Few forces can even come close to competing with China’s infrastructure spending in terms of domestic and international impact. Unfortunately, as it tends to happen with generation-defining narratives, inaccurate information abounds. From those who underestimate the importance of infrastructure spending when analyzing China’s GDP growth pattern to analysts on the other end of the spectrum, who consider China’s infrastructure investments the universal panacea of finance or in other words, something that can and will solve all of China’s problems.
Balance is the operative word, so let’s start by going through the most important facts associated with China’s infrastructure spending track record in a context-oriented manner. Therefore, in the spirit of context if for no other reason, we need to understand that prior to Deng Xiaoping’s 1978 reforms, to say that China was lagging behind in terms of infrastructure would be the understatement of the century… literally, the understatement of the 20th century.
As such, there was no way to go but up for a country the size of China and especially one as populated as China. The beginnings of China’s infrastructure growth path were, understandably, humble. Back in 1984, China embarked on its Food-for-Work program, in an effort to (at the same time) tackle poverty and build vital infrastructure (irrigation, roads, water conservation… the basics, so to speak) and as the name suggests, the government provided certain goods (from food and cotton to certain industrial products) free of charge and in return, rural workers offered their labor, with local governments chipping in to cover material and equipment-related costs.
Moving forward a decade, China wanted to get 80 million citizens out of poverty as of 1994 and until the year 2000 (in 7 years, to put it differently) through a program called, as some of you might have guesses, the “80-7 National Poverty Reduction Program” (80 million citizens, 7 years). Through it, almost 1 billion CNY were spent each year on rural highways, with 21 provinces and over 500 under-developed counties as beneficiaries. With over 40,000 kilometers of vital rural infrastructure built each year, the results were more than meaningful.
On that note, China wanted to double down on highway-related projects and as of 2002, implemented one specifically so as to reach the poorer western regions of China, serving 17 provinces through 252 projects. The same way, a nationwide highway program was launched in 2003, with over 5,000 projects lined up and the list could go on and on. Not only was there tremendous growth, with China’s yearly investments in infrastructure more than doubling from 2003 to 2006, things went even further as a result of the Global Financial Crisis (Great Recession) of 2007-2008. Like pretty much every other nation, China tried to combat the effects of the calamity through massive infrastructure investments and released a stimulus program about the size of the US one. However, unlike what tends to happen in the Western world, China was able to have a lot more decision-making power when it came to the trajectory of those funds, then them being quite a bit more aggressively directed toward… of course, infrastructure.
As such, generous infrastructure investments are not only a core element of China’s status quo development policy, they are also a go-to solution whenever the authorities feel China’s economy needs to be stimulated. The Great Recession of 2007-2008 is perhaps the most popular example but even later on, infrastructure investments were a core pillar of China’s strategy for combating the 2015-2016 stock market crash and nowadays, for combating the growth rate slowdown China is experiencing (down from 10% YOY prior to 2010 to the 6% – 6.5% range at this point).
This brings us to the top myths related to China’s infrastructure investments:
- They make all problems go away. Let’s just say that’s easy to disprove. For example, China’s stock market has performed considerably poorer than Western stock markets and even prior to the 2015 crash, 2007’s levels were a distant memory. Not only that but the 2015-2016 crash itself was followed by an anemic recovery and ultimate downward action to 2014 levels. China’s stock market problems make it clear that infrastructure investments cannot make all problems go away
- They’re in line with infrastructure investment strategies of other countries. No… they’re not. While infrastructure spending cannot solve all problems, it doesn’t mean we’re not dealing with a force to be reckoned with as far as China is concerned. To understand that China is indeed a special case study, it’s enough to mention that in just two years, it consumed more cement than the United States during the entire 20th century
- China only cares about its domestic infrastructure. If you truly believe this, we’d recommend reading our articles about the Belt and Road Initiative (with a $4 to $8 trillion final price tag) as well as Asian Infrastructure Investment Bank (AIIB)
- All of China’s infrastructure problems have been fixed. Again, it’s vital to realize just how significant the development gap is between China’s wealthiest regions and let’s say Western China, or how significant the gap between urban and rural development has become. Despite indisputably high investments, quite a bit still needs to be done
… the list could go on and on.
To sum it all up, it’s ultimately your responsibility to let facts do the talking when it comes to China’s infrastructure track record. Not headlines, not one-liners articulated by various more or less coherent financial media pundits. Should you or your organization need assistance with meaningfully understanding the dynamic of China’s infrastructure spending, ChinaFund.com is at your disposal, as a player who actually has a strong Chinese presence and therefore its finger on the pulse of the Chinese economy.