The Chinese Economy is mostly Bad Investments, Savings and little Domestic Consumption

Posted by PITHOCRATES - May 26th, 2012

Week in Review

The Chinese economic juggernaut is losing steam.  The communist 5-year plans in infrastructure projects isn’t having the magic it once did.  Exports are down thanks to a worldwide recession.  And worse of all for Keynesians everywhere savings are outpacing consumption.  People across China are acting responsibly.  And this just won’t do (see Chinese urged to spend more, save less by Mure Dickie posted 5/25/2012 on The Washington Post).

Yet with China’s economy slowing — to a relatively modest annual rate of 8.1 percent growth in the first quarter — some observers fret that consumption could be faltering. Retail spending in April was weaker than expected. And while Wen Jiabao, the premier, last week signaled action to shore up growth, the government appears to have set its policy focus on promoting investment rather than consumption…

Indeed, [Andrew] Batson [research director at GK Dragonomics] suggests that the present slowdown could promote a much-heralded rebalancing of China’s economy, away from reliance on increasingly unproductive investment to a healthier consumption-driven model.

While the government has long talked of such a shift, the proportion of gross domestic product accounted for by investment actually soared to 46 percent in 2010, while household consumption’s share of GDP slumped to just 35 percent…

So China’s investment is increasingly unproductive.  Perhaps their high-speed train program isn’t the only black hole for their investment capital to disappear in.  The Chinese have invested a fortune in their high-speed trains but so far that has been an investment earning a negative return.  Sure, it created a lot of jobs but their high-speed trains can’t turn a profit.  So far they’re only accumulating debt.  But they keep spending this money.  Adherents to Keynesian economics that they are.  For the Keynesians say anything that puts more money into a workers pocket is good.  Because that worker will spend that money.  Even if we pay him to dig a ditch.  And then pay him to fill it back in.  Or pay him to build a very costly high-speed railway that the people don’t need.  Or can ever pay for itself.  A Keynesian will say that’s good.  Because it will give the worker money.  And that worker will spend that money.  Thus increasing consumption.  Unless that worker does something stupid like put it in the bank.

Some economists say the government needs to do more to promote this rebalancing in a country where citizens still save a far larger proportion of their incomes than do their counterparts in developed economies…

Lower-income consumers also save fiercely. In the village of Wuti in northern Hebei province, house builder Li Moxiang and his farmer wife aim to set aside $3,150 or more a year to help raise their future grandchild — even though stingy state-set interest rates mean such savings are constantly eroded by inflation…

A big motivation for such saving is the lack of a social security system to cushion Chinese in old age or ill health. Serious illness or accident often spells household bankruptcy. For most rural people, children have to play the role of pension provider.

In a report this week, the World Bank said fiscal measures to support consumption — including targeted tax cuts, social welfare spending and other social expenditures — should be Beijing’s top priority as it seeks to avert an economic “hard landing.”

Some economists would like to see mass privatization to shift wealth out of the dominant and domineering state sector.

Keynesians hate savings.  They want people to spend their money.  And not be responsible and save for their retirement.  Or to save to pay for any unexpected expenses.  Why they hate savings so much that they constantly inflate the currency to dissuade you from saving.  For if you do save you’ll only see inflation eat away the value of your savings.  Sort of like putting an expiration date on your money.  Telling you saving is for fools.  That consumption is the smart way to go.  And so what if you can’t afford food or housing in your retirement.  Or pay for medical care.  That’s what family is for.  So you can be a burden to them.

Right now the social democracies of Europe are imploding from the massive debts they incurred from their social spending.  And the World Bank is encouraging Beijing to increase their social spending.  To be as irresponsible as the Europeans were.  Unbelievable.  Europe is burning because of the social expenditures they can no longer afford to pay.  And the people are rather reluctant to give up.  So when the government tries to live within their means with a touch of austerity the people reply with riots.  And this is what the World Bank is advising the Chinese to do.

History repeats.  For everything the Chinese are doing, or trying to do, or are being advised to do has been done by every nation with a spending and debt problem.  Sure, China is still enjoying 8% GDP growth.  But a lot of that growth is from building stuff that the market isn’t demanding.  Consumer spending in China is only at 35%.  With the worldwide recession hurting Chinese exports that leaves that 35% as a large component of their market-driven spending.  And you can rarely sustain economic growth from making stuff the market isn’t demanding.  Instead this artificial growth usually leads to some kind of a bubble.  And a painful recession to correct the mess the government made while artificially increasing economic output.

