We often criticize our governments for their inability to get things done, especially when it comes to large infrastructure projects. The US has been in the news for the federal infrastructure plan which is promising to put more than a trillion dollars towards upgrading and repairing infrastructure all across the country. Already the project is attracting criticisms from people arguing that this won’t meet the requirements to fix the nation's failing infrastructure.
The same is true for smaller projects which seem to inevitably be plagued with delays and massive cost overruns. This is a real shame because infrastructure spending can be one of the best investments a government can make. In the short term, it acts as a form of stimulus.
Bridges and roads don’t build themselves, they need laborers, engineers, city planners, and sure, maybe even a few environmental consultants. Just like a stimulus check this puts money directly into people's pockets and alleviates unemployment. However, unlike a stimulus check the money is actually going to build something which will continue to provide value to that economy long after regular stimulus checks would have been forgotten.
Projects like the hoover dam were built in part as a way to get people back to work during the great recession. Now, almost 100 years later the damn is still providing a reservoir and electricity. Infrastructure spending in a word, is fantastic, it’s also politically palatable as well.
Nobody says the paychecks that workers receive on these projects are handouts, and most infrastructure these days also helps to generate clean energy, or reduce time spent in cars, or whatever. Infrastructure spending is great, which is probably part of the reason why people get so frustrated when projects never seem to go anywhere, or just get caught up in an endless web of red tape and consultants. to look at places like China where infrastructure projects just seem to work.
American bridges and roads are falling into disrepair at the same time China is building feets of engineering once unimaginable. China built an entire hospital in 10 days, while it took the city of San Francisco ten years to approve a new bus route. California has spent 20 years planning a rail network in the time China spent 20 years building out the largest one in the world.
And if you think I am just throwing shade at America, then my own home here in Sydney spent over three billion dollars and more than 4 years to build out trams which have all of the traffic issues of busses combined with all of the flexibility of trains. It’s easy to see why people think whatever it is that China is doing is working, but unfortunately, it is not. China’s high speed rail network was the centerpiece of the nation's infrastructure development, the jewel in the crown of china’s building spree and a public demonstration to the world that effectively amounted to “nah nah we are better than you”.
The system is undeniably impressive, but it’s also threatening to be a problem for the Chinese economy that could make Evergrande look like a sideshow. So. How did China build such a massive high-speed railway network so fast?
Why did it build such a massive network? And finally. How much did it really cost to put all of this together?
China is a very large country with a lot of people in it. It’s also a country where car ownership is seen as somewhat of a luxury. For this reason, a robust rail network was essential for providing a cheap and effective way for people to get around the country.
Now for a long time this need was mostly ignored because most Chinese workers would live and die in the city they would born in, travel across the country was very limited and so the demand for such a rail network wasn’t really there. This all changed in the early 2000s. By this time the country's plan to open up to the world was well and truly in full swing.
More and more young workers were moving from their small hometowns to large cities to provide the labor needed to fuel the nation's ever growing industrial sector. These workers still wanted to be able to get back to their families, but air travel and personal cars were too expensive for most. Before the rollout of high speed rail most workers just settled on taking bus journeys that would often take days or even weeks to cover relatively modest distances.
By the time 2008 rolled around the Chinese government had already started working on some high speed rail developments, but the global financial crisis pushed these efforts into high gear, if you would pardon the pun. China was not immune from the fallout of the GFC, it was even more heavily dependent on trade back then than it is today, and trade intensity during this period fell rapidly. We covered what trade intensity was in our video two weeks ago on Brexit, so if you want a detailed breakdown of what this term means go and watch that video, but put simply, a fall in trade intensity meant both imports and exports were falling, which for a country as dependent on global trade as China, was bad news.
The counter to this financial blow was fiscal stimulus, but China was apprehensive about just giving money out because they weren’t sure at this point how long this crisis would last. Instead, they wanted to take people who might have lost their jobs making stuff for export markets and put them to work building high speed rail. Keynes actually half joked about this exact process in the ’30s.
He argued that an effective form of stimulus would be for the government to bury bank notes in the ground, because at least then the stimulus efforts would put people to work digging up the money, which would look good in unemployment metrics. Of course, if you can get something out of this stimulus spending that isn’t just a well toiled field then that’s probably preferable. The high speed rail development achieved this goal, it put millions of people to work, the Beijing to shanghai track alone, had over one hundred thousand direct on site workers, and that’s to say nothing of other workers in factories making steel and cement, delivering materials to the site, or simply providing goods and services to the workers as they slowly built out these tracks.
It was in large part because of this high speed rail development that China avoided going into a recession. So brilliant right? Mission accomplished, China avoided recession and they got a high speed rail network out of it, which meant workers could freely move around the country further improving living standards and industrial capacity.
