By John Richardson
LI Keqiang is spending on railways like it is still 2009, according to some analysts. In other words, they believe that China’s prime minister is pouring more money into this one area of infrastructure in a desperate and short-sighted attempt to shore-up economic growth – and they see this as a backward step in economic reforms that are meant to favour consumption over investment.
Certain analysts also talk about the need for “markets to decide” when, to what extent and in what areas future investment takes place in China. By this they mean the Western-style view of how markets should work.
But as Henny Sender writes in the FT in this thoughtful article on China’s latest round of railway spending:
And, to the extent that railway investment fuelled China’s growth, policy has been sound: the Chinese version of fiscal stimulus has produced more efficient train and metro services, rather than the property booms and stock market bubbles stemming from quantitative easing in the US.
Hear, hear. This leads me on to the pictures at the top of this blog post. On the left is is a photo of the 819-mile Beijing-to-Shanghai train service that costs $88 for a one-way tick. On the right is a picture of the Boston-to-Washington DC train service, which takes almost seven hours to cover 394 miles at a one-way ticket cost of $300.
Sure, as I keep reminding you, average per capita incomes in the US are a lot higher than China, and this narrows the effective price gap for these two train tickets. But as US infrastructure, from its bridges to its roads and railways continues to deteriorate, and as China very sensibly spends more money on this type of infrastructure, the per capita income gap will over several decades substantially narrow. The US is at risk of stagnating as China slowly catches up.
And ironically, as the US struggles to find the political will to deal with its infrastructure shortfalls, it is Chinese companies that are increasingly bidding for the US rail investments that are taking place. For instance, in Boston again a Chinese company has broken ground on a factory that will build subway trains for the Massachusetts city.
In the short term, projects like this one make sense as it will help keep Chinese engineering workers in jobs as painful economic rebalancing continues. There is also a long term objective: Exporting higher-value Chinese engineering skills which in a second example has led to another Chinese company winning a contract to build a high-speed train link from Las Vegas to Los Angeles. This is part of China’s push to become a “branded goods and services” supplier so that it can escape its middle-income trap.
It is thus just plain silly to think of railways investment as more wasteful spending. These new railway lines are in an altogether different category to the trillions of genuinely wasted dollars poured into unneeded high-end real estate and surplus low value and also environmentally toxic industrial capacity.
More spending on railways, and on roads and bridges, is also about opening up western China to eastern China, and to central Asia and Europe – and so this fits with The New Silk Road initiative. Build the infrastructure first and jobs will follow in lower-value manufacturing that will help narrow the wide income gap between western and eastern China.
This is also about giving the developed eastern provinces quicker and cheaper routes to international and domestic markets for their higher-value manufactured goods. So again this is about escaping the middle-income trap.
Further, these better road and rail links will make it economic to ship higher-value goods to western China for final assembly, as labour costs in the east are now too high for final assembly to take place there. Once assembled, these smartphones etc. can then be more efficiently shipped around China and to international markets.
Better road and rail links will also enable domestic growth to take off through the “search engine” Internet economy. It is no good just providing better and better broadband connections unless you also have improved road and rail links to efficiently transport the goods that have been bought on line.
I see the further growth of companies like Alibaba as a critical part of rebalancing towards more domestic consumption, as the internet is of course a fantastic tool in the search for ever-cheaper but still high quality goods and services. Big volumes and low costs are the names of the game here as affordability is the new priority.
Finally, there is the need to stress one more critical point: No matter how much extra money China finds to spend on infrastructure – and on new stimulus in general – over the next few years, it is mathematically impossible for this money to replace the lost momentum from lower spending on real estate and the wrong sort of industrial capacity.
And this lower spending simply has to continue. This is because it is very likely that today every new Yuan of debt raised to build more high-end real estate or another noxious cement factory is actually reducing rather than adding to GDP growth.