It's an opinion shared by a lot of people with a lot of knowledge about investment, development and China.
There is no reason to think, as you do, that this infrastructure construction is waste done only for economic stimulation.
No reason that you want to aknowledge, you mean.
Meanwhile, there are the famous ghost cities, the mountains of bad debts piling up in the financial system, the corrupt state-run banking system that pretty much insures that capital is misallocated, etc.:
From
http://thoughtfulindia.com/2011/04/chinas-bad-growth-bet/ :
The problem, of course, is that no country can be productive enough to reinvest 50 per cent of GDP in new capital stock without eventually facing immense overcapacity and a staggering non-performing loan problem. China is rife with overinvestment in physical capital, infrastructure, and property. To a visitor, this is evident in sleek but empty airports and bullet trains (which will reduce the need for the 45 planned airports), highways to nowhere, thousands of colossal new central and provincial government buildings, ghost towns, and brand-new aluminum smelters kept closed to prevent global prices from plunging.
Commercial and high-end residential investment has been excessive, automobile capacity has outstripped even the recent surge in sales, and overcapacity in steel, cement, and other manufacturing sectors is increasing further. In the short run, the investment boom will fuel inflation, owing to the highly resource-intensive character of growth. But overcapacity will lead inevitably to serious deflationary pressures, starting with the manufacturing and real-estate sectors.
from
http://www.economist.com/node/21555761 :
SOEs are responsible for about 35% of the fixed-asset investments made by Chinese firms. They can invest so much because they have become immensely profitable. The 120 or so big enterprises owned by the central government last year earned net profits of 917 billion yuan ($142 billion), according to their supervisor, the State-owned Assets Supervision and Administration Commission (SASAC). It cites their profitability as evidence of their efficiency. But even now, returns on equity among SOEs are substantially lower than among private firms. Nor do SOEs really “earn” their returns. The markets they occupy tend to be uncompetitive, as the OECD has shown, and their inputs of land, energy and credit are artificially cheap. Researchers at Unirule, a Beijing think-tank, have shown that the SOEs' profits from 2001 to 2008 would have turned into big losses had they paid the market rate for their loans and land.
Even if the SOEs deserved their large profits, they would not be able to reinvest them if they paid proper dividends to their shareholders, principally the state. Since a 2007 reform, dividends have increased to 5-15% of profits, depending on the industry. But in other countries state enterprises typically pay out half, according to the World Bank. Moreover, SOE dividends are not handed over to the finance ministry to spend as it sees fit but paid into a special budget reserved for financing state enterprises. SOE dividends, in other words, are divided among SOEs.
The rot may not become apparent at once. Goods for which there is no demand at home can be sold abroad. And surplus plant and machinery can be kept busy making capital goods for another round of investment that will only add to the problem. But when the building dust settles, a number of consequences become clear. First, consumption is lower than it could be, because of the extra saving. GDP, properly measured, is also lower than it appears, because so much of it is investment, and some of that investment is ultimately valueless. It follows that the capital stock, properly measured, is also smaller than it seems, because a lot of it is rotten.
From
http://www.nakedcapitalism.com/2010/01/on-chinas-overinvestment.html :
Although it is difficult to judge any single project as unviable, given that so many massive projects are being rolled out, the probability of waste increases, Chovanec said.
“All over the country, every province has at least one mega project. It’s one thing to build one mega project over a 10-year plan. It’s another thing to build this 10-year project in two years and do many of them all over the country. How much capacity expansion can the economy digest at one time?”….
“I can’t think of any economy where that rate of growth is sustainable,” Bruce Richardson, an American businessman living in Yingchuan, said….
Some local officials have realised the massive build-up is generating undesirable effects and are switching towards sustainable growth, including Yun Guangzhong, the mayor of Ordos, a city in Inner Mongolia.
Ordos, with a population of 1.55 million, has been described as a “ghost city” in blogs and Al-Jazeera television, because it contains a newly built city centre with ultra-modern buildings that is nearly empty. Ordos’ population density is 17.8 people per square kilometre, compared with an urban density of 10,606 people for New York City
From
http://chovanec.wordpress.com/2011/07/22/wsj-chinese-banks-are-worse-off-than-you-think/ :
Investors are worried about the health of China’s banks. They’re afraid—with good reason—that the massive, state-directed lending binge that was instrumental in pumping up China’s GDP figures the past two and a half years will end up producing an equally massive pile of bad debt. Barely a week goes by without new word of a troubled project or impending default.
A bank’s solvency in the face of losses depends on the loan-loss provisions it has set aside and the capital it has built up on the right (equity) side of its balance sheet. Chinese banks like to boast that they have an average “loan-loss coverage ratio”—the amount of equity set aside, divided by the amount of nonperforming loans—of 220%, up from 80% at the end of 2008. Optimists argue this shows banks have set aside more than twice the amount of equity they would need to make up for all their bad loans.
But that ratio considers only those loans a bank has formally designated as nonperforming, and banks have hardly recognized any bad loans stemming from their recent bout of lending. China’s banks are required to set aside loan-loss reserves equivalent to 2.5% of their total loan portfolios. Yet based on the lessons of previous rounds of credit expansion, it’s more likely that up to 20% or even 30% of their loan portfolios will turn bad at some point in the wake of the latest expansion.
Indeed, estimates leaked by Chinese bank regulators suggest that 23% of loans to local government-sponsored infrastructure projects are an outright loss, with another 50% at risk of cash default. If Chinese banks made appropriate provision for these losses alone, it would reverse the record earnings they have been reporting and eat into their capital base. Apply these estimates across other risky loan categories, such as real-estate development and business lending diverted to speculation in stocks or property, and their capital is in real danger of being wiped out. The loan-to-deposit ratio doesn’t matter; they can have captive deposits and lots of cash, and still be bankrupt if they threw it all away on bad loans.
Please keep this post in mind the next time you feel like asserting that there is no reason to think that China has a malinvestment problem.
