
China is already in the red zone for future supplies of nearly all crucial mineral commodities. Ergo the government of China has entitled a number of local state-owned and private companies to actively pursue mining deals throughout the world.

Tagging experts for more on this
@Levina @Rain Man

Experts?


I just fainted


The discussion sounds interesting, will keep a watch.

 

[JSCh]

China infrastructure investment model under fire — FT.com

Some quote from above:

Other economists dissent from Mr Ansar’s criticism. Even if an infrastructure project does not directly generate enough cash flow to cover its financing costs, they argue, positive externalities can spur enough economic activity that makes the project worthwhile.

“For most of the past few decades, the bulk of Chinese infrastructure investment has served the overall economy reasonably well. If you compare China with most other developing countries, they would love to be in China’s shoes in terms of having all that infrastructure,” said Louis Kuijs, head of Asia economics at Oxford Economics and former senior China economist at the World Bank.

But Mr Kuijs acknowledges that China now faces diminishing returns from additional infrastructure, as the most productive investments are already largely complete. Other analysts also see problems with excessive and wasteful infrastructure investment but doubt it will lead to crisis.

“The authors’ data on individual infrastructure projects tell us that China is basically no worse and no better than the rest of the world in terms of managing infrastructure projects — just like everywhere else, they often run behind schedule and over budget,” said Andrew Batson, China research director at Gavekal-Dragonomics in Beijing.
​

About that China infrastructure paper that is making the rounds | Andrew Batson's Blog

QUOTE:

The core of the paper is an examination of the performance of individual infrastructure projects in China, which the authors compare to projects undertaken in other countries. (The paper’s dataset is exclusively composed of infrastructure projects in China funded by the Asian Development Bank and the World Bank. One might therefore wonder whether the findings say more about the procedures of these multilateral institutions than about China’s unique circumstances. But let’s not quibble.) They find that infrastructure projects in China often cost more and take longer to complete than expected, and that planners often do not accurately forecast demand for the completed projects. Yet these seem to be general problems of large construction and engineering projects around the world:​

 

[yusheng]

I have read the article. It is funny.

The article applied high speed railway and roads project as study projects, and applied too accounting financial methodology, with many limitations itself, to analyze the return of the single project, such as cost, benefits, and financial risk. Then it concluded that most of the projects are not financially wellbeing. If its analysis was correct based on insufficient data, however it forgot that China is a socialism country which doesn’t take the single investment return as priority as private company does; the whole social return is more valuable and which is not easy to measure and study.

I have an expensive cast iron bathtub in my house, which I seldom use it, but I don’t care because I can afford. We enjoy what we buy, we enjoy what we build, no matter what will happen future, we ,Chinese only know hard working returns lots. that is the essence of the economy.

 

[cirr]

One only needs to bear in mind that on this day, China's infrastructure density, even in its relatively developed regions, is far from the level enjoyed by most European countries.

 

[yusheng]

The fundamental difference between the western and the Chinese is that:

The western try to establish a model for everything, and hope the model can be applied for anything related and forever though the model needs many funny assumptions;

However, Chinese don’t believe such methodology is good way to manage the world and we may consider the model but we are good at breaking the assumptions and make the model invalid.

That is the really problem for the western to understand Chinese.

 

[VCheng]

“The evidence suggests that for over half of the infrastructure investments in China made in the last three decades, the costs are larger than the benefits they generate,”

The investments in basic infrastructure such as transport,, energy and public works are quite often not just for direct economic benefits, but for long term strategies that pay for themselves many times over in the additional and indirect benefits they generate. What China is doing is based off this philosophy, clearly, and they are correct in doing so, in my view.

 

[TaiShang]

Another ghost cities story in the making. This time under the academic garb.

What the article basically says it do not build the most needed public infrastructure in a huge country that has really started its economic development some three decades prior because they do not make money.

the massive splurge may not be having the desired effect.

What is the desired effect that may not take place? That people travel more conveniently, goods and services are transported faster, and the country's remotest and poorest parts are just becoming accessible?

Besides, one wonders whether public projects such as highways, railways, schools, public housing and ports are really supposed to generate direct monetary gains. After all, public structures are not for direct gains, but more geared towards positive externalities which include long term indirect monetary gains (how better infrastructure built recently help invigorate China's internet based economy?) as well as betterment in people's life (How to calculate the comfort of a quickier, smoother and more comfortable trip back home?).

Public infrastructure investment is not supposed to be urgently profitable. Taiwan's rail and subway are both in the green (loss).

Large public projects also tend to miss schedule and may end up costlier. Commodity prices fluctuate. Labor cost increase. Unanticipated challenges (both bureaucratic and natural) might derail or put on hold projects.

It is all the very nature of large public investment. China is in fact just in the beginning of it. The construction is not a luxury for China. It is a need if it does not wish to end up like India.

Infra will mature in time, then it will slow down. But we have a good three decades to it. China will definitely contine its New Deal of economic nation building.

If one wishes to see what miracles infra development beings, compare China's Tibet with Indian border towns.

Or compare underdevelopped Western China GDP with that of entire India.

 

[GS Zhou]

Large infra. investment is NOT made for immediate profit. For example, China now has about 120,000 km expressway network, the network itself is in loss; but the build of the road network feeds the domestic steel, cement, heavy equipment industries.

What's more important is the indirect benefits brought by the roads. For example, car sales. Without the high quality roads that connecting all Chinese cities together, few families will be interested to get a car, thus no chance for China to become the largest car maker in the world. Compared to the size of the automobile industry, loss in roads system is ALMOST NOTHING.