Föhrenbergkreis Finanzwirtschaft

Unkonventionelle Lösungen für eine zukunftsfähige Gesellschaft

Is China Building a Road to Ruin?

Posted by hkarner - 22. September 2016

   Date: 21-09-2016
Source: The Wall Street Journal

SHANGHAI—Even the harshest critics of authoritarian rule generally concede that when it comes to building infrastructure China wins hands down over the rich democracies.

America has practically given up. Every four years, The American Society of Civil Engineers reviews the condition of the country’s crumbling schools, chronically congested major airports, potholed roads and decrepit transit systems and offers an overall grade. Its latest, in 2013: D+.

Meanwhile, China can’t build fast enough. Having recently finished the sixth ring road around Beijing, construction crews are now working on a seventh—100 miles out in some places—part of plans to merge the capital with surrounding municipalities to create a “supercity” of 130 million people, slightly larger than the population of Japan.
The national high-speed rail network, nonexistent a decade ago, is now more extensive than the European Union’s—and expanding rapidly. New dams, bridges, tunnels and subways are all in a day’s work for state planners.

But at what cost? A report by four academics at the University of Oxford’s Saïd Business School has created a stir by arguing that what outside observers often hail as a towering strength of the Chinese system has instead led to colossal waste. All this construction, they say, has produced cost overruns equal to one-third of China’s $28.2 trillion debt pile in 2014, and unless China scales back it is “headed for an infrastructure-led national financial and economic crisis” with global ramifications.

Examining data on 95 road and rail projects, the authors say cost overruns are typically about the same as in democracies, and although China handily wins on speed it comes at the expense of quality, safety and the environment.

Most of the finished routes carry paltry traffic; a few are clogged. Either way, the outcome is grossly inefficient.

If these failures are representative across the board, they not only suggest a Chinese financial blowup but challenge a conventional belief that the more you build the more you lower costs for businesses and households and add to economic growth. In China’s case, infrastructure may be the road to ruin.

Few dispute that debt has become the Achilles’ heel of the Chinese economy as the government builds frantically to boost growth at all costs, even as it seeks to rebalance the economy toward services and consumption. McKinsey calculates that between 2000 and 2014 China added $26.1 trillion to its debt, a figure greater than the GDP of the U.S., Japan and Germany combined.

And debt is concentrated in state-owned enterprises, which build much of the infrastructure. China Railway Corp., the national railway operator, is groaning under almost twice as much debt as Greece. Still, China has budgeted $120 billion for more railway construction this year.

Chinese leaders are well aware of the dangers. “Trees cannot grow to the sky. High leverage inevitably will create high risks,” the People’s Daily earlier this year quoted an “authoritative person”—likely a proxy for President Xi Jinping—as saying.

Skeptics have argued with the findings of the Oxford study. Andrew Batson, the China research director of Gavekal Dragonomics, writes in a blog post that the paper makes “grand macro claims about China based on rather equivocal micro data.” To wit: It shows that China botches individual infrastructure projects like everybody else, but doesn’t demonstrate that it does so on such a scale that it threatens a financial crisis.

Barry Naughton, a professor of China’s economy at the University of California, San Diego, has argued in the past that an advantage of the Chinese model is that it builds infrastructure ahead of demand, rather than waiting for bottlenecks to emerge, like India. Asked about the Oxford paper, he responded: “Building low-return infrastructure is not the most disastrous thing” an economy can do.

Still, there’s a widespread consensus that in recent years the Chinese infrastructure build-out has gotten out of hand. Local governments have run out of worthwhile projects and are getting downright frivolous in their spending habits, while companies are getting gimmicky. Hunan province strung a glass bridge between soaring cliffs to attract thrill-seeking tourists at a cost of $3.4 million.
A Changsha firm threw up a 57-storey building in 19 days.


Scott Kennedy, an expert on Chinese industrial policy at the Center for Strategic and International studies in Washington, says China should keep spending on infrastructure, but in different ways. He says the country needs more investment in rural areas to narrow regional wealth disparities, along with well-designed hospitals and schools.

Of course, these are choices that America can only dream about. Both leading presidential candidates, Hillary Clinton and Donald Trump, have pledged to invest more in infrastructure to promote growth and generate jobs, although it’s not clear how they would break through the political gridlock that prevents funds from being raised and spent.

What is indisputably clear is that in the realm of infrastructure, China has far too much of a good thing, while America and other Western democracies don’t have nearly enough. Both extremes threaten long-term growth, human well-being and financial fragility.


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