Infrastructure investment vital to sustain growth
CHINA'S latest move to fast track approvals for major projects has raised concerns that the country is compromising long-term economic gains by rushing to attract investment.
But at a time when external demand shows no signs of improving and domestic consuming habits need time to adjust, well-planned infrastructure investment seems essential, if not the only option for China to boost its sagging economy.
Anxieties over a new spree of investments intensified recently after the wide circulation of a photo of Wang Zhongbing, mayor of Zhanjiang City, Guangdong Province, kissing an approval document. Wang was jubilant as a steel mill in the city got the green light. The scene was read by some as a symbol that the government is once again relying on investment to spur growth, which they think will lead to future troubles.
In 2008, China unveiled a 4-trillion-yuan (US$635 billion) stimulus package that has helped weather the global financial crisis, but the plan also created lingering problems, including asset bubbles and redundant construction.
For these reasons, China's acceleration of project approvals recently has caused worries over a return of high inflation. However, regarding the scale of infrastructure investment, which amount to thousands every year, misplanned cases are rare.
It is true that the government should pay much caution to over-heating risks, but simply by restricting infrastructure investment is not the solution. China has much room to develop its infrastructure compared to Western countries.
Morgan Stanley said in a recent report that most of the infrastructure investment under the 12th Five-Year Plan have been better studied and prepared, and are of potentially higher quality, than those rolled out under the 2008 stimulus package. It said that the current window of declining inflation and lower growth is a good opportunity to push out more projects to help urbanization and industrialization in the longer term.
Moreover, China's determination to transform its growth pattern offers more investment opportunities in the emerging industries that will carry long-term benefits. Although infrastructure spending will pile up local government debt, statistics suggest the risks are controllable, as China has been taking steps to expand financing channels.
Last year, China approved the cities of Shanghai and Shenzhen, as well as the provinces of Zhejiang and Guangdong, to issue bonds and such trials will be continued this year.
Meanwhile, besides investment plans, China this time has initiated a slew of other structural reforms, including tax reductions and opening the floodgates for private investments, to target long-term growth.
But these policies will take time to have an effect on the economy, and in the short term, infrastructure investment will shield the economy from a hard landing.
21 June 2012