A22 Economy & Business
Stimulus created many infrastructure projects that may not pay off
by Keith B. Richburg
beijing — In late 2008, with the financial crisis rippling through the global economy, Chi- na’s leaders embarked on a two- year, $586 billion spending pro- gram to try to stave off a reces- sion and keep the Chinese econo- my growing. Unlike in the United States — where President Obama’s large stimulus plan became the subject of protracted congressional wrangling and was shaped to in- clude tax cuts and aid to states — Chinese leaders followed a sim- ple mandate: Spend and build. Forget the tax cuts; in China, it was infrastructure, infrastruc- ture and more infrastructure. China was already awash in
big-ticket construction projects. The stimulus allowed China to speed up some projects, begin digging on others and extend the building boom to less-developed areas in the country’s west and
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KLMNO China may have dug a financial hole
north. The result, 18 months af- ter the stimulus was introduced, is an astonishing frenzy of build- ing — highways, subways, air- ports, bridges, high-speed rail lines and even new cities con- structed, literally, in the middle of nowhere. China is building tens of thou- sands of miles of expressways at a pace unseen since the U.S. in- terstate boom in the 1950s, and it is on track to pass the United States in total highways in the next decade. Among other infra- structure projects — which now amount to 15 percent of China’s gross domestic product — are nearly 100 new airports, some serving isolated cities few out- siders have heard of, and dozens of subways. “They basically got started
about three months earlier than we did, and it was bigger,” said Nicholas R. Lardy, an expert on the Chinese economy with the Pe- terson Institute for International Economics. Now a year and a half into the spending spree, and with the stimulus set to end in just six months, many economists and others here are asking pointed
questions: Does China really need all this infrastructure? And what’s going to happen when the bills come due? “In China, we have an old say-
ing: ‘If it’s medicine, it will have some poison inside,’ ” said Guo Tianyong, director of research for the Central University of Finance and Economics. “So the stimulus must have some bad effects.” “You see little counties build- ing airports — how many people will fly there?” Guo said. “Small cities — why do they need a sub- way? Maybe there’s no market for all this infrastructure.” Several economists said it was
difficult to determine the worth of all the spending because there is no official, centralized list of projects — making it difficult to untangle whether projects are funded from stimulus loans, from local governments floating bonds or from some combination of the two. “It’s a black box financed by black laws,” said Xu Xiaonian, an economics professor with the China Europe International Busi- ness School. “There’s not enough information to make any sensible judgment.”
But enough is known for econ- omists to point to a crucial differ- ence between the Chinese and American stimulus plans. In the United States, the
$787 billion stimulus was fi- nanced by the federal govern- ment running large deficits. In China — where the size of the stimulus as a percentage of the economy is several times that of the U.S. package — most of the spending came from the coun- try’s state-run banks making loans to local government enti- ties. The provincial and munici- pal governments are largely re- stricted from borrowing money, so most set up quasi-independent “investment companies” that took out huge loans to build sub- ways, airports and office towers. Economists estimate that out of the 4 trillion yuan (about $586 billion) stimulus package, the central government spent just over a quarter of the money, with the rest coming as bank loans to local governments. Also, many local governments took out additional loans on their own to finance public works projects. As a result, economists said, local governments are now sitting on a
FRIDAY, JUNE 18, 2010
REUTERS
A man works Thursday on one of the many construction projects underway in China; this one is the Lanzhou-Urumqi railway line.
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total potential debt bomb of 7 trillion to 11 trillion yuan. “There’s tens, or hundreds, of Dubais waiting in the pipeline,” said Xu, referring to the debt- laden Persian Gulf emirate. “It was a panicked reaction to the global crisis. So they rushed out to spend money wherever they could. They borrowed from me — and from every Chinese.” He add- ed another ancient proverb: “You eat your dinner at noon, you have to starve at night.” Even skeptics here agree that the stimulus worked at staving off a recession. The Chinese econ- omy grew by 8.7 percent in 2009, while the economies of the Unit- ed States and Europe — China’s most important export markets —contracted or remained flat. “You spend that much money,”
Xu said, “and the economy will grow.” But at what price? “It’s wasteful investment in some areas,” said Andy Xie, a Shanghai-based economist. “The
issue is not overbuilding. It’s that lots of places should not develop at all. . . . A lot of local govern- ments are developing places where people don’t want to go.” The stimulus is supposed to conclude by the end of this year, but Xie said many projects were incomplete. “The withdrawal of the stimulus will be difficult,” Xie said. “All these projects have to be finished.”
