China Bets Highways Will Drive Its Growth

China Bets Highways Will Drive Its Growth

Updated Nov. 11, 2008 12:01 a.m. ET

QIJIANG, China — As more of the world falls into financial turmoil, China is hoping that an infrastructure spending spree can help sustain its long record of expansion and rising prosperity.

Much of the $586 billion stimulus package China unveiled this week will go toward building highways, railroads and airports. Already, according to official estimates, infrastructure spending had been increasing by an average of 20% annually for the past 30 years — a tried and true engine that has helped power the Chinese economy’s explosive growth.

The results are evident in this hilly corner of China’s southwest, where a new expressway has cut travel times to the big city of Chongqing to 45 minutes from more than two hours. That’s inspired local businesses to expand and outsiders to look for weekend retreats. Many villages are now resurfacing dirt roads to improve connections and ease travel further. Rather than selling their crop of Sichuan peppercorns from baskets on their backs, local farmers are loading them by the sackful onto trucks. Average annual incomes here reached about 4,100 yuan ($600) in 2007, up from 3,030 yuan ($450) three years ago.

The new road is part of the backbone of China’s national highway system, scheduled for completion this year. Twelve major routes cross the country from north to south and east to west, connecting millions to the wider world and showing the kind of impact China wants from its huge new spending program.

The speed of China’s motorization is stunning — some 30,000 miles of expressways were built in the past decade. Plans call for China’s highway system to stretch 53,000 miles by 2020, surpassing the 47,000 miles of interstate roads in the U.S. currently. China has roughly the same land area as the continental U.S.

Unlike the golden era of the American highway — which started in the 1960s and was mostly complete by the 1980s — this road boom is taking place in a poor, largely rural country where only about 10% of the population have their driver’s licenses.

Skeptics of China’s infrastructure spree worry that new roads and buildings are going unused and will end up being a waste of money. In the poorest areas, some highways are often empty but for the crops farmers spread out on them to dry in the sun.

But China’s expansion of transport infrastructure is often intended less to respond to growth than to stimulate it. A roadside slogan here, splashed in white paint on a rocky mountainside, sums up that philosophy: “For the economy to develop, transport must start off first.”

Says Li Yong, a regional economist at the Chongqing Academy of Social Sciences, “You can say it is wasteful now, but it is not wasteful over the long term.”

Indeed, while China’s economy is often seen as driven by exports — not surprising for a country that exported more than $1 trillion of goods last year, or 9% of the world total — domestic investment contributes far more to growth. In recent years, spending on everything from public works to housing to factory equipment has accounted for about four to six percentage points of China’s 10% average annual growth rate. Such investments tend to be more stable than exports and are now providing a welcome cushion as the global economy slows.

China isn’t immune to the woes of its trading partners, but it is still growing faster than any other major economy. Most forecasts call for China’s growth to slow to 9% or so this year, and around 8% next year. By comparison, the world’s advanced economies, including the U.S., Europe and Japan, are expected to grow by little more than 1% this year, and to contract in 2009, according to IMF forecasts.

“Investment puts a pretty high floor on growth. It acts as an economic stabilizer,” says Ken Peng, an economist for Citigroup in Shanghai. One worry: Infrastructure investment is growing so fast already that it may be hard to accelerate it further.

Just as the U.S. Interstate Highway System radically altered the American economy, China’s new expressways are starting to change lives in ways big and small. Roads have cut transport times, driven down costs in some places and made industry more competitive. Migration is easier, allowing people to look for opportunities elsewhere. Disparate local markets for goods and services are being knit together into regional and national markets. That gives consumers more choices, and allows companies to expand. Developing countries that have been slower to build infrastructure, like India, have seen fewer of these changes.

The rural county of Qijiang lies south of Chongqing, the commercial center of western China, on the way to the mountainous province of Guizhou. Since a new north-south expressway opened in 2002, followed by a spur line running east to west in 2005, Qijiang has become something of a transport hub.

Yang Zhenghua, a genial 34-year-old with a buzz cut, makes the run from Qijiang to Chongqing most days, bringing a truckload of farm produce to a wholesale market in the city. Traveling on the new highway, he can now get to the market earlier in the day, when demand is highest. The shorter journey has trimmed transport costs — his biggest single expense — by around 100 yuan ($15), to around 600 yuan ($90) a load.

