Public works boom raises fears on China
By Joseph Kahn The New York Times
Thursday, March 24, 2005
Heading for an overcapacity problem?
YANGSHUO, China Nature spent millennia carving the jagged limestone mountains of Guangxi Province into the fanciful forest of peaks so prized by ancient painters and modern tourists.
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Ren Ping and his crew of a few dozen migrant workers have been at their jobs only a few months, but the elevated superhighway they are building has already burrowed a path through the prehistoric crags.
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"We'll go around this one, but we will have to slice through that one over there," Ren said over the roar of dump trucks pouring concrete. "Drivers on this road will have the most beautiful view in all China."
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Environmentalists are less enthusiastic. But the highway will link mountainous northern Guangxi to the booming Pearl River Delta in the southeast. It is the sort of grand development project that elicits official support and opens checkbooks in China's economy, which some critics say has become dangerously dependent on such state-directed spending.
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After a road-building campaign unmatched by any country except that in the United States in the 1950s, China has created an extensive network of multiple-lane highways, complete with landscaped verges and well-equipped rest areas.
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The Communications Ministry announced in January that it planned to pave a further 85,000 kilometers, or 55,000 miles, of intercity highways and urban ring roads within 30 years at a cost of $250 billion. The total length of all the highways is expected to overtake that of the American interstate system, the world's biggest, in around 2020.
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But to an extent that is alarming some economists, such investment is a main driver of China's economy, which grew 9.5 percent last year. The investment binge could produce unneeded factories, highways and power plants, weakening the country's already shaky financial system.
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China's leadership agrees to an extent. Officials in Beijing have been trying to cut what they see as unneeded investment projects and reduce growth to a more sustainable pace. Yet in 2004, independent experts who examined government statistics say, investment in such projects represented 45 percent of China's gross domestic product.
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Xu Xiaonian, an economist at the China Europe International Business School in Shanghai, said the economic payoff from these huge investments had fallen sharply. He estimated that 15 years ago, China generated 50 cents of growth for each dollar it had invested in fixed assets like roads, subways and steel mills. That return has fallen to about 20 cents for each dollar invested, he said.
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While it is not unusual for a rapidly developing country to derive a substantial part of its growth from new investment, no other major country has depended so heavily on fixed investment. The United States invests about 15 percent of its GDP in fixed assets. Japan and South Korea never invested as much as 40 percent in fixed assets. Today, the share is below 30 percent in both countries.
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Chinese officials and most private economists agree that investment rates cannot remain so high without setting off high inflation, unneeded capacity and bad bank loans. The question is how much investment must come down and whether the reduction will cause a slump in the broad economy.
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Morris Goldstein and Nicholas Lardy, economists at the Institute for International Economics in Washington, wrote in a recent survey that China would have to limit such investment to less than 40 percent of the GDP to avoid widespread waste.
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Yet doing so would probably cause the overall growth rate to slide to perhaps half its current level.
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Communist Party leaders have said that the economy must expand at least 7 percent a year to create jobs for the large and growing force of urban and rural laborers. They worry deeply about slowdowns that could lead to social unrest and risk weakening the party's rule.
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Yet officials also worry about the investment binge. Ma Kai, the country's leading day-to-day economic planner, said at the annual legislative meeting in Beijing that government efforts to control investment would intensify.
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"As soon as we make progress addressing overinvestment in one area, it crops up in another area," he said, citing new bubbles in power generating and real estate.
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Ma said the government would aim to slow the increase in overall investment spending to 16 percent this year from 27 percent in 2004.
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Investment would remain the main driver of growth. And economists say such a controlled slowdown is the only way to ease the economy off its dependence on new capital injections without risking a crash.
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Officials in Guangxi hope that a new network of expressways will attract companies and stimulate the economy. They plan to open 235 kilometers of expressways this year, with total highway spending reaching $1.6 billion. Though the province is just west of the rapidly growing economic center of Guangdong, it remains one of China's poorest.
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Workers are now blasting a major highway through rocky hillsides and terraced sugar cane fields to link the provincial capital of Nanning to Vietnam in the south.
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The highway towers six meters, or 20 feet, over sparsely populated villages in its shadow. The elevation prevents peasants and their water buffalo from crossing the tarmac.
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Construction also began recently on the expressway linking Guilin to Guangzhou. It traverses a hauntingly beautiful mountain range near Yangshuo, one of the country's most popular tourist destinations.
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"It is an absolutely perfect model of karst mountains, and this road goes right through the middle," said Wang Yingke of the Institute of Karst Geology, part of the Chinese Academy of Geological Sciences. He and several other scholars petitioned the authorities to have the road redirected, to no avail. "They consider the economic factors, but nothing else," he said.
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Jiang Jihong, an official of the Communications Bureau of the Guangxi government, said local officials took the environment into consideration and had adjusted the route to minimize the geological effects. She said the highway was vital for the area's overall development.
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Yet some experts say that China's poor inland provinces may need good schools and affordable health care more than elevated expressways.
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Xu of the China Europe International Business School said some rural road projects were examples of overeager spending favored by local officials intent on their share of state-backed financing.
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Despite Beijing's vow to wean the economy from its dependence on such investment, the level has increased, he said. "There is an addiction to this style of economic management that may be very difficult to overcome," he said.
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