Infrastructure Mania Gone Wrong

Where can you find the lengthiest bridge? The most extensive high-speed railway network?  The longest metro system? If there were a list of Guinness World Records exclusively on transportation, China’s name would probably dominate most of its rankings. Having spent trillions of dollars on railways, highways, and waterways, the Chinese government loves to brand the country as “the infrastructure maniac” in state media. The self-applauding label quickly gained traction on the country’s social media and has become a source of national pride, with many posts comparing the cheap and convenient commuter rail of China with the slow and outdated one in the United States. But behind the fervent and thrilling scenes of mass construction exists another reality: deserted stations witness vacant trains passing day after day while local governments face high piles of debt surpassing the province’s annual real output. When the government continues to prioritize the funding of transportation projects with networks already at optimal efficiency, concerns emerge regarding whether officials are using taxpayer yuan to benefit the public, or to satisfy state propaganda and Beijing’s target of annual economic growth. In simpler terms: Is the “maniac” label worth the entailed expenditure? 

When a local government decides to invest in the construction of a major airport or a piece of highway, it automatically frees itself from the anxiety of meeting the output targets for the next few years. Over the past two decades, expansionary fiscal policies concerning transportation infrastructure have always been crucial in combating downward pressure on GDP growth. In 2008, the State Council and municipal governments collectively implemented the ambitious “4-trillion-yuan program” to alleviate the impact of the financial crisis. As the railway network expanded and the number of metro systems multiplied, the Chinese economy pulled out a 9.4% growth rate in 2009 when the rest of the world was deep in the Great Recession. In 2022, when China verged on recession under its quarantine policies, the State Council and the Central Financial and Economic Affairs Commission hosted meetings reiterating the central government’s support for transportation constructions. As a result of the policies, total investment in fixed assets increased by 6.1% year-over-year and contributed to 32% of economic growth in the first half of 2022. Chinese economists often describe the economy as a “three-horse carriage” driven by net exports, consumption, and government investment. As net exports are experiencing headwinds from intensifying international competitions, and domestic consumption is lagging under the burden of worsening income inequality, public spending on transportation becomes the only running “horse” stimulating short-term economic performance.  

As net exports are now experiencing headwinds from intensifying international competitions, and domestic consumption is lagging under increasing income inequality, public spending on transportation becomes the only “horse” that can still run and stimulate short-term economic performance.  

Besides encouraging short-term economic growth, transportation infrastructure in less-developed areas is an important way to alleviate poverty and explore new market potentials. As per the Chinese government’s report in 2022 on the “Comprehensive Victory of the Fight against Poverty,” 99.6% of Chinese villages now have concrete roads, and 81% of the counties are connected by railroads. In 2013, China’s highway network reached the last remaining county, Motuo, inaugurating an era of significant transformations deep in the valleys of Tibet. According to Xinhua, the state media outlet, Motuo has experienced a variety of improvements beyond reduced grocery costs and faster school commutes, with local industries flourishing.  Benefitting from improved accessibility for both people and goods, the county has capitalized on online sales of mushrooms, teas, and pitayas while also attracting tourists to its restaurants and B&Bs. Consequently, the county’s GDP surged from ¥260 million in 2012 to ¥790 million in 2022, representing a 148% increase with inflation considered. In some of the poorer villages of Motuo, the resulting rise in real income per capita has been as high as 825%. Similar narratives of remote villages undergoing rapid developments after infrastructural advancements are the favorite theme on state media, illustrating the Chinese Communist Party’s accomplishment of its “first centenary goal — building a moderately prosperous society in all respects and historically eradicating absolute poverty.” 

Despite the positive impact of infrastructure development on rural villages in urgent need, many recent construction projects may be providing facilities for which there is little demand. To boast their political achievements and embellish their resumes, provincial officials across China  have declared ambitious targets from “high-speed railway for every city” to “highway access for every county.” Looking beyond the passionate slogans, the question arises: Does every city truly need a high-speed railway? Due to low ridership, reports indicate that only thirty pairs of trains operate daily on the high-speed rail route between Zhengzhou and Xi’an, significantly below the track’s maximum capacity of 177 pairs. Guilin, classified as a Tier III city with a population of 5 million, boasts an impressive total of 9 high-speed train stations, yet these stations seldomly witness commuter activity. Among them, Wutong station, which opened four years ago, has now suspended operations. Wutong is not an isolated case in the extensive roster of deserted stations, many of which never even opened after completion due to significant financial losses suffered by their neighboring stations. More broadly, the average traffic density of Chinese high-speed railway stands at 17 million passengers per kilometer, half of that observed on the Shinkansen in Japan. The pervasive issue of inefficient resource allocation has transformed transportation from an economic necessity into mere propagandistic statistics found in policy papers and administrative reports. However, the short-run political motivations driving such actions do not come without greater economic repercussions. 

