Should China Hit the Brakes on Infrastructure Development?

by Eric Jaffe, infrastructurist.com, 04.21.2011

china-train-bendChina is making like Casey Jones and watching its speed. The country has announced it will pump the brakes on its fast trains — taking them down to 186 miles per hour (300 km/h) from 217 mph (350 km/h) — citing safety and affordability as reasons for the change. The reduced speed may even be accompanied by reduced rail spending. For a country with the world’s most ambitious rail program, the moves signal “a serious rethink,” writes the Financial Times:

In addition to the new speed limit, which is expected to lower energy usage and operating costs, the total railway construction budget for the next five years appears to have been scaled back.

Mr Sheng said the government would spend Rmb2,800bn ($428.8bn) on railway construction from now until 2015, significantly less than previous reported estimates.

Although China’s railway network will still be expanded from the current 91,000km to 120,000km by the end of 2015 as previously planned, analysts said it was likely some planned high-speed routes would be cut and replaced with ordinary lines.

China’s recent infrastructure growth has been enormous. It not only dominates the world in high-speed rail track, but is also constructing some of the world’s tallest towers and planning the world’s largest cities. McKinsey recently predicted that 9 of the 10 cities with the greatest economic growth in the world by 2025 will be in China, with infrastructure advancements a major reason for this surge.

But even before this news of speed reductions, questions have followed China’s every move. Earlier this yearconcerns emerged that the country’s rail construction was advancing too quickly to ensure proper safety. For all its city planning, some of China’s new cities appear to be sparsely inhabited, at best. One economic expert believes China’s skyscraper construction is a sure sign of a bubble. Nouriel Roubini appears to concur; he recently wrote that China’s infrastructure investments have set up the country to hit an economic “brick wall”:

China is rife with overinvestment in physical capital, infrastructure, and property. To a visitor, this is evident in sleek but empty airports and bullet trains (which will reduce the need for the 45 planned airports), highways to nowhere, thousands of colossal new central and provincial government buildings, ghost towns, and brand-new aluminum smelters kept closed to prevent global prices from plunging.

Commercial and high-end residential investment has been excessive, automobile capacity has outstripped even the recent surge in sales, and overcapacity in steel, cement, and other manufacturing sectors is increasing further. In the short run, the investment boom will fuel inflation, owing to the highly resource-intensive character of growth. But overcapacity will lead inevitably to serious deflationary pressures, starting with the manufacturing and real-estate sectors.

Eventually, most likely after 2013, China will suffer a hard landing. All historical episodes of excessive investment—including East Asia in the 1990s—have ended with a financial crisis and/or a long period of slow growth.

Roubini believes China can escape this fate, in part, by reducing its fixed investments. The latest news shows that China can adjust its speed to avoid one type of crash. If Roubini and other experts are right, it may soon need to do the same for another.

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Posted by ProTech at 4/21/2011 3:36 PM
Categories: Construction News
Tags: china infrastructure development china construction procore dealer protech construction cloudware
 

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