China Spending Its Way Over a Cliff
Hayekians would argue that both the Japanese lost decade and the recent US housing crash were both caused by massive mis-allocations of capital driven by a variety of government interventions and corrupted price signals (particularly on interest rates). This may be an early signal of a lulu of a bust coming to China, in an story on the high speed rail system in China
With the latest revelations, the shining new emblem of China’s modernization looks more like an example of many of the country’s interlinking problems: top-level corruption, concerns about construction quality and a lack of public input into the planning of large-scale projects.
Questions have also arisen about whether costs and public needs are too often overlooked as the leadership pursues grandiose projects, which some critics say are for vanity or to engender national pride but which are also seen as an effort to pump up growth through massive public works spending.
The Finance Ministry said last week that the Railways Ministry continued to lose money in the first quarter of this year. The ministry’s debt stands at $276 billion, almost all borrowed from Chinese banks.
“They’ve taken on a massive amount of debt to build it,” said Patrick Chovanec, who teaches at Tsinghua University. He said China accelerated construction of the high-speed rail network — including 295 sleek glass-and-marble train stations — as part of the country’s stimulus spending in response to the 2008 global financial crisis.
Zhao Jian, a professor at Beijing Jiaotong University and a longtime critic of high-speed rail, said he worries that the cost of the project might have created a hidden debt bomb that threatens China’s banking system.
“In China, we will have a debt crisis — a high-speed rail debt crisis,” he said. “I think it is more serious than your subprime mortgage crisis. You can always leave a house or use it. The rail system is there. It’s a burden. You must operate the rail system, and when you operate it, the cost is very high.”
It should be noted that this is the system that has been lauded by folks from Thomas Friedman to Barack Obama as something we should emulate in the US. By the way, this problem identified in China is in fact endemic to the US -- the cost overruns in every rail system. In the US, this probably has less to do with outright individual corruption (i.e. the stealing of money for personal gain) but more common political corruption, in the form of purposefully underestimating costs to get public approval, knowing that when inevitable overruns appear, it will be too late to stop the project.
Part of the cost problem has been that each segment of the system has been far more expensive to build than initially estimated, which many trace directly to the alleged corruption being uncovered, including a flawed bidding process.
I wrote earlier on high speed rail as triumphalism rather than real investment here. Why the US actually has the best rail network in the world is here (hint: from an energy, pollution, and congestion standpoint, the best thing to put on rails is freight rather than passengers, and the US does that better than China or Europe, by far)
DrTorch:
So, we're not really interested in HS rail, we're just bluffing to get the Chinese to waste more money to flatter their own ego?
Brilliant!
April 28, 2011, 10:26 amSean2829:
The Wall Street Journal also had an article a few weeks ago: ago:http://online.wsj.com/article/SB10001424052748703983104576262330447308782.html?mod=WSJ_hp_MIDDLETopStories
April 28, 2011, 11:03 amApparently, the high speed rail trains run almost empty and most people would settle for half the speed at half the price.
Ted Rado:
If left alone, competitive private industry would supply the nation's energy and transportation needs in the most economical way. The system worked fine for 200 years. Now the politicians want to pick winners rather than let natural economic forces do it. The result? The mess we are in, with billions wasted on ethanol, a myriad looney toons alternative energy schemes, and a huge waste of money. Worse yet, our R&D effort is down the drain, pursuing government sponsored nonsense. We could just as well pay our R&D people to play cards as do what most of them are doing. It would be just as useful.
We might as well emulate the inmates in the nut house or the the Chinese. We seem to be determined to screw everything up rather than do what worked fine for many years and brought us prosperity and technological progress.
April 28, 2011, 1:06 pmcaseyboy:
Nice to know our #1 economic and political adversary is prone to this type of ego stroking boondoggle. They probably think they can manage a soft landing just like old Bernanke is trying to pull off. Except that Bernanke isn't quite going to pull it off. As QEII is winding down, the economic recovery is slowing down. Doesn't seem we got the growth stability hoped for with QEII. Oh well, nice try don't you think? I wonder what will happen now?
April 28, 2011, 1:07 pmDon:
Ted,
I disagree. We paid for lots of R&D to find out how NOT to do things. That's quite different than just playing cards, because at least in cards, these guys wouldn't have wasted our other valuable resources, like food, for use in their mostly worthless technologies.
Anyone for a round of Rummy?
April 28, 2011, 1:26 pmSean2829:
On another note, Roger Pielke Jr. had a post a couple weeks ago on China's ghost cities. There is a 15 min video, produced in Australia. It really makes you wonder.
http://rogerpielkejr.blogspot.com/2011/04/chinas-ghost-cities.html
April 28, 2011, 1:59 pmDr. T:
I fail to understand the appeal of high-speed rail. The Japanese bullet trains have shown the most success: a few of the bullet trains now make money, but every one of the bullet trains received massive government subsidies. Without those subsidies, no bullet train line would come close to breaking even.
High-speed rail in Europe also requires massive government subsidies. The trains are convenient and pleasant (my daughter, who studied in Germany for a year, loved them), but without government subsidies the ticket prices would exceed the costs of flying.
Perhaps China can make this work by using the uniquely Asian version of train travel: packing each unfurnished bullet train car with two hundred standing passengers. China also has the "advantage" of having no private airlines or buses to compete against. People who need to travel halfway across China will have to pay enormous bullet train ticket fees unless they want to spend more than two days traveling by regular trains.
April 28, 2011, 5:07 pmBenjamin Cole:
I often wonder if the Chinese juggernaut will collapse, as it does not use the price system to allocate resources.
But...they also limit consumers to 35 percent of GDP. So, they can make big mistakes and pay for it. Waste a trillion dollars on rails? So what? This year we have another trillion.
BTW, the USA just allocated $3 trillion to Iraqistan. And now $1 trillion a year to the Department of Defense-Homeland Security-VA complex.
So who will collapse first?
May 1, 2011, 9:40 am