The pervasive issue of inefficient resource allocation has transformed transportation from an economic necessity into mere propagandistic statistics found in policy papers and administrative reports.

The first negative consequence happens after increasing local debt is funneled into mass constructions that yield little return. With the Chinese real estate market entering a downturn, local governments find themselves unable to depend on land sales for revenue. On the other hand, most completed transportation projects produce little revenue for the government to pay for their construction and operating costs. Over the last decade, the annual revenue-expenditure balance in the maintenance of highway networks has dropped from -¥56.6 billion to -¥627.9 billion. The daily revenue of the Lanzhou-Xinjiang high-speed railway cannot even cover its electricity bills. Nonetheless, the lack of financial resources has not dampened the enthusiasm for infrastructure as the aggregate investment in large-scale projects witnessed a 9.9% year-over-year growth in 2023. Expanded spending plus reduced revenue equals exacerbated budget deficits, which constituted 7.11% of GDP in 2023 compared to 0.3% in 2012. To address the deepening deficit amid macroeconomic challenges, municipalities have little choice but to borrow more. According to the Wall Street Journal, local debt has spiraled over the past seven years and now amounts to 80% of the GDP. While the central government seeks to mitigate the situation by shoring up transfer payments, credit ratings for local government financing vehicles (LGFVs) are now on the edge of pitfall, with rural financial institutions and shadow banks suffering from bankruptcies and frozen deposits. Alongside the decline of real estate giants like Evergrande and Country Garden, the mounting pile of infrastructure debts may fuel the arrival of a financial crisis. 

Even without precipitating a financial catastrophe, excessive transportation constructions have facilitated the crowding-out effect. Because government bonds offer higher expected returns, their proliferation incentivizes investors to divert their money from commercial to government financing, thus raising interest rates in the private loanable funds market and diminishing corporate investments. The study of Zhang et al. (2022) supports the application of this theory to China’s situation, where the amount of LGFV funds had a significant negative correlation with loan issuances to private corporations over the past 15 years. The escalating fiscal dependence on financial leverages in recent years thus risks discouraging private innovations and capital expenditures that should have formed the basis of long-term development in a healthy, market-based economy. 

On the other hand, arguments that an expanding infrastructure network would lower shipment costs and thus increase production incentives have failed to materialize. Theoretically, it is self-evident that improved connectivity reduces the cost of transporting resources. Nevertheless, most recent government investments have focused on passenger-based transportation like high-speed rails and metro systems that contribute nothing to material shipments. Additionally, the cumbersome bureaucratic procedures of freight rail and waterway traffic continue to account for most shipment costs. Hence, the freight rate index of transporting crucial metals and energy sources from northern mines to southern factories remains 15% higher than the U.S. standard, despite repeated calls for reform from the National Development and Reform Commission. Rather than driving sustainable economic growth, China’s current infrastructure investment has had the opposite long-term consequences of depressing private enterprises without curbing the cost of production. 

From high government debts to crowding out, the negative implications of inefficient infrastructure constructions have become critical areas of research for Chinese economists after the 2008 financial crisis. Even the central government itself cautioned against “strong stimulus policies that would have had an economy-wide impact” in its 2016 report. Nonetheless, whenever the economy enters another stage of increasing recessionary pressure, policymakers immediately prioritize short-term stabilization over long-term development. After all, in a low-confidence environment, expansionary fiscal policy serves as a much quicker and reliable means of avoiding widespread economic woes than addressing the persistent problem of low consumption. 

Another hurdle keeping the Chinese government from systematically reevaluating its infrastructure policies is the issue of excess supplies. As Chinese exports begin to fall with heightened competition from Southeast Asia and decoupling efforts from Western nations, the overcapacity of manufacturing materials in China, including steel and cement, is increasingly in need of an outlet. Initially, the Belt and Road Initiative (BRI) served that purpose by supporting constructions in less developed countries with Chinese materials. However, because of repeated foreign defaults and rising domestic discontent on spending abroad, Beijing is expected to gradually reduce its level of investment in BRI. Thus, domestic infrastructure has again taken on the central role of alleviating pressure from the manufacturing surplus. In essence, policymakers feel more comfortable in continuing the well-trodden path of boosting traditional manufacturing than uprooting the entire industry for a new emphasis on green and high-tech manufacturing with higher efficiency. 

Ultimately, despite transportation infrastructure’s positive impacts on short-term economic growth and alleviation of poverty, excessive government spending on an overexpanded network is, by definition, inefficient resource allocation that invites financial uncertainties while limiting long-term development of production potentials. When confronting recessionary headwinds and manufacturing overcapacity, the Chinese government should thus initiate comprehensive and structural reforms to boost consumer confidence and encourage industrial transformation instead of depending on superficial and short-sighted painkillers. 

Michael Qian ‘26 studies in the College of Arts & Sciences. He can be reached at mankang@wustl.edu.