China’s crumbling infrastructure model

 

China’s high-speed rail accident has attracted a lot of attention.  Even the FT Lex coloumn has something to say about it, believing that the pace of investment should be slowed.  While I have been arguing here for a while that investment has to be slowed, it is rather harder to see if the “accident” can really be marked as the turning point of the Chinese investment-led growth model as some believe.

Before considering whether it is a turning point, let’s look beyond high-speed rail. And there is a spectacle to see, with more bad news concerning Chinese infrastructure besides the crashing high-speed rail. Four bridges have collapsed just this month on 11 July in Yancheng, Jiangsu, 14 July in Wuyishan, Fujian, 15 July in Hangzhou and 19 July in Beijing.

We have 4 bridges collapsed in 9 days, with another one with some sort of structural failure.  Truth be told, we probably all know that things in China aren’t as reliable as we wish.  Is the wave of “accidents” really unexpected?

The theme I have pursued here in the past months or so is that China has been relying too much on fixed-asset investment to get the economy going (translation: make the GDP numbers up).  That’s why we saw the massive investment programme, particularly in the high-speed rail, in which the government has stepped up the pace of investment in the past 3 years or so.

But is it worth it?  My analysis shows that it probably isn’t (at least for the Hong Kong segment of the high-speed rail).  FT Lex points out that there seems to have been an under-investment in the past on railways in China, and they are now furiously catching up with high-speed rail.  But there is probably no need to be that furious.

A few months ago, professor Kam-Wing Chan offered some stories during Chunyun (i.e. the annual chaotic transportation of migrant workers around the Chinese New Year), explaining why it was not at all a good idea to invest so much in high-speed rail:

Chunyun 2011 is a telling example. Though the new high-speed trains had added notable rail capacity, ironically the migrant masses found it harder to get train tickets home. Many conventional trains were taken off the rails to make room for the fast ones, but their tickets were too expensive to most migrant travellers. This created a holiday crunch even worse than usual for seats on the regular trains. As a result, hordes of low-income travellers were pushed back onto cramped buses or forced to try something extraordinary to get home.

Press reports of several chunyun transportation dramas have caught public attention in the last month. They tell the struggle of the have-nots being left behind in the new bullet-train age.

After queuing for a train ticket home, and being third in the line for 14 hours without success, a migrant in Zhejiang unveiled his underpants in public to protest.

In the south, a migrant couple did not even attempt to get a train ticket. Instead, loaded with luggage and their 6-year-old son, they rode a motorbike for eleven hours, braving numbing wintry weather for 320 km.

Many more did the same despite the icy weather, and soon there were swarms of motorbikes on many highways, with police escorts helping in some instances.

In an even more extreme case, after failing to get a regular train or bus ticket, eleven young migrants decided to implement “Plan C,” and jogged 130 km home together across frigid northern China.

At the same time, some high-speed trains were leaving stations only half full, even in the peak holiday season.

Under-utilisation aside, which is expected (at least I think it is expected), there is the problem of corruption, which is also expected.  As this Reuters report points out, these large scale projects seem to be offering opportunity for corrupt officials to earn quick bucks.  Liu Zhijun, the former Minister for Rail, is the prime example of this, and has been sacked for precisely this reason.

So is the high-speed rail “accident” a turning point for the investment-led growth model as some might believe (or wish)?  It is actually hard to tell.

The problems associated with the investment-led growth model are pretty obvious.  Quality and corruption aside, the investment-led model is also associated with unsustainable debt, as a few other economists and I have argued many times.  There is no question that it has to stop, but whether the government will really stop remains questionable.

The reason is that economic growth is a very important target for the Chinese government.  With weakened external demand post-financial crisis and the small share of consumption in the GDP, investment is the only thing the Chinese can count on when it comes to generating growth.  After all, a government can’t force its people to buy more clothes or eat more, but they can certainly build some more stuff.

If the economy slows significantly (which is likely), there is no reason why the government won’t invest even more if economic growth remains its overriding target. Indeed, it is probably happening already. Even if the investment in high-speed rail is slowed near-term, the Chinese government is now furiously constructing affordable housing, which will certainly help to cushion the potential growth shock if the government happens to be tightening too much.

Despite the obvious unsustainability of the investment-led model, it is still too early to say that the government is rebalancing towards a consumption driven model.

