The Guest Blog

Don't Judge China on Phantom Facts

Shaun Rein, CNBC Contributor|Founder HKSCKPVIamp; Managing Director, China Market Research Group

There are a lot of doomsday scenarios about China’s economy floating around these days and oddly, a number of them are focusing on infrastructure spending and rising local debt rather than the real threat of rampant inflation, which hit a three-year high in June at 6.4 percent.

Rail attendants pose with the Chinese high-speed trains at a station in Shanghai on October 26, 2010, prior to the launch of the Shanghai to Hangzhou line. China's latest new high-speed passenger rail line went into service, halving travel time to 45 minutes between Shanghai and the eastern lake city of Hangzhou, officials said. CHINA OUT AFP PHOTO (Photo credit should read STR/AFP/Getty Images)
STR | AFP | Getty Images

Famed bearish economist Nouriel Roubini said in a column for Project Syndicate that China’s economy will face a sharp slowdown in 2013because of too much wasted infrastructure spending.

Similarly, MIT professor Huang Yasheng argues that Chinese incomes are not rising fast enough to offset dwindling export growth and that urbanization has been wasteful.

However, a quick examination of Roubini’s and Huang’s data points show there is little merit in their conclusions because they are both using phantom facts.

Roubini argues that infrastructure spending has been excessive and redundant, creating not needed and unsustainable projects that will cause an inevitable slowdown. A recent article in Reutersquotes Roubini as saying: ‘“I was recently in Shanghai and I took their high-speed train to Hangzhou,’ referring to the new Maglev line that has cut traveling time between the two cities from four hours to less than one. ‘The brand new high-speed train is half-empty and the brand new station is three-quarters empty.

Parallel to that train line, there is also a new highway that looked three-quarters empty. Next to the train station is also the new local airport of Shanghai and you can fly to Hangzhou,’ he said. ‘There is no rationale for a country at that level of economic development to have not just duplication but triplication of those infrastructure projects.”’ 

Scary stuff – if it were true. Fortunately reality is far from what is being framed by Roubini. His contention that there has been infrastructure spending in triplicate does not withstand even the most basic scrutiny. I checked with several airlines and travel agents like Ctrip and Expedia, and they all confirmed that there are no direct flight between Shanghai and Hangzhou and never was.

How about that empty Shanghai-Hangzhou Maglev train? That train would certainly be empty, since like those direct flights it simply does not exist.

Plans for a Maglev train were scrapped after thoughtful planners calculated such construction would indeed be wasteful. In fact, aside from the 7-minute Maglev ride that connects Shanghai's Pudong International Airport - which handled 40.6 million passengers in 2010 and 3,227,914 metric tons of cargo, making it the world's third-busiest in terms of freight traffic-  with a subway station in the city, there are no other Maglev trains in operation in the country.

Huang, on the other hand, in a July 6, 2011 blog post in the New York Times says, “Beijing and Shanghai have some of the lowest population densities among the world’s big metropolises.” From this Huang concludes that Shanghai’s infrastructure buildup is not needed.

In fact, Shanghai has the highest density of urban populations in the world at official population numbers, which does even include millions of unregistered workers in the city. It is not uncommon for Shanghai families of three or more to live in less than an area of 200 square feet per person, while the average home in America is 10 times that size.

Most workers in the restaurant and construction industries live in sub-human dormitories, where eight people or more share a room. Infrastructure spending is badly needed to relieve living congestion by allowing for cheaper land sales farther from the city center just to get basic living space for people.

Huang also underestimates the middle class’s purchasing power, but he does bring up important issues. Namely, China needs to avoid falling into the middle-income trap that many developing countries do when per capita GDP hits $6,000 a year and stagnate. If it does not, China will be more like a Mexico, with huge income disparity between the rich and poor, rather than the world’s leading economic superpower.

Measures to promote consumption are actively being implemented, which will lessen the risks, Huang mentions. Fourteen provinces this year increased their minimum wage by an average over 20 percent. This is on top of hikes by provinces like Sichuan, which increased the minimum wage by 44 percent in 2010.

Shanghai’s government is also forcing parity in social security and health care benefits for official Shanghai residents and migrants registered to work there.

Wage and social security increases are a must for the health of the economy as Huang rightly points out but they are also largely responsible for the massive inflation. The government needs to walk a careful line between improving everyday conditions and making China uncompetitive as an investment destination.

China is not immune to economic cycles. It will certainly go through ups and downs in the coming decades. But problems are more likely to stem from inflation, a weak education system, and a rocky shift to more consumption than concerns about local debt or over-infrastructure spending based on Roubini’s and Huang’s phantom facts.

Shaun Rein is the founder and managing director of the China Market Research Group (), a strategic market intelligence firm, and is based in Shanghai. He is also the author of an upcoming book on the end of cheap Chinese labor.

He does not own stock in any of the companies mentioned. Follow him on Twitter at @shaunrein.