Sunday, November 6, 2011

President Obama's (and Others') Clueless Love of Chinese Infrastructure Spending

Over the last few weeks, President Obama has traveled the country campaigning on the taxpayers' dime trying to sell parts of his Big Jobs Plan.  In order to sell a chunk of that plan - a massive new government spending spree on domestic infrastructure - Obama last week repeatedly cited China's infrastructure spending as the prime example of how the United States is desperately falling behind and needs to catch up:
Congress is expected to vote this week on a part of the jobs bill that would fund $50 billion for roads and bridges and $10 billion for other infrastructure projects. Obama said these projects would ease the unemployment rate, which was 9.1 percent in September, and rebuild America’s decaying infrastructure.  
“It makes absolutely no sense when there’s so much work to be done" and more than a million construction workers unemployed, Obama said, standing in front of the Francis Scott Key Bridge, which has been declared structurally deficient...  
Obama said Americans are paying nearly $130 billion a year to use bridges and roads that are out of date and unequipped to serve today’s society. He said the U.S. could be paying workers to rebuild these roads and compete with other countries transportation systems.  
Europe invests twice as much of its overall economy as the U.S. does on transportation infrastructure, Obama said, while China invests four times as much. “How do we sit back and watch China and Europe build the best bridges and high-speed railroads and gleaming new airports, and we’re doing nothing?” Obama asked.
Envy over Chinese infrastructure spending certainly isn't isolated to President Obama, or even Democrats.  Indeed, China's huge infrastructure expenditures are routinely cited by sinophobes of both parties as a clear indicator that the Chinese are eating our economic lunch these days.  For example, here's noted JapanChina-obsessive Clyde Prestowitz lamenting the disparity between the US and Chinese infrastructure budgets in his attempt to convince the American people that the US government should create an "Infrastructure Bank":
Just to maintain the current [US] transit and highway systems will take about $100 billion above current annual revenues for the next 25 years. To improve the system would take $150 billion annually. China, with an economy less than one-third the size of the U.S. economy, is spending about $1 trillion on upgrading its infrastructure. The total U.S. bill for a modern infrastructure would probably be on the order of $5 trillion to $10 trillion over the next quarter-century. That's a lot of money, and it's unlikely to come from either increased taxes or reduced government expenditures. It could, however, come from an Infrastructure Bank that could use an initial government-funded capitalization to leverage private capital on a project-by-project basis.

But don't hold your breath on this. It's not going to happen because of the policy issue.
Leaving aside for a moment the fact that the supposedly horrible state of the United States infrastructure is a highly questionable assumption, let's focus instead on the notion that China's massive infrastructure spending is something the United States should emulate.  Yes, sure, they're spending a lot of money on roads and bridges and rail lines, but beyond the sheer dollar-value, are these projects worth the money and, more importantly for our current purposes, worthy of US praise and imitation?

Well, if a high-level member of China's own planning commission is to believed, the clear answer to those questions is "no."  In a recent, eye-opening interview with Caixin, Chinese Academy of Sciences (CAS) academic and National Planning Expert Committee member Lu Dadao thoroughly explained that China's infrastructure system is rife with problems and in desperate need of reform. The entire interview is worth reading, but here are some of the highlights:
Caixin: What's the status of China's transportation construction initiative?

Lu: It's mainly about excessively big, redundant construction and unfair competition, as well as a lack of coordination between different modes of transport. First, look at expressway construction. In 2008, the nationwide total mileage plan was adjusted up to 100,000 kilometers. That year alone we built 6,433 kilometers and invested a total 600 billion yuan. Nationwide expressway mileage is expected to grow to a staggering 180,000 kilometers, if we add provincial and national building plans.

Personal vehicle traffic levels are too low on some expressways built over the past five years. Considerable stretches of expressways completed in central and western regions are usually empty, simply basking in the sun. Thus, expressway construction has suffered from excessive expansion. It's gotten out of control. Second, over-expansion for coastal port development planning and construction has clearly led to excessive competition between ports. China's port throughput capacity reached 4 billion tons in 2008, yet coastal communities continue to compete in the race to build large-scale berth and shipping container ports. Every port authority makes lofty claims about becoming a coastal or international hub for commercial shipping.

Additionally, many regional airports are being built blindly, with huge investments but no feasibility studies. This has led to major losses. In 2008, national subsidies to small- and medium-sized airports reached 9.3 billion yuan. But by 2020, we'll have added another 100 or so airports, mainly regional airports. Every year recently, construction has begun on about 20 regional airports, and more are waiting to be approved.

Moreover, there's been a surging wave of railway construction projects, including intercity rail linking big cities, suburbs and small cities in some provinces, regions and municipalities. Our research group found there will not be enough traffic to support the big, city-centered railway transportation systems after they are completed....

Currently, China's expressway network accounts for 1.62 percent of total road network mileage, which is higher than in either Europe or America. In eastern regions, the expressway ratio is as high as 2.4 percent, and in the west it has reached 1.16 percent. This sort of road network clearly reflects one fact: Expressways, which play a backbone transportation role, are mismatched against other kinds of roads. The total expressway length is too great. A reasonable expressway mileage ratio is around 1.2 percent.

Caixin: Why has China's transportation construction program been excessive?

