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CHINA
News on China
China gambles on huge projects to avert slump
In its own ‘New Deal’, Beijing is injecting money into the economy to ride out a period of growing unemployment, falling prices and low consumer spending in China
(Chongqing, China) The engineers who run China have decided that this congested south-
western city, cupped by the Zhongliang Mountains and divided by flood-prone rivers, needs a complete makeover.
Construction crews have carved a small canyon in the centre of town, where they are burrowing through mountains to create 1,000 kilometres of superhighways, four new railway lines, an urban light rail system and a new airport.
Chinese officials are also promising parks, drinkable tap water and riverside promenades for the city’s 30 million residents.
The cost of remaking Changing into a metropolis and a transportation hub in China’s heartland is estimated at US$200 billion over the next decade – most of it shouldered by the government and state-owned banks – a bit more than the US Congress spent, in adjusted dollars, to build the American interstate highway system in the 1950s.
China’s top leaders, many of them trained in the mechanical sciences, are not just making mountain cities into transportation hubs. They also want to pump 48 billion cubic metres of water each year from south to north, transport natural gas from Central Asia to China’s south-east coast, and construct the world’s largest dam, longest bridge, fastest train and highest railroad.
Even more than modernising its infrastructure – or, as some critics see it, erecting monuments to its emerging might – China is desperate to keep the economy growing quickly.
Over the past few years, it has reached deep into the national treasury to finance projects that it hopes will create jobs and stimulate enough growth to ensure social stability and keep the Communist party in power.
As a new generation of leaders takes control, China is using heavy government investment to escape the worldwide slowdown and maintain growth above the 7 per cent level that the government deems crucial to avoiding mass unemployment and urban unrest.
The plan has worked – so far. China last year reported defiantly robust growth of 8 per cent, attributed to surging exports and a nearly 25 per cent increase in state-directed investment.
But the strategy is risky. The once fiscally prudent central government is now running hefty budget deficits. State banks, told a few years ago to clean up bad loans and begin acting like capitalist lenders, are pumping tens of billions of dollars into officially sponsored projects that have sometimes failed to produce real returns.
The Communist Party has pledged to support private companies and allow the market to flourish. Financially though, the authorities are monopolising the country’s private savings for a building boom that dwarfs the US New Deal and the Marshall Plan.
‘The country has relied very heavily on government investment to lead the economy,’ said Shen Lishen, a top economist at the Chinese Academy of Social Sciences. ‘It really should begin to fade out, not become part of the long-term economic plan’.
Beijing opened its coffers to stimulate growth beginning in 1998, when it feared that the financial contagion spreading around Asia would infect China. Instead of fading out, the spending is getting more ambitious.
The government, state banks, and companies and foreign investors collectively spent $200 billion in the first 11 months of last year on basic infrastructure projects, one quarter more than they spent in 2001, according to the State Statistics bureau. That represents about 15 per cent of China’s gross domestic product (GDP), or about the proportion that the United States spends on health care.
Even for the nation that built the Great Wall, the scale of construction is extraordinary. Not long ago, Beijing had China’s only subway. Now Shanghai, Guangzhou and Tianjin have tunnelled under heavily-populated residential districts to install subway systems. Seven other cities have begun construction on their own subways.
By 2005, China plans to add 13,500 km of railroad, half of that to places that now have no rail service. Shanghai recently started running the world’s first magnetic levitation train, which zips to its new airport at up to 430 kmph, faster than any other commercial train. And railroad officials are completing plans for a US$22 billion high-speed track from Beijing to Shanghai.
Meanwhile, workers carrying oxygen tanks are pounding spikes for the 1,070 km-long Qinghai-Tibet railroad, which will operate at elevations of up to 16,600 feet on its way to Lhasa, Tibet’s capital.
The Three Gorges Dam, designed to tame the mighty Yangtze river and generate the power of 18 ordinary nuclear power plants, was for years considered the world’s most expensive project, with a price tag of US$ 30 billion. It has now been eclipsed by China’s latest engineering colossus: a US$ 60 billion system of channels and pump stations to divert water from the Yangtze in the central part of the country to the Yellow River in the north. In late December, Chinese officials broke ground on the first phase of the project, which they say will alleviate desertification and drought.
Like many large cities, Chongqing is now following what officials refer to as the ‘Shanghai model’. That refers to the heavy financial support that the central government gave to Shanghai over the past eight years, after two former city leaders, Jiang Zemin and Zhu Rongji, became China’s leaders.
Like Chongqing, Beijing is also pressing the central government to support a huge urban improvement plan including new subway lines, light rail, highways and even a giant new opera house to dress up the city for the 2008 Olympics. Beijing estimates the cost at US$ 34 billion – far more than potential revenue from the Olympics alone could justify.
Some economists argue that such investments are smart bets on the future. Only a small percentage of the urban population earns middle-class wages, and China cannot rely on consumer spending to spur growth the way it does in most industrialised nations.
China also needs to expand much faster than wealthy countries to generate jobs for workers laid off by state-run factories and for farmers flocking to the cities to seek something better than subsistence income.
‘The government is sucking up savings and investing in the future’, said Andy Xie, a regional economist for Morgan Stanley. ‘The financial returns on these kinds of investments are low. But the payoff for the economy is high’.
Xie argues that China’s workforce is becoming significantly more efficient. He estimates that China is experiencing productivity growth of 4 per cent a year. An eight-lane highway between two crowded cities greatly enhances productivity when it replaces a two-lane road. Cell phones have revolutionised communications in a place where fixed-line phones were scarce.
Fred H, chief China economist for Goldman Sachs, agrees. He argues that as China suffers through a period of falling prices and low consumer spending, Beijing is right to inject money into the economy.
‘This is China’s New Deal’, Hu said. ‘Every problem is easier to solve when growth is faster.’
Yet the risks are also mounting, in part because China is trying to outrun or perhaps run away from its inherited burden of socialist inefficiency. Banks still give loans to bankrupt factories to prevent labour unrest. Now the central government has taken to running a budget deficit of about 3 per cent of economic output.
A State Statistics Bureau report last August bemoaned copycat projects that waste state funds. The report cited one unnamed Chinese province that had 800 industrial parks under way at the same time, most of them unneeded. The bureau also said a rush to build airports had led to a glut, with 127 of the nation’s 143 airports running losses.
But China is not tightening its belt. Like the departing leadership, China’s new leaders, led by the new Communist Party general secretary, H Jintao, are under pressure to keep priming the economy. - NYT
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