One hesitates to call China “desperate” because it seems so at odds with the country’s well-earned reputation for knowing how to play the long game. Still, as Reuters reports,
China has given the green light for 60 infrastructure projects worth more than $150 billion [...] Shares and steel futures contract prices jumped on the plans to build highways, ports and airport runways which are among the most ambitious unveiled in China this year.
This is a departure from script. Before now China was more concerned with re-shaping its economy to focus less on infrastructure investment and more on getting its citizens to become consumers in the Western mold. After all, its size notwithstanding, how many airports does one country need? Barry Eichengreen explains:
Restructuring meant redirecting Chinese output from foreign to domestic markets, which implied a change in the product mix, given differences in Chinese and foreign spending patterns. Restructuring meant rebalancing domestic spending from investment to consumption. The investment rate would be lowered from a stratospheric 50 percent, given that no economy can productively invest such a large share of its national income for any length of time. There would be no more construction of ghost towns and no more bullet trains running off the rails, in other words. As wages rose, the share of consumption would be allowed to rise from 1/3 of GDP toward the 2/3 that is the international norm. Bank balance sheets would be strengthened by holding financial institutions to stricter reserve requirements and higher lending standards. The result was to be a better balanced, more stable, and less financially vulnerable Chinese economy.
Now it looks like these plans will be put on hold. Why, exactly? Perhaps China’s politicians are being extra careful to not upset the applecart in advance of its once-in-a-decade leadership transition. Political stability is being bought at any cost and heavy infrastructure investments will put labor-intensive industries back to work and keep bread on the table of vulnerable, low-skilled workers.
Isn’t this precisely what a government should do when faced with a slowdown — implement policy that will help protect the most vulnerable? Yes. But. The very best policy would see investments made in projects that provide actual, long-term benefit. That means concentrating projects in population areas that have the greatest economic viability, or making sure that what’s constructed today is free from defect and built to last. China’s record on these metrics is questionable, at best.