China’s Infrastructure Investment Style

Is China investing too much? There’s no consensus to this question. Advocators for more investment can prove it based on the gap between China’s per capital and that of the advanced countries, while criticizers worry about government’s ability to meet its debt obligations. However, which debt ratio is proper for China’s government? No one can irrefutably figure it out. So it’s more meaningful to discuss investment fields than arguing whether China is over-investing. By doing this, we can focus on benefits raised from specific investment fields.

So taking the infrastructure construction as an example: on one hand, consumers are dissatisfied with the excessively high charge of highways; on the other hand, some local governments believe that ROI(return on investment) of highways is too low, therefore the charges need to be further raised.

For example, on November 21, 2012, a hearing on the adjustment for freeway tolls was held in Yunnan. In the two sets of the adjustment schemes put forward by Yunnan Price Bureau, charges for 30 toll roads in Yunnan had a large amount of raise. Yunnan Price Bureau explained that the local special terrain caused the extremely high construction cost for freeways, so the charges need to be raised. Otherwise, low return can’t appeal to investment for freeway constructions.

One simple query is that, since the cost is so high, why should these highways been built in these places? Why are local governments so keen to do such infrastructure investments?

In fact, investment decision should be made based on all known factors. As highways being business assets, investments into them should be profitable. However, under the current system, the charging standards are formulated by the country in a unified way. And such profit constraints must be taken into account before any investment decision. In another word, the final operation loss should be borne by road and bridge companies, and the cost should not be imputed to consumers.

If investors argue that current toll charges can’t lead to profits or even can’t cover costs, they should discuss charges with government in advance instead of raise tolls after roads have been built up. Otherwise, once operation loss can be imputed to consumers without any limit, infrastructure investments will always be profitable. That’s not market economy.

Based on decades of investments, highway network has been preliminary built in economically advanced areas, while most new projects are concentrated in mid-west economically less developed areas. If those new projects end with higher and higher tolls, then enterprises in those areas eventually have to relocate to other areas with higher return rates. In this way, infrastructure investments can hardly stimulate demands.

In fact, facing the population agglomeration brought by urbanization, a good investment strategy is to concentrate resources on cities with more population. Such investments can contribute to scale economy which more people will benefit from. However, if there is no free movement of people in the process, massive economies of scale may never come. In another word, we need to make a choice between “people going out” and “building infrastructures like highways”.

For most areas in China, letting “people going out” may be the more efficient and fairer practice. So when discussing new infrastructure investments, governments should take all known costs and benefits into consideration. Otherwise, more investments will only bring more non-performing debts.

Originally published on CAIJING | 2012-12-3