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In China, Spending on Industrial Projects Stirs Growing Resistance

Local leaders were all smiles this summer at a groundbreaking ceremony for a vast copper smelting project that seemed like the answer to the chronic unemployment that has plagued this city in northern Sichuan ever since a devastating earthquake in 2008.

Peter Parks | AFP | Getty Images

But within days, the tree-lined plaza at the heart of the city was packed with thousands of youths, protesting that the $1.6 billion factory would pose a pollution hazard. After two nights of street battles pitting youths against the riot police, city leaders canceled the smelter.

"The environment is more important" than new investments or jobs, said a young woman sitting on a recent afternoon at the cafe across the street from the plaza, now empty except for a clutch of retirees gathered under the clock tower.

(Read More: 'Greyjing'? Air Pollution Fouls Beijing's Name)

China's economic boom over the last three decades has depended overwhelmingly on a build-at-all-costs investment strategy in which pollution concerns, the preservation of neighborhoods and other such questions have been swept aside. But that approach is starting to backfire, posing one of the biggest challenges for the new generation of Chinese policy makers who will take over at the Communist Party Congress, which starts on Thursday.

New investment projects used to be seen as the best way to keep the Chinese public happy with jobs and rising incomes, assuring social stability — a paramount goal of the Communist Party — while frequently enriching local politicians as well.

But from Shifang in the west to the port of Ningbo in the east, where a week of sometimes violent protests forced the suspension on Oct. 28 of plans to expand a chemical plant, more projects are running into public hostility.

In many cases, they are running into opposition not just from farmers who do not want their houses and fields confiscated, but also from a growing middle class fearful that new factories will lead to more environmental damage.

In response to this and other worries about the economy, a number of influential officials and business leaders in China have stepped up their calls for changes aimed at increasing the efficiency of investment and simultaneously shifting the country toward a greater reliance on consumption.

(Read More: China Cabinet Seeks Ambitious Economic Reform Agenda)

But China's leaders, including the outgoing prime minister, Wen Jiabao, have been talking about such a transformation for years with little sign of success, as state-controlled banks continue to lend huge sums to politically powerful state-owned enterprises and local governments.

Frenzied construction of roads, bridges, tunnels and rail lines over the last decade has left China with world-class infrastructure. But it has also produced deeply indebted local governments that are struggling to finance more projects.

At the same time, vast unused capacity in practically every industrial sector has crippled profitability and left manufacturing companies straining to repay their borrowings, a problem that has been partly masked by banks in the habit of simply rolling over loans rather than recognizing losses.

"All Chinese industries are like that — can you dig out which area of Chinese industry is not in overcapacity?" said Li Junfeng, a longtime director general for energy at China's top economic planning agency.

Investment reached 46 percent of China's economic output last year. By comparison, Japan's investment rate peaked at 36 percent, which it reached in the early 1970s; South Korea topped out at 39 percent in the late 1980s.

Growth in Japan and South Korea started to slow and eventually tumbled after investment peaked. The big question now is when China will run into the same limits, and how rapidly change will take place, said Diana Choyleva, an economist at Lombard Street Research in Hong Kong. "The potential for a big crisis is always there," she said.

Even experts who strongly favor fundamental policy changes, like moving to a more market-oriented system for allocating bank loans and setting interest rates, doubt that China's leaders are preparing to move quickly. Conversations at senior levels of the Communist Party appear to have focused so far on reducing the state's role in the day-to-day management of many state-owned enterprises rather than selling them or breaking them up.

But a few hints have surfaced that sentiment for reining in the excessive reliance on business investment might be strengthening even among those segments of the Chinese elite — executives at China's big state-owned enterprises — that benefit the most from the status quo.

Zhu Fushou, the chief executive of the Dongfeng Motor Corporation, one of China's largest car and truck manufacturers, startled executives at an industry conference in September when he said that China might have almost all the cars it needs, at least for the near-term, and that the government should discourage further investment in the sector.

Mr. Zhu called for greater reliance on the free market to determine the winners and losers in major industries, chastising other auto executives for complaining too much about fierce competition.

Such griping "is not objective — it's irrational, incompetent and immature," Mr. Zhu said at the Global Automotive Forum in Chengdu, the main annual conference for top executives from Chinese automakers and the China divisions of global car companies like General Motors and Volkswagen.

Mr. Zhu's remarks were especially striking because of Dongfeng's longstanding close ties to Beijing as a pillar of Chinese heavy industry ever since Mao ordered its founding in 1969. Mr. Zhu's predecessor at Dongfeng, Miao Wei, is now the minister of industry and information technology, leading an office that has long favored government-organized oligopolies of state-owned enterprises in many industries.

The auto industry in China is operating at about 60 percent of capacity this year, typical of Chinese industries these days, according to a report this summer from the International Monetary Fund.

By contrast, United States auto factories and those in other industries usually operate at a much higher rate; even during the worst days of the economic crisis in 2009, capacity utilization in American industry fell no lower than 66.8 percent and then only briefly, according to Federal Reserve data.

For many years, economists inside and outside of China have recommended a shift toward more reliance on consumption to sustain growth over the longer run. Progress has been slow, in part because the Chinese government has set a cautious pace in offering more medical insurance and pensions, forcing many Chinese to maintain high savings rates to provide their own safety net.

But the rising tide of protests against big investment projects may put pressure on Beijing to move faster. Almost every region of China has been affected within the last year or so, starting with a protest against a large chemical plant in northeastern China in August 2011; the local government promised a crowd it would close that plant but after the crowds went home, the plant has continued to operate.

Just in the last two weeks, there have been numerous demonstrations against a proposed coal-fired power plant on the southeast coast of the island of Hainan and against the expansion of the petrochemical plant in Ningbo, a port near Shanghai.

Shifang, the site of the canceled copper smelter, is a town full of retirees that had hoped to create more jobs for its young people, instead of sending them off to factories in Chengdu, a 90-minute bus ride to the south, or even to Guangdong in southern China, a 30-hour train ride. Yet many youths joined the protests here in July, with some even traveling from nearby towns, and the recent Ningbo protests also attracted many youths.

The re-emergence of youth protests is surprising because in a nation of one-child families, Chinese parents often seek to stop their offspring from participating in political activity because they worry that it will harm their future careers. The Chinese authorities have shown scant tolerance for anyone who travels to another town to participate in a protest.

It is not clear whether Beijing officials will heed further protests around the country or decide instead that they see no other way to stimulate economic growth than to keep fostering ever more heavy industry projects. They appear to be keeping all options open.

On the outskirts of Shifang, there was no sign of work at the smelter site, but a uniformed soldier stood near a heavy steel barrier painted in bright red and white. Large signs warned visitors not to enter.

And about 100 yards past the barrier sat a dozen troop carrier trucks, to make sure no one did.

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