A recent blogpost by Professor Gerard (with the supporting observations from Dr. Doom (Nouriel Roubini) suggests that the answer might be yes. At some point, this will be true, but I’m not sure that it will happen in the next few years.
As a recent visitor to the Middle Kingdom (last two weeks in June) and to the western part of the Middle Kingdom in particular (Guizhou Province), I observed an incredible amount of building. Housing construction continues its rapid pace and not just in the biggest cities (such as Guiyang) but in regional (within the province) outposts such as Kai Li and even fast growing counties (such as Danzhai.) Furthermore, the links among these places are made by new toll ways and long tunnels through the mountainous countryside. Airports and local road improvements are also underway.
Is it too much? Has the marginal product of capital become small or even negative? It’s too soon to tell. It must be noted that China is approaching 50% urbanization which suggests that interurban transport and urban housing will be needed along with other critical infrastructure pieces such as water filtration and waste water facilities. These items certainly have found their way into provincial budgets.
In a recent article in Seeking Alpha, Shaun Rein, the Managing Director of the China Market Research Group, begs to differ with Dr. Doom:
“However, most of Roubini’s conclusions are based on phantom facts, as is his evidence for why China will have economic problems. There is no direct flight between Shanghai and Hangzhou, nor is there a maglev train system connecting the two cities. Shanghai has two — not three — airports, and the last new one opened a dozen years ago, in 1999. Both the Hongqiao and Pudong airports have been adding runways and terminals because the airports are too crowded, contrary to Roubini’s suggestions of emptiness. Pudong’s passenger and cargo traffic grew 27% in 2010, to 40.6 million passengers. It is now the third busiest airport in the world in terms of freight traffic, with 3,227,914 metric tons handled every year.
That hardly sounds like an underutilized airport with wasted investment in triplicate. Many analysts have turned bearish on China’s economy over the last few years because they are concerned about empty apartments, too much debt and overcapacity. However, like Roubini, these analysts surprisingly misunderstand basic facts about income, demographics and investment in these facilities, and they use data points that are simply wrong to lead to their conclusions.
The reality is that most of China’s infrastructure spending has created greater business efficiency while maintaining stable employment numbers. There were indeed plans to build a maglev train between Shanghai and Hangzhou, but those plans were scrapped following analysis that indicated it would be a waste of money. Instead, high speed rails were installed. This is a sustainable investment because it improves the linkage between two cities with populations of 24 million and 9 million. Every time I have been on the trains they have been packed to capacity, and I can assure you I have been on them far more often than has Roubini.
Most of China’s transportation projects are not like Japan’s bridges and highways to nowhere in that they connect big cities with hamlets. China’ projects improve business efficiency, and they are needed in that still developing economy. China has not yet gotten to where Japan was when it started wasting money on infrastructure projects to get out of its deflationary cycle.
The Chinese government is also severely limiting the number of new automobile license plates it issues, to reduce pollution and congestion. Only 21% of those who applied for a license plate in Beijing in January received one. My firm, the China Market Research Group, estimates that 350 million Chinese now live in households that can afford automobiles, and gross domestic product per capita is rising 10% a year. Per capita GDP more than tripled to $3,400 at the end of 2010 from $949 in 2000. As a result of the limits on new autos, there is major pent up demand for cars, as incomes continue to rise. Until the restrictions on auto buying are eased, if ever, the demand for high-speed comfortable trains will grow.
China is not immune to economic cycles. It will definitely go through rough patches in the coming years, and housing prices may in fact fall. Despite a relatively efficient bureaucracy, no government can stave off market forces forever, and problems are starting to arise. However, the headwinds are coming from raging inflation, a shrinking labor pool and a weak education system, not from over-construction in infrastructure spending, as Roubini argues. It is important that analysts use real, not phantom, data points to draw conclusions about China.”
There certainly exists evidence of substantial local governmental debt (see last Sunday’s New York Times article) as well as overbuilding (see the recent Forbes article ) in which one analyst opines that it will take 8 years to fill the existing housing stock in Wuhan, a city approaching 10 million population.
My sense is that China can continue to grow rapidly for the next few years but that demographic problems will put an end to their rapid growth phase by 2020. China has moved from 20% to 50% urban in just over 30 years. How long will it take for China to reach European or US levels (75 to 80%)? Answers to these questions will determine whether the infrastructure investment will have been worth it.