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China Spending less on Unprofitable High-Speed Trains, wants Private Investors to Lose Money Instead

Posted by PITHOCRATES - May 26th, 2012

Week in Review

Governments everywhere want to build high-speed trains.  They like them because they’re very high profile and can stand as memorials to the politicians that gave them to us.  They like them because they are so costly, both to run and to operate.  Requiring higher taxes and lots of government borrowing.  They like them because they are so labor intensive.  Both to build and to operate.  This creates a lot of jobs.  Yes, they are all of these things.  But one thing they are not is profitable (see Railways try to get investors on track by Wei Tian and Xin Dingding posted 5/21/2012 on China Daily).

Experts predict lukewarm response as sector seeks private capital…

Zhou, who is chairman of the Wenzhou Small and Medium-sized Enterprises Development Association, represents a group of wealthy industrialists in East China’s Zhejiang province.

The railway authority in Wenzhou, he said, has been negotiating with entrepreneurs but so far the government is offering just 8 percent of the profits.

“Eight percent is not attractive,” he said. Railway programs require huge investment, the sector has suffered losses and entrepreneurs are cautious, he said.

According to data released by the ministry, its debt reached 2.43 trillion yuan ($384 billion) by the end of March, with a debt ratio of 60.6 percent.

The ministry also reported a loss of 6.98 billion yuan in the first quarter.

Meanwhile, fixed investment in railways was 89.6 billion yuan, 48.3 percent less than the same period last year…

…private capital is already involved in railway construction, he said, explaining that a 624-kilometer coal transport line, partially funded by the privately owned Xinjiang Guanghui Industry Investment Group, had begun construction in late March.

However, he warned that it will not be easy to attract private investors into industries that are no longer profitable.

Building these railways gave the government a huge debt.  That debt ratio (total liabilities divided by total assets) means lenders are not all that happy.  With over half the total assets of the railway programs paid for by debt and an annualized loss of 27.9 billion Yuan (4 X 6.98 billion Yuan) investors see these railway programs for what they are.  Investment losers.  They rack up debt and can’t operate at a profit.  Even the government doesn’t want to pay for them anymore and is trying to find private investors to throw away their money.

Railroads are so costly because there is infrastructure everywhere a train travels.  And the revenue from the train has to pay for this infrastructure.  From the first survey to the first grading to the first ballast to the first track to the first switch to the first signal there are nothing but high capital costs.  Followed by high operating costs to make everything work.  From maintenance crews to engineers to conductors to train crews to dispatch centers to ticket sellers.  High-speed passenger rail is the most expensive rail of all.  Because they’re typically electric which requires even more infrastructure wherever that train travels.  And no grade crossings.  So that’s more tunnels and bridges.

Only two high-speed lines earn enough revenue to pay both their capital and operating costs.  One in Japan.  And one in France.  Governments subsidize all other passenger rail.  Only the freight railroads are profitable.  Which is why companies in the private sector still own the freight railroads.   Why freight?  Because there is no more cost effective way to move containers or bulk freight.  Like coal.  Which is where private capital is currently going to in China.  Because coal is never an investment loser.  And there is no better way to move coal overland than by train.

The bidding process has come in for harsh criticism by the public after a crash involving two high-speed trains in Zhejiang province killed at least 40 people and injured more than 200 others in July.

According to the findings of an investigation announced last December, malpractice and illegal contracts were found in the bidding process administered by the Ministry of Railways and its subordinate bureaus, which resulted in the failure of a train control system that had never undergone field tests before launch, Xinhua reported.

The national auditor said in March that it had uncovered evidence of fraud, waste, mismanagement and irregular accounting and procurement totaling billions of yuan at the ministry’s flagship high-speed Beijing-Shanghai railway.

And here’s the other reason why politicians love high-speed rail.  It is so much easier to conceal fraud, waste and irregular accounting and procurement practices when the money amounts are so large.  It’s a sad thing that government is not very good at building and running trains but is very good at the fraud.  We should remember this the next time government wants to spend a fortune on high-speed rail.

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