Structural changes needed for infrastructure investment in China

Abstract: Global Times Wednesday published an article named Structural changes needed for infrastructure investment in China. The article, compiled based on a report by Beijing-based private strategic think tank Anbound, said that against the background of the increasing downward pressure and rising demand for stabilized growth, China will likely boost its infrastructure investment to keep its economic growth from stalling. Nevertheless, in order to avoid the structural problems that past investment experienced, China needs to change its mindset and adjust investment structure so as to find new market space for infrastructure investment.

Large-scale infrastructure investment used to be a panacea for China's economic development, which was in urgent need of a large number of roads, railways, airports, bridges and power facilities in the past. In particular, the urbanization drive pushed the construction of infrastructure and real estate to new highs. When more than 1.3 billion Chinese people began to pursue a higher standard of living, it generated worldwide influence, which was so strong that there was a saying that China's urbanization is one of the key drivers for the global economy.

It is an undeniable fact that infrastructure construction and real estate investment used to contribute greatly to the Chinese economy. In general, the contribution ratio of real estate to China's GDP is estimated at around 8 percent. However, this figure could be seriously undervalued in our opinion. Structural factors usually have a strong impact on the Chinese economy, and once resources are concentrated in a few areas, they often generate tremendous impact and grow exponentially. That's exactly what has happened to the infrastructure and real estate sectors.

From the perspective of investment, infrastructure investment grew slower than fixed-asset investment over the past decade. According to information from the Institute of Industrial Economics of the Chinese Academy of Social Sciences, the total investment in transportation, energy supply as well as information and communication climbed from 637.65 billion yuan (92.56 billion U. S. dollars) in 2003 to 4.03 trillion yuan in 2014, representing an average annual growth rate of 18.26 percent. Meanwhile, China's fixed-asset investment rose from 5.56 trillion yuan to 51.2 trillion yuan during the same period from 2003 to 2014.

The proportion of infrastructure investment in fixed-asset investment has generally remained at approximately 20 percent. Data from the National Bureau of Statistics showed that infrastructure investment accounted for 18.4 percent, 19.9 percent and 22.2 percent of the fixed-asset investment in 2015, 2016 and 2017, respectively. Apparently, infrastructure investment remains an important part of China's fixed-asset investment. Moreover, despite the slowing economic growth in recent years, China's infrastructure investment has still maintained a relatively fast and healthy growth rate, which is about two to three times the GDP growth during the same period.

After years of rapid growth, China's infrastructure construction has indeed slowed down recently. This is largely due to the continuous restriction measures for speculative home purchases, so the country's real estate investment has seen an obvious slowdown, which has weighed down infrastructure investment.

Yet, with the deteriorating international trade environment and the structural problems in the domestic economy, the Chinese economy is still facing increasing downward pressure. Under these circumstances, China is likely to go back to the path of heavy infrastructure investment to stabilize its economy. In fact, the National Development and Reform Commission fast tracked some infrastructure projects this year. The development has now aroused a concern that a comeback of large-scale infrastructure and real estate investment may sabotage all the efforts made for economic restructuring over recent years.

Then, how much room is there for China's infrastructure investment if structural reform needs to be carried out while economic growth must be stabilized at the same time? The answer requires the meaning of infrastructure to be redefined. In the past, infrastructure in China mainly referred to roads and bridges, which has been the case for decades. However, infrastructure may cover a wide range of public facilities, including transportation, postal services, telecommunications, radio and television, broadband, water conservancy and environmental protection.

In this sense, there is still a lot of room for China's infrastructure construction, including solving water resource problems, improving land resources, upgrading of the telecommunication network, and building sports facilities. Therefore, the demand for infrastructure investment in China is huge, as long as authorities shift with the right investment focus.

It is worth noting that the expansion of the definition of infrastructure is not just meant to expand the investment scale. If the Chinese policy-making authorities can change their mindset to expand the coverage of infrastructure construction, it will actually expand the market space for infrastructure.

Against the background of the increasing downward pressure and rising demand for stabilized growth, China will likely boost its infrastructure investment to keep its economic growth from stalling. Nevertheless, in order to avoid the structural problems that past investment experienced, China needs to change its mindset and adjust investment structure so as to find new market space for infrastructure investment.