[A-List] Full Throttle Keynesian for China

["Henry C.K. Liu" <hliu@xxxxxxxxxxxxxx>]

China Gambles on Big Projects for Its Stability
By JOSEPH KAHN

CHONGQING, China — The engineers who run China have decided that this
congested southwestern city, cupped by the Zhongliang Mountains and
divided by flood-prone rivers, needs a complete makeover.

Construction crews have carved a small canyon in the center of town,
where they are burrowing through mountains to create 600 miles of
superhighways, four new railway lines, an urban light rail system and a
new airport. Chinese officials are also promising parks, drinkable tap
water and riverside promenades for the city's 30 million residents.

The cost of remaking Chongqing into the heartland's metropolis, most of
it shouldered by the government and state-owned banks, is estimated at
$200 billion over the next decade, a bit more than the United States
Congress spent, in adjusted dollars, to build the American interstate
highway system in the 1950's.

China's top leaders, many of them trained in the mechanical sciences,
are not just making mountain cities into transportation hubs. They also
want to pump 48 billion cubic meters of water each year from south to
north, transport natural gas from Central Asia to China's southeast
coast, and construct the world's largest dam, longest bridge, fastest
train and highest railroad.

Even more than modernizing its infrastructure or, as some critics see
it, erecting monuments to its emerging might, China is desperate to keep
the economy growing quickly. Over the past few years, it has reached
deep into the national treasury to finance projects that it hopes will
create jobs and stimulate enough growth to ensure social stability and
to keep the Communist Party in power.

As a new generation of leaders takes control, China is using heavy
government investment to escape the worldwide slowdown and maintain
growth above the 7 percent level that the government deems crucial to
avoiding mass unemployment and urban unrest.

The plan has worked, so far. China last year reported defiantly robust
growth of 8 percent, attributed to surging exports and a nearly 25
percent increase in state-directed investment.

But the strategy is risky. The once fiscally prudent central government
is now running hefty budget deficits. State banks, told a few years ago
to clean up bad loans and begin acting like capitalist lenders, are
pumping tens of billions of dollars into officially sponsored projects
that have sometimes failed to produce real returns.

The Communist Party has pledged to support private companies and allow
the market to flourish. Financially, though, the authorities are
monopolizing the country's private savings for a building boom that
dwarfs the New Deal and the Marshall Plan.

"The country has relied very heavily on government investment to lead
the economy," said Shen Lishen, a top economist at the Chinese Academy
of Social Sciences. "It really should begin to fade out, not become part
of the long-term economic plan."

Beijing opened its coffers to stimulate growth beginning in 1998, when
it feared that the financial contagion spreading around Asia would
infect China. Instead of fading out, the spending is getting more ambitious.

The government, state banks and companies and foreign investors
collectively spent $200 billion in the first 11 months of last year on
basic infrastructure projects, one quarter more than they spent in 2001,
according to the State Statistics Bureau. That represents about 15
percent of China's gross domestic product, or about the proportion that
the United States spends on health care.

Even for the nation that built the Great Wall and the Grand Canal, the
scale of construction is extraordinary.

Not long ago Beijing had China's only subway. Now Shanghai, Guangzhou
and Tianjin have tunneled under heavily populated residential districts
to install subway systems. Seven other cities have begun construction on
their own subways.

By 2005, China plans to add 8,500 miles of railroad, half of that to
places that now have no rail service. Shanghai just opened the world's
first magnetic levitation train that zips to its new airport at up to
270 miles per hour, faster than any other commercial train.

Railroad officials are completing plans for a $22 billion high-speed
track from Beijing to Shanghai. Meanwhile, workers carrying oxygen tanks
are pounding spikes for the 670-mile-long Qinghai-Tibet railroad, which
will operate at elevations of up to 16,600 feet on its way to Lhasa,
Tibet's capital.

The Three Gorges Dam, designed to tame the mighty Yangtze river and
generate the power of 18 ordinary nuclear power plants, was for years
considered the world's most expensive project, with a price tag of $30
billion. It has now been eclipsed by China's latest engineering
colossus, a $60 billion system of channels and pump stations to divert
water from the Yangtze in the central part of the country to the Yellow
River in the north. In late December, Chinese officials broke ground on
the first phase of the project, which they say will alleviate
desertification and drought.

