China hoping rail projects will aid slow economy

Despite high costs

Matt Dietrichson, Sep 06, 12.

In attempt to revive their stagnating economic situation, the Chinese are making major investments in their transportation infrastructure, according to China Daily:

China’s top economic planner announced on Wednesday the approval of 25 new urban rail transit and intercity rail line projects with a total investment of more than 800 billlion yuan ($127 billion) as the world’s second-largest economy struggles with a slowdown.

The projects, most of which will take three to eight years, are expected to inject vitality into the country’s slowing economy and improve the investment environment, but economists warned of low-efficiency investment.

...

Sun Lijian, a senior economist at Fudan University in Shanghai, said infrastructure construction costs are high, so local governments must carefully analyze the yield on their investment.

“If the upgraded infrastructure and environment cannot attract more investment and tax revenue from enterprises, the investment is likely to turn into bad debt,” Sun said.

...

MORE

The day after the original announcement, the NDRC announced approval of an additional 20 projects, 13 of which are roads, for a total estimated cost of 848 billion yuan. The investments have already shown some promise, according to Business Insider:

The news sent the Shanghai Composite which had been languishing at 3.5-year lows surging nearly 4 percent.

Bank of America’s Ting Lu writes that after cutting interest rates from mid-May to early July this is Beijing’s second round of policy easing/stimulus.

Markets weren’t buoyed by the local government stimulus plans because most of them were part of the larger five-year plans, and because they typically look to the central government for stimulus, rather than local governments. So, Lu writes that this stimulus is a step in the right direction.

“We believe this new approach of policy stimulus is in the right direction because adding home supply and improving urban infrastructure are the two best ways to contain home prices, speed up urbanization and increase social welfare.”

The new rail projects mean that China’s subway system will grow to 7,000 kilometers (approx. 4,350 miles) by 2020. That would be 4.3 times the current length. And these would includes coastal cities and inland cities. The road projects are expected to total 2,000 kilometers in length and most are set for the central and western regions like Qinghai, Xinjiang and Hunan.

...

MORE