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In China actual infrastructure construction costs are on average 30.6% higher than estimated costs, in real terms.
In China actual infrastructure construction costs are on average 30.6% higher than estimated costs, in real terms.

China’s Great Wall of Debt

China’s debt-to-GDP ratio stands at over 280%, exceeding that of many advanced economies and all developing economies for which data is available

China’s Great Wall of Debt

For over three decades, China has experienced a staggering public investment boom. In 2014, it  spent $4.6 trillion on fixed assets, accounting for 24.8% of total worldwide investments and more than double the entire GDP of India.
But China’s investment boom has coincided with a rapid build-up of debt. Between 2000 and 2014 China’s total debt grew from $2.1 trillion to $28.2 trillion, an increase of $26.1 trillion—greater than the GDP of the United States, Japan and Germany combined, EastAsiaForum reported.
China’s investment boom has heaped on a great wall of debt that now threatens the hard-fought prosperity of the country. Unless China shifts to fewer and higher-quality infrastructure investments, the country is headed for an infrastructure-led national financial and economic crisis, which is likely to spread to the international economy.
This reality is illustrated by a new analysis of 95 large Chinese road and rail transport projects and 806 transport projects built in rich democracies. A typical Chinese infrastructure investment suffers cost overruns and benefit shortfalls so large that they destroy economic value.
In China actual infrastructure construction costs are on average 30.6% higher than estimated costs, in real terms, measured from the final business case—which is in line with global trends. The evidence is overwhelming that costs are systematically biased towards underestimation.
Projects Economically Unviable
For example, over half the projects had an ex-post benefit-to-cost ratio lower than 1.0, meaning that these projects were economically unviable at the outset of their operational lives. Less than a third of the sample could be considered genuinely economically productive.
The pattern of cost overruns and benefit shortfalls in China’s infrastructure investments is linked with China’s growing debt problem. It is estimated that cost overruns have equaled approximately one-third of China’s $28.2 trillion debt pile. China’s debt-to-GDP ratio stands at over 280%, exceeding that of many advanced economies and all developing economies for which data is available.
The revised calculation of China’s implicit government debt as a proportion of GDP suggests that China’s government is the second-most indebted in the world after Japan. Extraordinary monetary expansion has accompanied China’s piling debts—China’s M2 broad money grew by $12.9 trillion in 2007–13, greater than the rest of the world combined. The result is increased financial and economic fragility.

Rapid Build-Up of Debt
A puzzling feature of debates regarding the rapid build-up of debt is that many economists condone such profligacy. Noble laureate Paul Krugman has increasingly encouraged countries to take on debt. Similarly, Nicholas Lardy makes little of China’s alarming great wall of debt.
New-Keynesian arguments that see large public debt as benign are misguided. A Keynesian stimulus can be necessary to push the economy forward during a crisis. But the investments still need to be productive to avoid accruing liabilities that do not generate sufficient benefit streams such as end-user fees or tax revenues.
Moreover, to use such stimulus on a more or less continuous basis to drive a high national growth rate is ill-judged. This is especially the case if the stimulus is debt-financed like it is in China. Incurring this level of debt to fund infrastructure is destabilizing. Negative macroeconomic impacts include volatile movements in interest, exchange and inflation rates, unpredictable movements in asset prices, adverse growth outcomes, rising unemployment from deleveraging and a lack of capital to finance productive investments. Several of these negative consequences are already materializing in China in 2016.
China’s debts are owed in large proportion to its own thrifty households. The numerous and dispersed creditors thus face state-owned and powerful debtors.
China’s total per capita debt now stands at above $20,000. The multiple of per capita debt to per capita annual income for China is 11.5, far greater than that of the US (7.5) or Brazil (8.1) and in line with that of Greece (11.8).

 

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