China: Is More Construction the Answer?

construction cranes

As the world’s second largest economy and Australia’s largest export destination, the importance of China both to the world and to Australia cannot be understated.

Furthermore, given some of the economic data coming out of the country recently, statements by Premier Wen Jiabao regarding stimulating the economy by speeding up approvals for infrastructure construction and investment serve as a welcome reprieve for many against a backdrop of global economic uncertainty.

But is this really the best way for China to go?

Perhaps not, suggests Global Times editor Zhu Daming in a recent report in the China People’s Daily Online. As a measure of stimulating the economy, Daming points out, public spending on infrastructure projects has a number of potential drawbacks.

First, there are the large amounts of capital involved. To the extent that it cannot be funded out of fiscal surpluses, money for this type of investment would have to come from cutting spending elsewhere or, more likely, by raising consumer or business taxes, which in turn would hit either businesses and/or consumers and impact upon consumer spending and/or business investment outside of areas which directly benefit from the infrastructure spending efforts. Such an effect would partially offset the impact from the government’s investment activities.

Second, there is the flow on impact upon inflation. Following the 4 trillion yuan ($US631.9 million) stimulus package in 2009, Daming notes, a massive cash inflow put enormous upward pressure on prices, with the result of China’s consumer price index gaining 5.4 percent over the course of 2011 alone. By pushing up prices for daily necessities, such as food, this impacted both upon consumers’ buying power and their ability to provide basic living requirements for their families.

man riding on dollar sign

Third, there are questions about whether the types of measures under consideration are really worthwhile. As it is, Barclays Capital in its latest report says it expects the Chinese economy to grow by 8.1% this year and 8.4% in 2013 (meanwhile, inflation next year is set to creep up to 4.5%). Notwithstanding the fact that Barclays says its predictions in part reflect anticipated stimulus efforts from the government, this does raise questions as to how much stimulus is really needed.

Related to that are question of whether the infrastructure in question itself is really necessary or appropriate, and whether or not sufficient discipline will be exercised over the implementation of projects so as to drive worthwhile structural outcomes associated with project delivery. One only has to look at the wasteful stimulus efforts in Japan over the past two decades or the sheer debacle in Australia in its implementation of post-GFC Building Education Revolution program to see how badly stimulus efforts on infrastructure spending can go wrong.

On the flip side, there are of course some benefits associated with China’s proposed course of action. For one thing, notwithstanding any adverse impacts associated with any increase in taxes, more infrastructure spending would have at least a short-medium term stimulus effect on the economy and the benefits of this might flow back into the manufacturing sector as well as the construction sector.

And if it is well managed, building and infrastructure spending can have benefits beyond the immediate economic stimulus. Should they come to fruition, China’s plans regarding environmentally sustainable public housing, for example, will have a positive impact upon its carbon footprint as well as housing affordability for needy people. And smart investment on roads, railways and airports has productivity benefits as well.

On balance, the potential disadvantages of stimulating the economy by infrastructure investment appear to outweigh the advantages, and it would seem that there are better ways for China to stimulate its economy (if that’s even necessary at all).

Still, given the situation in some other parts of the global economy, many not just in China but around the world would welcome any efforts to keep the Chinese economic engine going as strongly as possible at least for now.

By Andrew Heaton
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