Economic growth is frequently thought of as the marriage of policy frameworks and market outcomes, with little consideration of path dependence and social preferences.
In China, examining those preferences and the costs they impose gives just as much insight into what has shaped the nation as a study of macro decisions.
Modern China is defined by the grandiosity of its vision. Consider the unceasing laying of high-speed rail, constant attempts to build Asia’s tallest building, or the urban technological dystopia represented by total surveillance.
The colossal scale of the Shenzhen Stock Exchange building is a good example of the need to project an imposing edifice.
Chinese Communist Party leaders and technocrats face pressure to demonstrate material improvements, year in, year out, using big projects and capital infrastructure as tangible metrics.
In remaking a major nation, China started from a unique place, because there was almost no modern infrastructure that needed overhauling. Power grids, roads and ports were rudimentary or nonexistent even three decades ago: Everything is new.
For all the criticism of major US airports, they have proved durable. Los Angeles International Airport opened its doors in 1930 and the hub that later became JFK International Airport started life in 1948, just before the founding of modern China.
Across the Pacific, China discards or mothballs airports rather than renovating them. Shenzhen Baoan International Airport opened in 1991 and became one of the busiest hubs in the world.
In 2013, the original terminals were closed and replaced with a new section designed by world-famous architects. The slick design might attract headlines and drive GDP growth, but it is a terribly expensive development model.
Disposable investment is not limited to infrastructure: Real estate is much the same. By the Chinese government’s estimate, almost half of the current housing stock — or everything built before 1999 — is of such poor quality that it will need to be demolished. Again, this is the wrong model: Assets like housing and airports are designed to have longer lives than 20 to 30 years, or their cost becomes prohibitive.
Even cities reflect the social preferences of Chinese central planning. European towns, steeped in history, stress the preservation of the past and a character handed down from generation to generation. In China, there is little restraint on bulldozing historic homes and farmland to build factories or railways.
This usually reflects the will of technocrats, whereas Europe and the US have clear social preferences in targeting economic output, to say nothing of budget constraints.
The Chinese government sees building as a straightforward way to achieve output goals.
To cap the population in Beijing at about 23 million, the authorities announced the construction of an adjacent city, Xiongan, on agricultural and light-industrial land.
In the absence of budget limits, this costly plan was seen as preferable to relaxing population controls under the household registration system, hukou.
Renovation and reform, while frequently more efficient, seldom draw the headlines devoted to billions of yuan in investment to build a city from the ground.
Research has found that in many economies, male leaders tend to invest more in construction and infrastructure, while women favor health and education.
Just as Chinese real-estate buyers will pay a substantial premium for new over second-hand apartments, there is a clear bias — with a significant cost — in how China achieves growth targets.
Despite the rhetoric that quality matters more than quantity, there is scant evidence of that.
This development model is showing strains. Debt has built up rapidly to pay for infrastructure and real estate with an inadequate lifespan. Rapid depreciation will increase costs to pay for projects that need to be replaced, in many cases before they have even paid off borrowings.
Beijing fueled economic expansion with capital accumulation and debt as savings growth slowed. Now the slogans about shifting to quality must be made reality.
China needs to change its growth model to account for long-term financial sustainability, rather than just meeting construction targets.
Christopher Balding is a former associate professor of business and economics at the HSBC Business School in Shenzhen and author of Sovereign Wealth Funds: The New Intersection of Money and Power.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Polytronics Technology Corp (聚鼎科技) yesterday announced that it is buying Henkel AG’s thermal clad dielectric material (TCLAD) business division for US$26 million as the Taiwanese firm aims to improve its technology, product portfolio and revenue performance. Polytronics, headquartered in the Hsinchu Science Park (新竹科學園區), is a supplier of protection components and heat dissipation materials. The firm entered the metallic heat-dissipation substrate market in 2007 and developed a unique solventless production process. Its board of directors approved signing an agreement with Henkel to acquire the German chemical firm’s TCLAD division in the US. The purchase includes all assets and business interests, including equipment,
ELECTRIC FARMLAND: TSMC’s proposal to clear 230 hectares of reforested land for what would become Taiwan’s largest photovoltaic solar farm has generated concerns New rules curbing solar farms built on agricultural land sparked fierce debate at a packed public hearing at the Legislative Yuan yesterday, with industry representatives saying that the new restrictions would endanger President Tsai Ing-wen’s (蔡英文) green energy goals, while agricultural officials emphasized the importance of protecting farmers and the environment. The Tsai administration has set a target to generate 20 percent of the nation’s power from renewable sources by 2025, by which time it also aims to install 20 gigawatts (GW) of solar power, including 6GW from rooftop solar systems and 14GW from ground-mounted solar farms. Although rooftop solar systems are
Taiwan Semiconductor Manufacturing Co (TSMC, 台積電) yesterday posted monthly revenue that suggested second-quarter sales surpassed analysts’ estimates, underscoring how its technological lead is helping the chipmaker weather the COVID-19 pandemic and US sanctions on its second-biggest customer Huawei Technologies Co (華為). Apple Inc’s main iPhone chipmaker posted sales of NT$120.88 billion (US$4.08 billion) for last month, up 40.8 percent year-on-year and bringing its revenue for the second quarter to NT$310.7 billion, beating the NT$308.8 billion analysts expected on average. TSMC, a barometer for the industry thanks to its heft in the global supply chain, had previously lowered its revenue outlook for this
‘SENSITIVE MARKETS’: The previously unannounced project would involve the company handing over control of data to a third party to sidestep privacy concerns Google has abandoned plans to offer a major new cloud service in China and other politically sensitive countries due in part to concerns over geopolitical tensions and the COVID-19 pandemic, two employees familiar with the matter said, revealing the challenges for US tech giants to secure business in those markets. In May, the search giant shut down the initiative, known as “Isolated Region” and which sought to address nations’ desires to control data within their borders, the employees said. The action was considered a “massive strategy shift,” said one of the employees, who added that Isolated Region had involved hundreds of employees