Loading Now
Translation: The Problems of Inefficient Infrastructure Spending Are Beginning to Surface
Translation: The Problems of Inefficient Infrastructure Spending Are Beginning to Surface

Translation: The Problems of Inefficient Infrastructure Spending Are Beginning to Surface

After a decades-long infrastructure spending spree, many of China’s local governments now find themselves saddled with unsustainable levels of debt and a surplus of vastly ambitious but often underutilized infrastructure projects. The International Monetary Fund and Wall Street banks estimate China’s total outstanding off-balance-sheet government debt to hover between $7 trillion to $11 trillion U.S. dollars, which includes bonds issued by thousands of local-government financing vehicles (LGFVs) to finance roads, bridges, and other forms of infrastructure. 

The local government debt problem is a concern for investors and governments alike. In November of last year, China’s central bank announced that it would provide emergency liquidity support to regions heavily burdened by debt, but there is a limit to even the central government’s largesse. The following month, Moody’s issued a downgrade warning on China’s sovereign credit rating, citing concerns that centralized bailouts of local governments and state-owned enterprises, coupled with an ongoing property crisis, would weigh down the Chinese economy. Moody’s also placed the ratings of 26 Chinese LGFVs on review for a downgrade, and dropped the ratings outlook of another 22 LGFVs to “negative.” In January of this year, China’s State Council—concerned about managing approximately $13 trillion U.S. dollars in municipal debt—instructed 12 heavily indebted local governments to delay or halt some state-funded infrastructure projects.

The following full translation of an article from WeChat finance account 关胖本胖 (guān pàng běn pàng) describes some of the more egregious examples of inefficient and excessive infrastructure spending—for example, hugely expensive high-speed rail stations that are located in the middle of nowhere, or that serve very few passengers, or that were never put into operation at all. The author also dissects the systemic political weaknesses that gave rise to such undisciplined infrastructure spending, and lays most of the blame on the Chinese Party-state’s “top-down” system predicated on absolute obedience to authority:

Over the past two years, as finances have tightened for local governments in China, many high-speed railway stations have been temporarily closed. Issues stemming from “excessive infrastructure” spending are finally beginning to surface. Even more astonishingly, it appears that some newly-constructed high-speed railway stations were never put into operation at all.

One such example is the Haitou high-speed railway station in Danzhou, Hainan province, a subject of much recent public discussion. Over 40 million yuan was invested in the construction of this two-thousand-square-meter station, but eight years after its completion, it has yet to be used. The news about this “unconscionable” spending earned Danzhou viral infamy. People were flabbergasted to learn that no fewer than three high-speed railway stations have been built to serve Danzhou, a small city of just one million people.

But Danzhou’s three stations are nothing compared to some other regions. In the third-tier city of Guilin, they built nine stations in a single breath: Quanzhou South Station, Yongfu South Station, Xing’an North Station, Wutong Station, Gongcheng Station, Yangshuo Station, Guilin West Station, Guilin North Station, and Guilin Station. Just reading that list aloud in a single breath requires a certain mastery of tongue-twisters.

Guilin is a well-established tourist destination, so developing transportation infrastructure there is understandable to some degree. But high-speed railway stations are not the same as subway stations. It makes you wonder if this is some sort of “Nine-Star Constellation” vanity project. If so, the cost is completely unjustified. Wutong Station alone, one of the nine, cost over 50 million yuan, yet not a single high-speed train has stopped there in over six months. The story of Wutong Station is a classic example of the innate deficiencies of these sorts of infrastructure projects. When the Guiyang-to-Guangzhou high-speed railway opened for operation in late December 2014, construction of Wutong Station was behind schedule. Its official opening was delayed to March 2018. Afterward, during its early days of operation, only seven trains stopped there per day, with an average daily passenger flow of fewer than 200 riders. This proved to be the peak of the station’s ridership. The number of passengers dwindled over time, and Wutong Station operated only intermittently before service was eventually suspended indefinitely.

The provinces of Hainan and Guangxi [home to Danzhou and Guilin, respectively] aren’t the most economically or financially stable of regions. They can ill afford to support “idle stations.” But “neither do the landlords have surplus grain”—even the richest province in the country, Jiangsu, cannot afford to support idle stations either. In April 2020, both Huaqiao Station in Kunshan, Suzhou and Baohuashan Station in Jurong, Zhenjiang were closed due to low passenger volume. Two stations in Jiangsu’s provincial capital of Nanjing—Pudong Station and Zijinshan East Station—have been idle since their construction over a decade ago.

