As people question build-at-all cost strategy, Chinas investment slows

Written by New York Times | Shifang (China) | Updated: Nov 14 2012, 08:45am hrs
Local leaders were all smiles this summer at a groundbreaking ceremony for a vast copper smelting project that seemed like the answer to the chronic unemployment that has plagued this city in northern Sichuan ever since a devastating earthquake in 2008.

But within days, the tree-lined plaza at the heart of the city was packed with thousands of youths, protesting that the $1.6-billion factory would pose a pollution hazard. After two nights of street battles pitting youths against the riot police, city leaders cancelled the smelter.

The environment is more important than new investments or jobs, said a young woman sitting, on a recent afternoon, at the cafe across the street from the plaza, now empty except for a clutch of retirees gathered under the clock tower.

Chinas economic boom over the last three decades has depended overwhelmingly on a build-at-all-costs investment strategy in which pollution concerns, the preservation of neighbourhoods and other such questions have been swept aside. But that approach is starting to backfire, posing one of the biggest challenges for the new generation of Chinese policymakers who will take over at the Communist Party Congress, which started on Thursday.

New investment projects used to be seen as the best way to keep the Chinese public happy with jobs and rising incomes, assuring social stability a paramount goal of the Communist Party while frequently enriching local politicians as well.

But from Shifang in the west to the port of Ningbo in the east, where a week of sometimes violent protests forced the suspension on October 28 of plans to expand a chemical plant, more projects are running into public hostility. In many cases, they are running into opposition not just from farmers who do not want their houses and fields confiscated, but also from a growing middle class fearful that new factories will lead to more environmental damage.

In response to this and other worries about the economy, a number of influential officials and business leaders in China have stepped up their calls for changes aimed at increasing the efficiency of investment and simultaneously shifting the country toward a greater reliance on consumption.

But Chinas leaders, including outgoing Prime Minister Wen Jiabao, have been talking about such a transformation for years with little sign of success, as state-controlled banks continue to lend huge sums to politically powerful state-owned enterprises and local governments.

Frenzied construction of roads, bridges, tunnels and rail lines over the last decade has left China with world-class infrastructure. But it has also produced deeply indebted local governments that are struggling to finance more projects.

At the same time, vast unused capacity in practically every industrial sector has crippled profitability and left manufacturing firms straining to repay their borrowings, a problem that has been partly masked by banks in the habit of simply rolling over loans rather than recognising losses.

Investment reached 46% of Chinas economic output last year. By comparison, Japans investment rate peaked at 36%, which it reached in the early 1970s; South Korea topped out at 39% in the late 1980s.

Growth in Japan and South Korea started to slow and eventually tumbled after investment peaked. The big question now is when China will run into the same limits, and how rapidly change will take place, said Diana Choyleva, an economist at Lombard Street Research in Hong Kong. The potential for a big crisis is always there, she said.

Even experts who strongly favour fundamental policy changes, like moving to a more market-oriented system for allocating bank loans and setting interest rates, doubt that Chinas leaders are preparing to move quickly. Conversations at senior levels of the Communist Party appear to have focussed so far on reducing the states role in the day-to-day management of many state-owned enterprises rather than selling them or breaking them up.

But a few hints have surfaced that sentiment for reining in the excessive reliance on business investment might be strengthening even among those segments of the Chinese elite executives at Chinas big state-owned enterprises that benefit the most from the status quo.

Zhu Fushou, the chief executive of the Dongfeng Motor Corporation, one of Chinas largest car and truck manufacturers, startled executives at an industry conference in September when he said that China might have almost all the cars it needs, at least for the near-term, and that the government should discourage further investment in the sector.

Zhu called for greater reliance on the free market to determine the winners and losers in major industries, chastising other auto executives for complaining too much about competition. Such griping is not objective its irrational, incompetent and immature, Zhu said at the Global Automotive Forum in Chengdu, the main annual conference for executives from Chinese automakers and the China units of global car companies like General Motors and Volkswagen.

Zhus remarks were especially striking because of Dongfengs longstanding close ties to Beijing as a pillar of Chinese heavy industry ever since Mao ordered its founding in 1969. Zhus predecessor at Dongfeng, Miao Wei, is now the minister of industry and information technology, leading an office that has long favoured government-organised oligopolies of state-owned enterprises in many industries.