Some economists are more bullish on the stimulus and more optimistic about China’s ability to steer a sensible course out of stimulus spending and into sus- tainable future growth. “It’s my guess that the eco- nomic return on investment is likely to be quite high,” said Lardy of the Peterson Institute. The infrastructure building “will facilitate China’s rapid urbaniza- tion and economic growth.”
richburgk@washpost.com
Staff researcher Liu Liu contributed to this report.
New opposition to by Brady Dennis
A provision in financial over- haul legislation that would force the nation’s largest banks to spin off profitable derivatives-trading operations continues to divide lawmakers on Capitol Hill, most recently drawing criticism from a group of business-friendly Dem- ocrats. The measure, proposed by Sen. Blanche Lincoln (D-Ark.), would restrict federal aid to banks that operate as major derivatives dealers and could result in a size- able hit to the bottom line of firms such as Goldman Sachs and J.P. Morgan Chase. It has been opposed by Obama admin- istration officials, some lawmak- ers in both parties, multiple banking regulators and Wall Street.
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Despite the opposition, the measure had been gaining sup- port, particularly after Lincoln’s staff circulated clarifications aimed at easing concerns that the provision could harm the ability of U.S. banks to help cli- ents hedge risks and drive de- rivatives-trading operations into less-regulated foreign markets. Two regional Fed presidents
backed Lincoln’s efforts, and White House economic adviser Paul A. Volcker softened his ear- lier criticism that the provision was too far-reaching. Even Sen. Christopher J. Dodd (D-Conn.), who tried to engineer a compro- mise on Lincoln’s measure dur- ing Senate debate, said he is “in support of what she has in the bill.”
But, in a letter to the leaders of
a House-Senate conference working to resolve differences over new financial regulations, 43 members of the New Demo- crat Coalition — self-described as “moderate, pro-growth members of Congress” — argue that the controversial measure “would in- crease systemic risk by forcing derivatives transactions into less-regulated and less-capital- ized institutions and impede ef- fective regulatory oversight of the derivatives market.”
Opposition from the group, which has voiced support for much of the financial overhaul package, presents a potential
derivatives spinoff Business-friendly Democratic coalition takes aim at proposal
hurdle as House and Senate lead- ers try to hold together enough votes to pass a final bill through Congress. “It would be a tragedy if, in the
service of Wall Street interests, a few Democrats sabotaged the hard work by the White House and the majorities in both houses of Congress to get a final strong bill passed and to the president,” Heather Booth, director of the advocacy group Americans for Financial Reform, said Thursday. Lincoln’s measure also was criticized Thursday in a letter from the Coalition of Derivatives End-Users, a group that repre- sents companies that use deriva- tives as a way to hedge, such as an airline seeking to manage its fuel costs.
“End-users, who did not con- tribute to the financial markets crisis, should not be subjected to the same regulatory structure as swap dealers and others who do not use derivatives to reduce le- gitimate business risks,” the let- ter said. The letter marked the first time that groups such as the U.S. Chamber of Commerce and the Business Roundtable have endorsed the more-lenient House language on derivatives. Lawmakers aren’t expected to
take up Lincoln’s provision until next week, when they plan to deal with some of the thorniest remaining issues regarding new financial rules. Meanwhile, con- ferees spent the day Thursday debating, plodding through sec- tions of the bill that would create a Financial Services Oversight Council and new government powers to wind down large, trou- bled financial firms. The latter topic revived a months-old argument over whether the government should establish a fund, paid for by the financial industry, that could be tapped to liquidate failing firms. Republicans continued to label the idea as a “bailout fund,” while Democrats reiterated that it would be used only to shut down seized companies. House Democrats proposed re- instituting the $150 billion fund that they passed in December. Senate leaders, however, rejected it. Although the Senate bill origi- nally proposed a $50 billion fund, it was dropped as part of a compromise with Republicans. “We cannot undo one of the most critical pieces” of a deal that allowed the Senate bill to pass, Dodd said late Thursday.
dennisb@washpost.com
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