Comments

  1. The question of the debt being unsustainable or not is likely a moot point and of little long-term concern to many. The Chinese powers-that-be will resolve the debt issue – I am confident of that.

    But here we go, another article on the dangerous pace of infrastructure growth, the problems of corruption (real, but exist everywhere – look no further than Wall St for that), issues of quality blah blah blah. I’m going to stick with my philosophy, working pretty well for me so far – life’s too short for an angst ridden existence.

    On the point of using the rail disaster as a lead in to this discussion, I leave you with this:

    http://www.chinahearsay.com/the-most-insensitive-story-on-the-wenzhou-rail-crash/

    • Different China Fanboy

      Surely you are not objecting to the daily “China is doomed” story! 🙂

    • Sticking your head in the sand then Fanboy?

      The Chinese powers-that-be will resolve the debt issue – I am confident of that.

      Hilarious. Is there bubble in belief in Chinese infallibility?

      Hey, I am confident that Europe can solve its debt issues. I am confident the US will get its budget deficit under control. I am confident Australia can support a diverse export sector with the dollar at $1.50.

      Its all nonsense of course, but I’m confident!

    • The same would have been said of the Japanese before they crashed and burned.
      .
      I wonder what happened to the Japan fanboys of the 90’s – a quick end with a Katana? (Now..Dont take that literally).

    • Your post is completely free of content or meaning: you have nothing to back up your bold assertions regarding debt in China, you link to an insipid blog post by someone with clear political biases toward the left, and you invoke the lowest common denominator of writing by using the “blah blah blah.” Well-done.

      When observers talk about “corruption” in China, they are usually referring to local Chinese bureaucrats, whose entire existence is driven by the desire to stoke GDP growth and gain favor from the CCP. Citing “corruption” in the US in terms of Wall St doesn’t work since it does nothing to lessen the degree or even the basic existence of corruption in China. It’s a rhetorical dodge, plain and simple.

      I don’t think China is “doomed,” just like I don’t think the US or Europe or Russia or any of the world’s major states are “doomed,” either. These states have too many citizens and too many resources not to survive in the long run: the US lost 40% of its GDP only 80 years ago, Russia defaulted on its debt as recently as 1998, and China was left destitute by Japan and its own stubbornness barely 65 years ago, but they all recovered in time.

      At the same time, I don’t think China is any more or less exceptional than America. China’s growth is resembles that of most mercantilist states, except on a larger scale. Its policy and its autocratic government are secondary to
      the basic fact that, when you turn 1.3 billion (for now) citizens free to make money after years of stagnation, growth is inevitable. But not growth lasts forever, and no country is immune to basic economic realities, such as credit booms being inevitably reciprocated by credit busts, or malinvestment and debt write-offs taking a major toll on household consumption (the 2001 Chinese debt crisis is the main reason that consumption has dwindled as a share of GDP for the last decade).

      I’ll leave you with this thoughtful piece from Michael Pettis, a levelheaded old China hand whose views are much more nuanced than mine or, for that matter, nearly anyone on the Internet’s:

      http://mpettis.com/2011/07/incentives-and-debt/

  2. The Ministry of Railroad in China is a political force on its own. They even have their own police departments!! So there will be a lot of political maneuvering before the Chinese government can announce the ‘reason’ for the accident.

    Even train accidents are political in China.

  3. Let’s see them take a hair cut on all the Treasuries they own…

    This whole thing is also internally inconsistent. Workers can’t afford tickets for the trains that represent strong economic growth. Says alot.

    Either they start developing social infrastructure, at the expense of fixed asset exenditure (last of the miners please turn out the lights), or they continue on their current path, further dividing society and the wealth gap, until there is a revolution.

  4. I have no doubt that China will have a correction/slowdown, and it could be massive.

    I know from personal experience in China that finance is hard to get unless it’s shadow market derived. I know they are seeking, in the part of China I’m familiar with, foreign funding for projects, so there are warning signs.

    Property in the east of China is in a bubble, and local economists will fess up to that, but the centre of China is trying to develop, but funding is difficult to get. You can see it on building sites, and rail projects to name a few.

    However, I’m pro China for all their faults which are many. If we didn’t have the mining exports at this time, where would this country be? Given we have mining, housing, and a service economy pretty much, other than mining it’s looking a bit shaky these days.