Like many large cities, Chongqing is now following what officials refer
to as the "Shanghai model." That refers to the heavy financial support
the central government gave Shanghai over the past eight years, after
two former city leaders, Jiang Zemin and Zhu Rongji, became China's top
bosses.

Shanghai created a new financial center in Pudong, its eastern section.
It tore apart former colonial districts to install a modern
transportation network. While some of the uncounted billions of dollars
invested almost certainly went to waste, Shanghai has also become an
Asian center of commerce and finance.

Huang Qifan, a former top Shanghai official, is now the executive vice
mayor of Chongqing. He said the once remote city on the upper reaches of
the Yangtze, which served as a redoubt for China's Nationalist
government when it fled the Japanese advance during World War II, would
be the beachhead to develop China's west. Chongqing lobbied hard for
that role, partly as a political payoff for supporting the Three Gorges
Dam, which will inundate riverside towns in the area.

"We have more infrastructure work going on here than anyplace else in
China," Mr. Huang said. "When I say $200 billion a year, this is not
some abstract number. It is really happening."

Mr. Huang spent most of a two-hour interview citing statistics to back
up his point. He ticked off the highways (8), the ring roads (2), the
bridges (8), the rail lines (4) and the sewage and trash facilities (4)
among the projects that he said would turn Chongqing into a commercial
gateway.

Like Chongqing, the capital city of Beijing is also pressing the central
government to support a huge urban improvement plan, including subway
lines, light rail, highways and even a giant opera house to dress up the
city for the 2008 Olympics. Beijing estimates the cost at $34 billion,
far more than potential revenue from the Olympics alone could justify.

Some economists argue that such investments are smart bets on the
future. Only a small percentage of the urban population earns
middle-class wages, and China cannot rely on consumer spending to spur
growth the way most industrialized nations can.

China also needs to expand faster than wealthy countries to generate
jobs for workers laid off by state-run factories and for farmers
flocking to cities to seek something better than subsistence income.

"The government is sucking up savings and investing in the future," said
Andy Xie, a regional economist for Morgan Stanley. "The financial
returns on these kinds of investments are low. But the payoff for the
economy is high."

Mr. Xie argues that China's work force is becoming significantly more
efficient. He estimates that China is experiencing productivity growth
of 4 percent a year. An eight-lane highway between two crowded cities
greatly enhances productivity when it replaces a two-lane road.
Cellphones have revolutionized communications in a place where
fixed-line phones were scarce.

Fred Hu, chief China economist for Goldman Sachs, agrees. He argues that
as China suffers through a period of falling prices and low consumer
spending, Beijing is right to inject money into the economy.

"This is China's New Deal," Mr. Hu said. "Every problem is easier to
solve when growth is faster."

Yet the risks are also mounting, in part because China is trying to
outrun or perhaps run away from its inherited burden of socialist
inefficiency. Banks still give loans to bankrupt factories to prevent
labor unrest. Now, the government has taken to running a budget deficit
of about 3 percent of economic output.

CLSA Emerging Markets, a Hong Kong-based brokerage firm, estimates that
when official debt is added to bad loans at state banks and the
unfinanced pensions of state workers, China's debt rises as high as 140
percent of economic output. That is as much as the burden now crippling
Japan's economy.

"There is nothing wrong with investing in the future, but the question
is whether they are doing enough to change the whole economic system,"
said Andy Rothman, China economist for CLSA.

Even within China's government, opposition has emerged. Some economists
say privately they worry that the latest construction boom has become a
binge of the sort that has repeatedly proved hazardous to China's health
since the Great Leap Forward of the late 1950's.

A State Statistics Bureau report in August bemoaned copy-cat projects
that waste state funds. The report cited one unidentified Chinese
province that had 800 industrial parks under way at the same time, most
of them unneeded. The bureau also said a rush to build airports had led
to a glut, with 127 or the nation's 143 airports running losses.

But China is not tightening its belt. Like the departing leadership,
China's new leaders, led by the new Communist Party general secretary,
Hu Jintao, are under pressure to keep priming the economy.

During the leadership transition last fall, half a dozen cities
publicized development plans with price tags in the billions. City
leaders say they are focused on the future.

"It's a little crazy to be talking about adding so much capacity today,"
said Mr. Huang of Chongqing, acknowledging the unusual scope of his
city's investment plans. "But in 20 years you will see what happens to
this place and it will all make sense."

http://www.nytimes.com/2003/01/13/international/asia/13CHIN.html?pagewanted=2