China's economic white elephants
China Daily/Asia News Network
FUNDS wasted by local governments in China are a drain on the economy and badly hamper urgently-needed reforms.
Daily news reports from China often provide vivid, sometimes shocking, fodder for critics of China's investment-led growth.
Not long ago, Professor Paul Krugman, a Nobel laureate in economics, wrote about China's overdue transition from being an economy driven primarily by investment to one that draws a larger share of its growth from consumption.
As returns from investment are helplessly in decline, China's economy needs rebalancing. But this reform is slow in coming, Prof Krugman noted.
At almost the same time, there was a report in the Chinese business press from the State Oceanic Administration saying that the "almost maddening" land-filling activities along China's coast in the past decade have created at least 1,100 sq km of new land for "development". This has not only reduced the country's pristine coastline, but also damaged the the coastal environment.
Massive investment projects led by local governments are going from one city to another to reclaim land, flatten hills, redirect rivers, and remove entire villages and townships.
In the thick of the global financial crisis in 2009, a Buddhist temple could have embarked on a 5-billion yuan (S$1-billion) project to develop itself into a tourist attraction.
The funds were, of course, guaranteed by the local government. The project has so far generated nothing in return.
Despite such fiascos, the passion for investment has not died out. Last weekend, a friend from a domestic fund told me that, even as the central bank has been tightening credit supply, investment officers continue to receive numerous proposals requiring more than 10 billion yuan.
Premier Li Keqiang and Finance Minister Lou Jiwei must have been aware of how many big-ticket investment projects were going on in China and how much money those projects were gobbling up.
But no mathematical modelling could ascertain how much damage those wasteful projects have done and are doing to society.
Now, most local governments are prisoners of the investment projects they began in haste and are regretting at leisure, because they do not have the resources to give the projects a profitable conclusion.
Therefore, it is unrealistic to expect a rapid rise in consumer spending in China. All the old investments have a doubly dampening effect by channelling society's money away from consumers and by supporting often excessively large projects that offer little use to small private companies.
As for the government, officials need to realise that some things are more important than just big money and big numbers.
They also have to create jobs without building new factories, generate prosperity (and tax revenue) without spending a lot of public funds and, perhaps, sell some of their useless projects to turnaround managers from the private sector.
Before the country goes through a process like this, it is highly likely some investors will lose money on China, including those involved in urban-housing projects from second-tier cities down.