Overestimating passenger flows is understandable, but the locations of some of these high-speed railway stations seem to have been carefully chosen to avoid passengers. In Hubei province, Xiaogan North Station is located 100 kilometers from Xiaogan’s downtown. Who would travel one or two hours by car from the city center just to get to Xiaogan North Station? And yet, there it is, a 120-million-yuan, first-class, high-speed railway station, serving only a hundred or so passengers per day. The station has more employees than passengers. Even more ridiculous is Guizhou province’s Zunyi South Station, a three-hour journey on public transportation from downtown Zunyi. Instead of “South Station,” they ought to have named it “Out-in-the-Sticks Station.”

It goes without saying: high-speed railway station planning and development in China is a complete disaster, in terms of both excess and inefficiency. According to publicly available information, as of 2022, China had 5,544 railway stations, including 50 special-class stations, 236 first-class, 353 second-class, and 939 third-class stations. These so-called “classed” stations, including the Xiaogan North Station with its first-class facilities and third-class passenger flow, make up less than 30% of the total. How many of these 5,544 stations can effectively be put to use? It’s a very concerning question.

Looking back now, the term “infrastructure mania” was quite apt: the manic pace of building high-speed railway stations back then looks just as maniacal today. And what became of the “scientific planning” and “strict budgeting” the public was promised? After so much debate and so many layers of approvals, how is it possible that these enormous projects, costing tens or hundreds of millions of yuan, are now sitting idle? What’s the point of spending millions of yuan per year to maintain these “idle stations,” where the employees outnumber the passengers?

There has been a great deal of reassessment of “ineffective” and “excessive” infrastructure. Many people blame these problems on the “GDP-only” performance appraisal system for local cadres, and though that may be a cliché, it is one that rings true.

A train enters a station along a curving track.

In the wake of the 2008 global financial crisis, many local governments realized that large-scale infrastructure construction was an effective shortcut to raising GDP. Breaking ground on a new infrastructure project meant that GDP growth—and performance assessments based on GDP growth—would remain stable for years to come. High-speed rail construction naturally played a starring role in this. As the data bears out, the GDP-growth-based performance-appraisal system for local cadres was indeed the impetus behind many excessive and ineffective infrastructure projects.

But would changing performance-appraisal benchmarks really cure local governments of their addiction to excessive infrastructure investment? Let’s not be naive. Well, you couldn’t go wrong by switching the performance-appraisal benchmark from “GDP growth” to “safeguarding citizens’ livelihoods” (i.e. improving the economic well-being of ordinary citizens), could you? To answer this question, let’s consider Hegang, a city in Heilongjiang province, whose [housing glut] situation recently went viral on the Chinese internet. Back in 2011, China officially designated Hegang as a “resource-depleted city.” Because of this designation, performance-appraisal benchmarks for Hegang’s municipal cadres based on GDP growth and other economic indicators were scrapped in favor of benchmarks based on improving the economic lot of ordinary citizens. Subsequently, between 2013 and 2018, the city built 110,000 units of low-income and affordable housing. But because the population of Hegang is less than one million, and that number is shrinking as permanent residents leave the city, Hegang now finds itself with a glut of unoccupied low-income housing. Some families have even been allocated four apartments—an average of one apartment per person. At that rate, a four-person family could switch to a different apartment every season of the year, if they wanted to! But the residents of Hegang aren’t happy about having all these apartments, because they must pay a fee for obtaining low-income housing—about 350-550 yuan (roughly $48-76 U.S. dollars) per square meter. It may not be much for one apartment, but the fees for four apartments add up to a substantial sum of money. It’s also important to note that while Hegang was feverishly building all this low-income housing, many of the area’s coal mines were shutting down and laying off workers. Many laid-off residents ended up using their severance money to pay the apartment fees.

The next part of the story became famous on the internet. In formerly “overcrowded” Hegang, property values plummeted, homes could be bought for a song, and real estate agents were thrown out of work. Needless to say, all those apartment fees that residents had been paying turned out to be a complete waste of money.

Hegang’s low-income housing glut represents not only ineffective infrastructure investment but also ineffective social-welfare strategy. Switching the performance-appraisal benchmark from “GDP growth” to “citizens’ welfare” has not altered the behavior of the local government, which continues to follow the same old playbook: reckless, excessive infrastructure investment with no thought for the consequences. [In 2022, Hegang became the first prefecture-level city in China to be forced into fiscal reorganization.]

Top-down performance appraisals of municipal-government officials are like the essay section of the university entrance exam: the essay questions may change from year to year, but the answers are always written in the same old style. When the government made “environmental protection” a paramount concern, it led to the closure of a huge number of factories. When the government decided to strengthen market supervision and oversight, fines rained down without mercy. When the government decided to “beautify” a certain city, all the store signs were changed to a uniform, spartan black and white. Some say that local governments are inefficient, but that is a misunderstanding: when higher levels of government wield the “big stick” of performance-appraisal benchmarks, local governments can be motivated to make miracles happen.

