High-speed rail, investment-led model for growth, big projects, quality & corruption and affordable housing. Why do I suddenly see a parallel between Malaysia & China? Read on for an intriguing analysis of China’s growth strategy.
It seems that China’s high-speed rail accident has attracted a lot of attention. Even FT Lex has something to say about it, believing that the pace of investment should be slowed. While I have been arguing here for a while that investment has to be slowed, it is rather harder to see if the “accident” can really be marked as the turning point of the Chinese investment-led growth model as some might believe.
Before considering whetherx it is a turning point, let’s look beyond high-speed rail. Indeed, we actually have more bad news concerning Chinese infrastructure besides the crashing high-speed rail. We are seeing bridges collapsing here and there. This article summarises just a few of the collapsing bridges we have:
11 July in Yancheng, Jiangsu
14 July in Wuyishan, Fujian
15 July in Hangzhou
19 July in Beijing
We have 4 bridges collapsed in 9 days, with another one with some sort of structural failure. Truth be told, we probably all know that things in China aren’t as reliable as we wish. Is the wave of “accidents” really unexpected? Maybe, maybe not.
Now the theme we have here in the past months or so is that China has been relying too much on fixed-asset investment to get the economy going (translation: make the GDP numbers up). That’s why we saw the massive investment programme, particularly in the high-speed rail, in which the government has stepped up the pace of investment in the past 3 years or so, and now they have a really large network of high-speed trains.
But is it worth it? My analysis shows that it probably isn’t (at least for the Hong Kong segment of the high-speed rail). FT Lex points out that there seems to have been an under-investment in the past on railways in China, and they are now furiously catching up with high-speed rail. But there is probably no need to be that furious.
A few months ago, professor Kam-Wing Chan offers some stories during Chunyun (i.e. the annual chaotic transportation of migrant workers around the Chinese New Year), explaining why it was not at all a good idea to invest so much in high-speed rail:
Chunyun 2011 is a telling example. Though the new high-speed trains had added notable rail capacity, ironically the migrant masses found it harder to get train tickets home. Many conventional trains were taken off the rails to make room for the fast ones, but their tickets were too expensive to most migrant travellers. This created a holiday crunch even worse than usual for seats on the regular trains. As a result, hordes of low-income travellers were pushed back onto cramped buses or forced to try something extraordinary to get home.
Press reports of several chunyun transportation dramas have caught public attention in the last month. They tell the struggle of the have-nots being left behind in the new bullet-train age.
After queuing for a train ticket home, and being third in the line for 14 hours without success, a migrant in Zhejiang unveiled his underpants in public to protest.
In the south, a migrant couple did not even attempt to get a train ticket. Instead, loaded with luggage and their 6-year-old son, they rode a motorbike for eleven hours, braving numbing wintry weather for 320 km.
Many more did the same despite the icy weather, and soon there were swarms of motorbikes on many highways, with police escorts helping in some instances.
In an even more extreme case, after failing to get a regular train or bus ticket, eleven young migrants decided to implement “Plan C,” and jogged 130 km home together across frigid northern China.
At the same time, some high-speed trains were leaving stations only half full, even in the peak holiday season.
Under-utilisation aside, which is well expected (at least I think it is expected), there is the problem of corruption, which is also well expected. As this Reuters report points out, these large scale projects seem to be offering opportunity for corrupted officials to earn some quick bucks. Liu Zhijun, the former Minister for Rails, is the prime example of this, who has been sacked for precisely this reason.
So is the high-speed rail “accident” a turning point for the investment-led growth model as some might believe (or wish)? It is actually hard to tell, in my view.
The problems associated with the investment-led growth model is actually pretty obvious. Quality and corruption aside, the investment-led model is also associated to unsustainable debts, as a few other economists and I have argued for many times. There is no question that it has to stop, but whether the government will really stop is indeed questionable.
The reason is that economic growth remains to be a very important target for the Chinese government. With weakened external demand post-financial crisis and the small share of consumption in the GDP, investment is the only thing the Chinese can count on when it comes to generating growth. After all, a government can’t force its people to buy more clothes or eat more, but they can certainly build some more stuff. That’s why the government thought it was a good idea to invest so much after the financial crisis.
If the economy slows significantly (which is actually likely), there is no reason why the government won’t invest if economic growth remains the overriding target of the government. Indeed, it is probably happening already. Even the investment in high-speed rail may be slowed in near-term, the Chinese government is now furiously constructing affordable housing, which will most certainly help to cushion the potential growth shock if the government happens to be tightening too much.
So despite the obvious unsustainability of the investment-led model, it is still too early to say that the government is indeed rebalancing towards consumption driven model.
– Also sprach Analyst