By chief economist Shen Minggao

(Caijing.com.cn) Much Chinese government-backed funding from the 4 trillion yuan stimulus package has gone into infrastructure, which has raised concerns about unnecessary road projects.
 
Caijing's chief economist Shen Minggao and economist He Yin recently warned that China's road construction has outpaced real demand since 2000.

In Caijing's macroeconomic weekly report published on July 20, Shen pointed out that China, the world's fastest growing and third largest economy, has witnessed a rapid expansion of road networks since 1979.

In the past three decades, the road length per capita in China has grown tremendously. In the 1980s and 1990s, the length per capita increased by an average annual growth rate of 1.1 percent. In the 2001 and 2007 period, the figure soared by an average growth of 16 percent annually, with especially notable years being 2001, with a 20 percent growth rate, and 2006, with a 78 percent growth rate. By 2007, the road length for every thousand people was 3.5 kilometers, up from half that length in the 1970s.

Geographically, the road length per capita has been higher in China's central and western areas than in the eastern regions, since the central and western regions are quite mountainous and have sparse populations. In 2001, the road length per capita rose by 12 percent in eastern China and 34 percent in central and western China. In 2006, the road length per capita rose again by 50 percent and 55 percent, respectively, in eastern China and central and western China. The sharp increase in 2001 resulted from an economic stimulus package adopted by China following the Asian financial crisis.

In terms of road quality, 71 percent of China's roads are paved, a much higher proportion than the average of less than 50 percent paved road for other middle income countries. The middle income nations, according to the World Bank's classification system, include China, Russia, Turkey, Brazil and other countries where per capita annual incomes range from US$ 1,000 to US$ 10,000.

In the 1980s and 1990s, the expansion of road infrastructure was largely in accordance with the fundamentals of economic development, said Shen.

"China's fast economic growth has not only led to a need for road infrastructure but also provided financial support for infrastructure upgrades," said Shen.

Between 1979 and 2007, China's investment in fundamental industries and infrastructure totaled 30 trillion yuan and the annual growth rate was 19.9 percent. Transportation is a major part of infrastructure and roads have accounted for 84 percent in total infrastructure investment since 2000.

But the economist warned that even if the economy grows at 9 percent in the next decade, the demand for roads will increase at no more than 30 percent by 2020, compared to demand in 2005.

Per capita income is associated with the magnitude and quality of road infrastructure, Shen noted, citing a 1993 World Bank report.

According to another World Bank report released in 2003, high income countries need 11.7 kilometers per 1000 people while middle income countries require 1.3 kilometers per 1000 people. Low income nations need 1.2 kilometers per 1,000 people.

From 2000 to 2010, the World Bank predicts that demand for roads will rise annually by 2.6 percent in middle income nations, 1.4 percent in low income nations and 1.6 percent in high income nations.

"Compared with these World Bank numbers, China's explosive growth in road construction is unusual," said Shen.

Economic development is a major factor in determining demand for roads, according to academic research and empirical experience worldwide, said Shen, adding that the farther along the economic development, the higher the demand for roads.

In eastern China, where the pace of economic growth has been faster than in the west, the expansion in road infrastructure has generally been in line with economic development although the two factors diverged after 2005. In the central and western regions, there has not seemed to be correlation between road expansion and economic development since 2005.

Suppose that GDP grows at 9.89 percent in eastern China and 9.18 percent in central and western China, while population density rises by 1.52 percent in the east and 1.14 percent in the central and west, and urbanization levels are up by 0.66 percent in the east and down by 0.66 percent in the central and western regions. Given all these factors, in 2020, the demand for road infrastructure in eastern China would be 2.26 kilometers per 1,000 people and in the west would be 6.01 kilometers per 1,000 people with the 2005 figures as a base, according to Caijing's estimates.

According to China's official statistics, at the end of 2007, there were 1.85 kilometers per 1,000 people in eastern China and 4.75 kilometers per 1,000 people in the central and western areas.

Simply putting into place more public works projects without having a clear vision or overall plan for them will bring about more harm than benefits, which is an experience Japan has already gone through.

From 1991 to 2001, Japan invested a total of US$ 6.3 trillion in infrastructure projects. However, a Tokyo University economics professor pointed out that public works did not contribute to economic growth but instead crowded out private investment. Due in part to those unnecessary infrastructure projects, Japan's stimulus plan proved to be a failure.

Currently, the global recession has resulted in weak overseas demand. China's exports have fallen, employment and survival of enterprises have become the top priority, and investment has turned into a major engine for economic revival. Investment has increased greatly in methods of transportation– railways, airports, and, of course, roads.

Shen warns that while a fast-growing China needs more roads, it must also prevent investments from becoming superfluous.

"We need to think carefully and invest efficiently for public works to truly stimulate the economy," said the economist.