One theory is that these investments help prepare for the coming wave of urbanization. This is a myth.
Pumping Up China’s G.D.P.
Yasheng Huang is professor of international management at Sloan School of Management, Massachusetts Institute of Technology. He is the author of “Capitalism With Chinese Characteristics.”
Updated July 27, 2012, 6:19 PM
Many Western economists heralded China’s massive stimulus program as proactive and decisive. They had no idea just how proactive and decisive the Chinese government was. The local governments have piled on their own programs. One estimate is that these local investment platforms have accumulated massive debts in the neighborhood of 7 to 9 trillion renminbi (equivalent to about 1 to 1.39 trillion dollars).
But few analysts stopped and asked: Why should China, a country credited for having a vibrant middle class, a huge internal market and a rapid pace of wealth-creating urbanization, undertake a stimulus program larger both in relative and absolute terms than the stimulus program in the United States, which was at the epicenter of the financial crisis?
The answer is that China’s middle class is far less vibrant than commonly assumed; its internal market (relative to its G.D.P.) is actually modest, and its urbanization is rapid but not wealth-creating. In the face of a precipitous collapse of the demand for exports, the country resorted to the only thing it knew how to do -- embark on a government-organized, debt-financed investment binge to raise the G.D.P.
One theory is that all of these investments are made to prepare for the coming wave of urbanization. This is a myth. The Chinese cities do not lack buildings, which they have in surplus. The cities lack people. Beijing and Shanghai have some of the lowest population densities among the world’s big metropolises. The current infrastructure is more than adequate to accommodate China’s urbanization.
It is likely that a sizable portion of this investment binge is sheer waste and will surely end up as non-performing loans on the banks’ balance sheets. The Chinese term for crisis comprises of two words: danger and opportunity. The corrupt local officials saw abundant opportunities to amass wealth for themselves, and the central government completely lost sight of the inherent danger. The structural distortions of the Chinese economy grew worse and the government did exactly what it should not have done: It wasted a perfectly good crisis.