Lu: The main cause is a lack of consideration for China's national conditions, its stage of socio-economic development, and development trends. More than 30 years of high-speed economic development have caused China's GDP, population and urban population to expand rapidly. But China's per capita GDP is still quite low, and we can't use European or American per capita indicators such as transportation capacity or road length as a basis for the scale and rate of our development.

Caixin: Profit-driven but unrealistic "leapfrog" development has been widely mentioned in official documents. Are the pursuit of GDP growth and performance stars for government officials driving the transportation campaign?

Lu: Of course. Some local leaders think a big highway investment will play a large role in boosting the local economy. The search for profit and returns on short-term investment is prominent. Wild enthusiasm among local governments for transportation development often forces central government plans to be adapted to local plans. Plans for some local government transportation networks may be redone after new leaders are appointed. In addition, the limitations of current management authority have led to fragmentation among various modes of transport, which relevant government departments have a hard time coordinating....

Caixin: After the Wenzhou train crash, everyone has been concerned about the next step for high-speed rail planning and construction in China. What kind of plan do you think high-speed rail construction should follow?

Lu: Our view is that high-speed railway development in China has only begun. We still lack practical experience in safety and economic efficiency, as well as coordination with civil aviation and expressways, and we need to consolidate existing domestic and international experience. Internationally, the rational operating range for a high-speed railway is considered to be between 180 and 800 kilometers. On either end of this range are the operating ranges of expressways and aviation, respectively.

Caixin: There is a lot of talk about reforming various government departments. How do you see relations between transport authorities and other institutions?

Lu: Transport-related departments are currently too strong. Each has its own, strong planning and design institutions. But authorities in charge of comprehensive coordination are too weak and cannot negate the plans of functioning departments, such as the transportation ministry. There is no overall coordination for transportation construction, and department goals are neither unified nor coordinated. In this atmosphere, enthusiasm is stoked inside various departments, and the result is that each department launches individual, large-scale projects that greatly increase the overall scale and contribute to imbalance in the transport structure....
Behold, the miracle of central planning!  On the bright side, China's vaunted economic plans are at least consistent: now they have creepy ghost highways to connect their creepy ghost cities.  Heh.

But seriously, considering all of these problems, I'm sure that the Chinese government has pulled back on the infrastructure spending in order to implement the necessary reforms that Lu has proposed, right?

Fresh funds appear to be flowing into China's beleaguered railway sector more than three months after a deadly train crash, which embarrassed Beijing and prompted it to reassess key aspects of the rapidly built system.

China's state-run Xinhua news agency, quoting unnamed sources, said on Tuesday that the Ministry of Railways expects a 200 billion yuan ($31.45 billion) funding injection soon, though it didn't indicate the source of the support. Calls to the Railway Ministry Tuesday evening weren't answered.

Also Tuesday, bullet-train and locomotive maker CSR Corp. said the ministry late last month made a key 6 billion yuan ($954 million) payment for equipment. Also, in recent weeks, the Railway Ministry itself raised 40 billion yuan selling domestic bonds.

Railway-sector stocks have been buoyed in recent days on hopes that money is being unlocked, in a possible sign that construction halted on thousands of miles of track may resume. Any fresh commitment to railway spending by Beijing is likely to be seen by financial markets as the latest sign authorities are moving to underpin the economy in the face of slowing growth.

Railway work in recent years has been a proud Chinese achievement, and a key aspect of the country's spending on infrastructure construction. But spending slowed this year after the collision in July of two bullet trains that killed 40 people and appeared to undermine the safety of the system. The disaster added to pressures that already included tighter Chinese monetary policy as well as closer scrutiny in the wake of scandals and equipment snafus.

Money has appeared tight at the Ministry of Railways, one of China's largest government institutions. After the July crash, analysts began to question how it might pay its long-term debts: Standard Chartered Bank estimated its debts at the end of the first quarter of 2011 at $300 billion and a debt-to-assets ratio above 58%. By October, railway contractors said work on thousands of miles of track and tunnels had been halted due to cash shortages, a slowdown that in some cases left migrant workers stranded.

Though the July crash prompted authorities to promise a full safety review of the high-speed railway system, Beijing hasn't announced a pullback from its commitment to modernizing the railway, including adding new freight capacity.

Still, there is no sign China's railway troubles are over.

Top railway officials, including the minister, were fired this year by Communist Party investigators on charges of corruption, though little information has been disclosed publicly. Speculation has also swirled that the central government could revamp the agency, possibly by separating its operation responsibilities from oversight roles.

Safety questions continue to hover over high-speed trains following the July accident in the eastern city of Wenzhou. It led to a recall of certain locomotives and a pledge by Beijing that inspections would be undertaken. One sign that clouds still linger: Beijing hasn't yet released a report of a probe into the July 23 crash that was expected in mid-September.
To summarize: government mismanagement of China's supposedly-awesome infrastructure spending has resulted in many wasteful - and often dangerous - bridges, highways and railways.  And despite serious problems surrounding China's vaunted rail program, the government is quietly dumping even more money into the current, broken system in order to maintain arbitrary GDP and employment benchmarks.  But, hey, I'm sure that they've, like, totally fixed all of that, right?


China's infrastructure problems are hardly unique to China: they're typical of any highly-centralized plan to use construction spending as an economic and employment crutch.  And yet President Obama and Mr. Prestowitz (and many others) think we should copy China's master plan?

No thanks.

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