For 14 years, Mr. Yang has distributed produce from around Qijiang, supplying farmers with seeds and ordering crops in advance. Last year, he started raising crops himself on land leased from several farmers. “Without the highway, we wouldn’t dare to develop this,” he says, gesturing toward his fields of corn, eggplant and chili peppers. He has 20 farmers working for him on this site, and he is adding more at other locations. Other local farmers are expanding plantations of papaya and Sichuan peppercorns, both high-value crops that can now be sold in bulk because of access to big-city markets.

China laid out its first plans for a national highway system in the early 1990s. Things didn’t really take off until 1998, when local governments seized on infrastructure spending as a way to support growth in the midst of the Asian financial crisis.

Construction moved quickly thanks to a combination of factors. Like other Asian nations, China has historically had a high savings rate, so its financial system was flush with cash. The banks are state-controlled, ensuring that much lending could be channeled to government priorities like infrastructure. Authorities’ embrace of road tolls further eased the financial burden, by providing steady revenues to recoup costs. And since all land in China is ultimately owned by the government, authorities could push through new road projects quickly with a minimum of dissent.

“Our system is very difficult to copy,” says Xu Li of the Transport Planning and Research Institute in Beijing.

Not all of the kinks in China’s highway system have been worked out yet. Speed limits and traffic regulations are poorly enforced, so driving on the new expressways can be harrowing. China has one of the world’s highest rates of traffic deaths, though fatalities have been declining in recent years. Weight limits on trucks are frequently flouted, a problem because overburdened vehicles wear down road surfaces more quickly.

Local road networks also haven’t kept up with the rapid spread of new expressways. Once off the highway and out of the main town in Qijiang, for example, the speed of travel on gravel and dirt roads slows significantly — and can be even slower when late-summer rains turn them to mud.

“Our roads now are mostly dirt,” says Wang Xianlu, who is in charge of road building for the little town of Longsheng, in Qijiang county. Mr. Wang says he’s working to change that. Trucks carrying stones and asphalt to resurface roads are a common sight here, and they often cause traffic jams in the villages as they try to squeeze through narrow lanes already crowded with motorbikes and donkey carts.

Better transport could help make the local economy less dependent on farming. Liu Zhaohua, a 39-year-old mother of two, runs a rural hotel on Dingshan Lake, a scenic spot in Qijiang county that has been getting more visitors from Chongqing. “Business is getting better and better, especially in recent years after the highway was completed,” she says. Her operation has expanded to more than 40 rooms, and pulls in about 90,000 yuan (about $13,000) a year, compared with just 10,000 yuan when she started out a decade ago. “I plan to renovate our building this year so we can earn more money in the future,” Ms. Liu says.

As China’s highway network nears completion, the government’s focus is shifting to issues that got less attention in the headlong rush to build. The method that helped get roads built so quickly, in which a hodgepodge of local governments and private companies took charge of different sections, has been a liability in managing what is supposed to be a unified national system. During heavy snows last winter, for example, only some stretches of certain highways were plowed.

Though the new highways have lowered transport costs for businesses, critics say there is probably room to push them down further. For instance, the total cost of moving and storing goods around the country has fallen from 24% of gross domestic product in 1991 to around 18% now. Yet it hasn’t moved much in the last few years, in part because of high tolls on the highways and poor service on the rails. The U.S., by contrast, keeps logistics costs to around 10% of GDP annually.

The last decade’s explosive growth in automobile use has also come under more public scrutiny in recent years, as air quality worsens. China is the world’s biggest emitter of sulfur dioxide, a major component of the urban air pollution that causes 350,000 to 400,000 premature deaths a year in China, according to a joint report last year by the World Bank and the Chinese environmental agency.

Still, the economic benefits have been real, and sometimes surprising. Zhang Wen, a transport specialist for the Asian Development Bank in Beijing, recalls visiting a village near the western city of Xi’an, where chicken farms had taken off after a new highway opened. Why chickens? Since the new road wasn’t so bumpy anymore, farmers could take eggs to market without them getting broken along the way, says Mr. Zhang. “Farmers know how to take advantage of efficiencies.”

—Kersten Zhang contributed to this article.

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