Well, this is where the problems start. From its inception the rail program has been marred by corruption, now that’s kinda par for the course with a lot of government works projects, especially those taking place in China, but this was one of the largest and most public projects ever so the corruption scandals were also bound to be bigger and bolder too. This was a bit of a problem for the government because it meant that they weren’t able to brag about how amazing their new project was without those claims being overshadowed by news of some official taking a bribe or two.
These issues were compounded in 2011 by a crash between two high speed trains which collided on a section of track that was elevated twenty meters about the ground. It was later revealed that the accident was caused by a series of management failures which had overloaded the route. This had serious impacts on the public's confidence in the high speed rail infrastructure that China had just invested hundreds of billions of dollars into building.
It also resurfaced concerns about corruption and nepotism in the ranks of the now bloated ministry of railways. The government's solution to this was to semi-privatize the railways by selling them to the state owned corporation China Railway. A year later the two companies that were responsible for producing the rail cars CSR and CNR, merged to form the CRRC.
These were two massive state owned corporations which set out on the biggest building boom yet. Because these corporations were technically distinct from the government they had more control over how much money they could raise. They borrowed almost a trillion dollars to get Chinese railways to where they are today and they found this money through a combination state owned banks, publicly issued bonds, and investments from local governments.
Now almost as soon as the final piece of rail was laid on this latest construction push the problems started. You see, by the time China rail had started its latest building spree, most of the highly profitable lines between major population hubs had already been established. This meant that the new lines were been laid to city centers which were not going to demand the same volume of trains and therefore not provide the same revenue from ticket sales.
These projects were still pushed by the government because they still wanted people to have access to and from these smaller tier cities, even if it wasn’t massively profitable. There are a few reasons why they did this, most of them were political, Sam from Wendover Productions did a great video on this so if you are really interested in that go and watch his video. Misguided political motivations aside there were other problems too.
China's high speed rail network became such a point of national pride that the developers never really stopped to ask if there was a better solution to the problem of moving people around the country. If you run the ministry of hammers, every problem starts looking like a nail. Likewise, if you run China railway, every problem looks like it can be solved with a high speed train.
The problem was that wasn’t always necessarily the case. High speed rail is very technically impressive and gets a lot of attention from the international community, attention that the Chinese government really likes, but sometimes there are better alternatives. Regular rail just for a start.
Regular rail is much cheaper to build and operate which means that tickets are also much cheaper, this can be very important for cost conscious workers who are still far from wealthy by western standards. Regular rail also has the benefit of being able to haul cargo, which for a country as dependent on heavy industry as china, is a really big deal. For a while and in isolation China’s high speed rail network was overdone but breaking even, losses from unprofitable routes were made up for by the highly profitable routes, and the state owned corporation even got to make a little bit of profit for itself after paying off it’s massive debt.
This delicate balance stopped in 2015 however, since then the interest payments on the accrued debts have been outpacing the operating profits of the rail lines. A number of factors have been making this worse, the lines are starting to age and are requiring more and more maintenance, the rail lines can’t increase their prices because then people would just choose to fly or go back to busses, and then covid hit which tanked the demand for rail tickets to the point where almost every line was unprofitable. So now China is looking at a state-owned enterprise with 850 billion dollars in debt that it can’t repay.
Ironically this has come at a time where fiscal stimulus like the original high-speed rail development program from 2008 would be needed all over again. Obviously, that’s not going to happen and the government has already halted construction of any more high-speed rail, but that doesn’t mean that they are free from the problems the existing network will create. If they try to sell off the network to pay down these loans, then any profit-motivated company would only be interested in purchasing the highly profitable routes between major cities.
This means that the government would need to maintain the unprofitable routes with taxpayer money which would be a huge ongoing expense. Alternatively, they could just close down the railways, but that would leave hundreds of thousands of workers without a job and destroy one of the great symbols of China's economic success over the past two decades. The final option is a bailout and a renationalization of the railway, and yeah I know china railway is a state owner company but it does have some autonomy that isn’t afforded to an actual government ministry.
None of these options are particularly appealing, especially during a time when China is facing down the barrel of a housing market crash, an energy crisis, and the impacts of an ongoing pandemic. I am always apprehensive about predicting the future, but it’s difficult to see a reality where china just shrugs these issues off. If nothing else, let this latest issue be a demonstration of why massive projects like rail lines, highways and bridges take time to plan and execute in your home country.
You may get angry at the red tape, and I do too, but perhaps pointing to China as the place the just gets stuff done isn’t the best way to highlight how useless our own governments are.
