Riding China’s infrastructure boom

Even to the casual observer this would seem unlikely. Pictures of China's 'ghost cities' have, after all, become internationally well known. If a span in Alaska counts as a 'bridge to nowhere', then surely vast empty metropolises in the middle of the Gobi Desert do too.

But China's 'ghost cities' are really just the tip of the iceberg. From $US 4.8 billion dollar theme parks in Tibet, to an economically dubious $US 23 billion dollar railway from Lanzhou to Xinjiang, to ridiculously excessive government buildings resembling the US Capitol Building or (according to taste) the Kremlin, to Tianjin's 'replica Manhattan' championed by China's then President Hu Jintao – there are no shortage of questionable projects across the country. There has also been no shortage of collapsing bridges in recent years.

Shrewd observers of the China scene typically have their own favorite examples of government-directed boondoggles and white elephants. The truth is such projects exist in almost every town across China if you know where to look.

Indeed, given the political environment of China – where corruption is endemic, where decisions about government projects are often determined to meet political rather than commercial imperatives, and where infrastructure is rolled out at speed – it is remarkable that many projects do turn out to be economically beneficial.

Even accepting many malinvestments, there is still a case that in aggregate China's infrastructure investment to date has been largely beneficial. Economist Arthur Kroeber is probably one of the best proponents of this view.

At the same time there are others, Charlene Chu (formerly of Fitch) is one of the more prominent, who argue that the rapid expansion of government-directed lending to infrastructure projects poses a real systemic risk to China's financial system.

What is agreed is that the model for financing China's infrastructure needs to change and could be much better.

China's infrastructure to date has almost been completely domestically financed – estimates currently put foreign investment in Chinese infrastructure at less than 1 per cent. Equally it has been financed overwhelming from the public purse rather than through Chinese private investment.

China's various levels of government provide, for example, over 96 per cent of general infrastructure finance; 99 per cent of funding for urban and airport projects; 80 – 85 per cent of power, water and port projects.

It is also true that at least some in the Chinese leadership have belatedly recognized that the infrastructure-led growth model is not sustainable – as the amount of bad debts in the state-owned banks pile up.

The upshot is that there now appears to be a greater openness in China – explicitly encouraged in China's current 5-year plan – to allow greater participation of foreign investment in future infrastructure projects.

In Beijing alone the municipal authorities last year invited foreign participation on over 126 projects valued at $US 55 billion and are making soothing noises about ensuring foreign investors get a reasonable return.