    From what I’m seeing the Greens will make mining here so difficult that only the BHP/Rio’s etc. will be able to afford the compliance.

    I’d love to see more of the mineral processing done here, but economically the cost of labor, compliance, and lack of skills stops a lot of those possibilities.

    I think we need to clean up our own back yard which is pretty grubby IMO, before constantly bagging China. What is Australia’s Plan B? I keep hearing we need to be in surplus to get infrastructure projects going, but how is that possible the way federal governments spend.

    There does not seem to be a way to convince our politicians to resolve the dutch disease, and build this country, so what’s the solution? NBN is going to save us I keep hearing. Let’s see, but I’m not convinced.

    • There is no Plan B. Its China or bust!

      If we didn’t have the mining exports at this time, where would this country be?

      New Zealand.

  5. If you all continue to espouse that mining saved Australia ie China from the effects of the GFC and that’s a good thing.

    Then why are you so against the politico-housing complex which actually has had a bigger impact by far than mining over the last 10 years? The answer surely is not income versus debt as isn’t the future boom going to repay the debt?

    In my world both represent massive misallocation of resources

      • Nothing has saved us from the GFC. Mining and housing only delayed its effects….until now.

        The only thing mining or future boom could do is to help repay the debt that went into housing with the cash out being mostly consumed.

        All of which means that my children and grand children already are worse off with less opportunities, with an outlook of things getting worse.

  6. Take a look at our own history.

    In Melbourne, the early rail network was exploited by corrupt council officials who profited from land value hikes.

    http://en.wikipedia.org/wiki/Railway_Construction_Act_1884

    At some point in the future, the white elephants will be written off and the public will benefit from the remainding viable lines for decades to come.

    But the note that travel was more congested due to the existing slow trains being cancelled to make way for unaforable fast trains did make me smile.

    I think situation like this deserve their own acronym. How about,

    “Not Better new” (NBN)?

  7. China’s bridge collapsing epidemic started around 2005 but could be earlier.

    If bored, Google ‘china bridge collapse’ and you’ll find alot more.
    2007 – Fenghuang county bridge collapse. If you enlarge the main pic you’ll notice a lack of reobar.
    http://www.dailymail.co.uk/news/article-475309/22-dead-road-bridge-collapses-China.html

    2010 – Central Shanghai
    Recycling gone wild.
    http://www.weirdasianews.com/2010/02/05/shanghai-wonderbridge-trash-collapses/

    2011 – Hangzhou bridge
    Again lack of reobar
    http://www.wantchinatimes.com/news-subclass-cnt.aspx?cid=1103&MainCatID=&id=20110717000076

    My Favourite (no pics)

    Jun 11, 2007
    http://www.reuters.com/article/2007/06/11/us-china-collapse-idUSPEK16970120070611
    “A Chinese court has jailed two officials after they let a blind contractor build a bridge which collapsed during construction and injured 12 people, the official Xinhua news agency said Monday.”

  8. I guess that Californians will have to hope that their newest bridge now being built in China will not suffer a similar fate.

  9. I am a freelance product engineer. My current customer designs localy but manufactures in China.

    There is a huge variation of suppliers there. You can order from companies certified at Aerospace levels and Automotive levels. You can also order from uncertified companies that range from very competent to dirt floor opperations that can’t read drawings.

    One design needed “bike chain” and we considered a few sourcing options. One supplier offered a variation that was cheaper because it did not have any manganese in it, and manganese was a trace element that added 5% to the purchase cost. But the manganese chain had less durability and a tendency to stretch excessively with use. I wanted to understand “If it’s so marginal, why do they offer it then?”

    China is the great land of cost downs. They have had just about every western manufacturing interest come over and ask, “could you make it here for us cheaper?”. For items already manufactured in china there are now second and third generation designs where the same question gets asked again and again. And they rarely say “No”. With labour costs so low the only cost down is to remove material or to substitute an inferior grade. If it’s not breaking it’s over specified and can be trimmed down somewhere.

    There is an almost Italian national preferance to not saying “No” when presented with a business decision. So it is up to the buyer to beware. There is a fair degree of outright corruption but there is a more underlying culture of just saying “Yes” and then dealing with the consequences latter.

    Considering where the country has come from, there is a lot to admire and respect in that approach, providing it doesn’t end up as a train wreck.