The “GDP-only” standard appears to be the lesser of two evils. Before infrastructure development emerged as the predominant strategy to juice GDP numbers, the “GDP-only” model did, to some extent, promote local government efficiency and improve the economic well-being of the citizenry. Because of the focus on economic indicators, local governments were incentivized to follow a more laissez-faire policy, maintaining a certain degree of tolerance for (and sometimes even actively encouraging) the normal operation of the local economy. It was a delicate balancing act that at times undermined the local economy, but never totally destroyed it—that is, until the “infrastructure shortcut” emerged.

All it took to jump on the infrastructure bandwagon was a seal of approval from government higher-ups and a bank loan. Who cared if it meant that the local government coffers were overextended? Poor planning, excessive debt loads, and other such problems could be pushed off into the future. By the time those problems surfaced, chances were that none of those local cadres with cushy sinecures would still be in office, and those fly-by-night project teams would be long gone, so why overthink it?

Faced with the shambles of inefficient, excessive infrastructure construction by local governments, there are many critics who take it for granted that “holding people accountable after the fact” is the right medicine, as if it were some sort of panacea.

But real accountability requires digging back through the entire project approval process, examining each and every link in the chain. How would you even go about doing that? Not only would you need to sift through each layer of the approval process, stretching back many years, but at each step of the way, you’d also have to contend with bureaucrats’ instinctive tendency to cover for one another.

Even if you do make an example of some of these local cadres, it stands to reason that you can’t punish everyone who erred back in the day. Any official who balked at an infrastructure project for fear of future consequences would have been dismissed on the spot, so naturally, anyone with a brain in their head just chose to go along with it. The notion of “holding people accountable after the fact” doesn’t exert the deterrent power that some might imagine.

Even if, against the odds, you are singled out and held “accountable after the fact,” your punishment, at worst, will be administrative in nature. The matter will be dealt with internally, forming just a minor setback in your career as an official. Once you’re out of the limelight, you can go back to being an “honorable” official. And if not, you’ll still always have what you need, which is a far sight better than being sacked immediately for not playing along in the first place.

Those who think it sufficient to pursue accountability after the fact do not realize that top-down accountability and top-down government performance appraisal standards are part of the same closed feedback loop. “Imbibing more of the same” isn’t going to fix anything.

In the end, top-down government performance appraisal standards are similar to writing assignments given at school. The higher-ups assign the topic and ultimately decide the grades. In other words, whether the performance appraisals are based solely on GDP growth or on some other criteria, the system is still predicated on absolute obedience to authority. Whatever policies the higher-ups deem worthy, the underlings are expected to implement with enthusiasm. And as those underlings go about their work, they will seek out any advantage they can gain over their peers, knowing that the most ruthless among them will receive the best marks. Thus, under this “top-down” system, the result is always the same. Excesses are inevitable. It’s just a matter of degree.

All problems stemming from excessive infrastructure construction, such as lack of local fiscal self-discipline and lax planning controls, are systemic in nature and rooted in this strictly top-down system. Local budgets are constrained, resources are limited, and priorities are constantly shifting, so how is it possible to rein in local government spending? Performance appraisal standards are imposed from above, as are project approvals, so central government authorities face a dilemma. Their control over local governments is predicated upon these performance appraisal standards, but excessively high performance benchmarks lead to undisciplined local spending. But if central authorities demand too much fiscal discipline from local governments, then nothing will ever be accomplished. For what seem like technical issues at the local level, there are no technical solutions.

If these fundamental issues are not resolved, how can local government fixes hope to solve the problem? After so many years of tinkering, everything that can be fixed at the local level has already been fixed. What is left is unsolvable, at least at the local level.

Admittedly, there is nothing wrong with local governments pursuing political achievement. Nor is there anything wrong with keeping an eye on economic indicators such as GDP growth when endeavoring to develop the local economy. Every government in the world does this. But we must reflect on why we are pursuing these normal goals through such abnormal means. And by reflect, I mean actually ask probing questions, rather than assuage yourself by making some clichéd, superficial remarks and calling it a day. False or careless reflection is worse than no reflection at all. While the “GDP-only” model led to our excessive infrastructure problem, is it really true that simply switching to another standard could fix the problem? Surely you couldn’t be so naive as to believe so. [Chinese]

Translation by Little Bluegill.

*Editor’s note: This post has been edited to clarify that the 5,544 stations referred to include all railway stations, not only high-speed railway stations.