After $5 trillion in spending on infrastructure over the past five years, China still needs more.
The nation struggles to provide drinkable tap water, millions of people live in shantytowns and the length of the rail network is yet to match that of the U.S. in 1880.
While investors focus on ghost cities and unneeded factories as evidence of overinvestment, gaps in infrastructure will allow the spigot of state spending to be open for years to come, according to HSBC Holdings Plc. That may serve as a safety net, limiting the scale of any slowdown during the economic restructuring that Communist Party leaders are set to map out at a meeting in Beijing next month.
“China still has plenty of room to keep building useful bridges before building bridges to nowhere,” said Qu Hongbin, Hong Kong-based chief China economist at HSBC. “Even after five or six years of massive infrastructure development, China’s infrastructure is only at a level similar to that of Japan in the 1960s or 1970s.”
Installed in March, President Xi Jinping and Premier Li Keqiang have already used infrastructure spending to support growth in what Bank of America Corp. described as a “mini fiscal stimulus” this year. After expansion cooled during the first and second quarters, the State Council rolled out measures targeting city infrastructure such as drainage systems, waste-water treatment, subways and light rail, roads and bridges, power grids, railway construction and shantytown redevelopment.
The effects may be visible in tomorrow’s report on third-quarter expansion from the National Bureau of Statistics, which will say that the economy grew 7.8 percent from a year earlier, based on the median estimate of 46 analysts surveyed by Bloomberg News.
Any reading below the government’s 7.5 percent annual target would stoke anticipation of fresh stimulus measures. Li said last week that growth exceeded 7.5 percent in the first nine months of the year, following a report of 7.6 percent expansion in the first half.
Data tomorrow will also show that authorities maintained the pace of fixed-asset investment excluding rural areas at 20.3 percent for the first nine months of the year, equal to the January-August pace, according to the median economist estimate. The statistics bureau also reports September figures for industrial production and retail sales.
Investment in national railways and joint-venture railways rose 12.2 percent to 327 billion yuan in the first nine months of 2013 from a year earlier, according to a report in today’s Economic Information Daily, a newspaper of the official Xinhua News Agency.
Separately, China’s inbound, non-financial foreign direct investment rose 4.9 percent in September from a year earlier, following a 0.6 percent gain in August, Commerce Ministry data showed today. In Singapore, non-oil exports in September fell 1.2 percent from a year earlier as manufacturers shipped fewer electronics and pharmaceuticals, a report showed.
Elsewhere in the world, retail-sales figures are due in the U.K., Sweden and the Netherlands report on September unemployment and the U.S. will see weekly reports on jobless claims and the Bloomberg Consumer Comfort Index.
China’s fixed-asset investment in infrastructure totaled 33.1 trillion yuan in the five years through August, based on data compiled by Bank of America. The figures include spending on transportation, such as roads and railways, as well as utilities and water facilities.
The gaps in infrastructure range from the absence of a subway system in Lanzhou, a city of about 3.6 million and the capital of northwestern Gansu province, to passengers crushed together during peak hours on Beijing underground lines.
The average Internet speed of 1.7 megabits per second ranked 98th worldwide and compared with 14.2 megabits in No. 1-rated South Korea in the first quarter of this year, according to Akamai Technologies Inc. (AKAM), which provides services to speed delivery of Web content.
“I hate the traffic jams,” Li Xuejun, a taxi driver, said last month in Jinan, the capital of Shandong province, as cars, buses, trucks and motor-tricycles jostled for space. Li said he was looking forward to the completion of the West Second Ring highway bridge, an 8-kilometer (5-mile) highway completed this month with a price tag of 2 billion yuan.
China is putting about 5,500 kilometers of railway lines into operation this year, bringing the total length to 100,000 kilometers, Xinhua reported in August. The government said in July that it plans to grant ownership and operating rights on some city and regional railways to local government and private investors.
In the early 20th century, Sun Yat-sen, Republican China’s first president after the fall of the Qing Dynasty, set a goal of 160,000 kilometers. In the U.S., the rail network reached about 148,000 kilometers by 1880 and peaked at 409,000 in 1916, shrinking to 224,000 kilometers in 2011, according to the Association of American Railroads.
In Beijing, a city known for architectural signature pieces such as the Bird’s Nest stadium built for the 2008 Olympics, people died in flooding last year because the city’s drainage system was inadequate to handle the biggest rainstorm in six decades. The downpour killed 77 and submerged vehicles and flooded homes, resulting in about 11.6 billion yuan in losses, according to Xinhua.
China has pledged to ensure the supply of safe drinking water by 2015 to more than 100 million people in rural areas who don’t have access to it now, Xinhua reported in August.
At Credit Suisse Group AG, economist Dong Tao says that the new Communist Party leadership regards infrastructure spending as a “stabilizer” rather than the “accelerator” used in the global financial crisis, when a 4 trillion yuan stimulus package helped reverse the nation’s slump.
Over coming quarters, officials will jab the pedal as needed to keep growth around the 7.5 percent to 8 percent level, according to Tao, chief regional economist for Asia excluding Japan.
Potential obstacles to infrastructure spending include government debt that analysts at banks including JPMorgan Chase & Co. say is approaching levels that helped trigger turmoil in other economies.
The National Audit Office is working on the broadest review of government borrowing in two years, with former Finance Minister Xiang Huaicheng saying in April that local-government finance vehicles may hold more than 20 trillion yuan of debt, almost double the official tally from 2010.
Some of the nation’s design and construction failures have been deadly. In August 2012, a new $300 million, eight-lane suspension bridge collapsed in the northeastern city of Harbin, sending four trucks tumbling and leaving three dead. The high-speed rail system suffered a blow from a collision in July 2011 that killed 40 people. Former Railway Minister Liu Zhijun was given a suspended death sentence this year for abuse of power and taking bribes.
China also has overinvestment in some areas. The government on Oct. 15 posted a plan by the State Council to cut excess capacity in steel, cement and aluminum.
Some municipalities have turned into ghost cities after local governments failed to attract residents to fill new towers. A prime example is Ordos, Inner Mongolia, where cranes stood silently above half-finished developments in July after a building spree that included an expanded airport, a sports stadium and high-rise apartments surrounding an artificial lake.
Underscoring potential risks, Japan’s administrations ran up the nation’s debt in the 1990s with repeated supplementary budgets that failed to stop the economy from sinking into deflation.
“China is quite different from the 1990s in Japan,” said Changyong Rhee, chief economist at the Asian Development Bank. Especially in the nation’s western regions, “huge potential” remains for investment to increase productivity and incomes and reduce inequality, Rhee said.
At the same time, Rhee said he’s concerned that China’s spending is led by local governments through an expansion of credit, with the risk that investment decisions are made for political reasons and project quality suffers. He said that the central government is trying to tackle that issue.
--Paul Panckhurst, Shen Hu, with assistance from Zhou Xin and Nerys Avery in Beijing, Jasmine Wang in Hong Kong, Tim Catts in New York, Toru Fujioka in Tokyo and Ailing Tan and Rina Chandran. Editors: Paul Panckhurst, Scott Lanman
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