4/14/2011 4:16 PM ET|
High-speed trains to nowhere?
The graft and corruption plaguing China’s railway system are not what worry me -- it’s the misallocation of capital. China may not unseat the US as the world’s largest economy as soon as expected.
China's economy will catch and then surge ahead of the U.S. economy by . . . 2015, 2020, 2025 or 2050.
The date is subject to debate, but the assumption is that in relatively short order the Chinese economy will be bigger than that of the United States, currently the world's largest. The argument makes basic sense to anyone familiar with compounding. China is growing its economy at 10% a year; the U.S. growth rate is closer to 3%. With that 10% growth rate compounding every year, at some point China catches the larger but slower-growing U.S. economy.
How long it takes really depends mostly on how you calculate the size of the Chinese economy. The CIA World Factbook notes that since China's currency is undervalued, the official exchange rate, which puts the size of the Chinese economy at $5.7 trillion at the end of 2010, isn't very accurate. Using purchasing power parity, which looks at how much a yuan actually buys in China, the CIA World Factbook puts the size of China's economy at $9.9 trillion. The size of the U.S. economy is $14.7 trillion.
Next year the gap will be $550 billion smaller, at current relative growth rates. It seems inevitable that China will match the size of the U.S. economy and then pass it by.
Unless compounding really isn't at work in China's economy. The only thing that can derail these projections -- whatever year you think it will happen -- is massive misallocation of capital in China. If, instead of investing its growing wealth in projects that will increase the country's wealth in the future, China is pouring its annual "profits" into projects that will never pay off and should never have garnered a yuan of investment, then, maybe, China won't catch the United States. Or at least it will take much longer for the country to close the gap with the world's largest economy.
This is why the current scandal that shows massive graft in the construction of China's vaunted high-speed railway system is so fascinating and important. It gives investors a window -- albeit a window with a narrow view -- into how China allocates capital and how much capital China might be pouring down rat holes rather than into investments with positive returns.
And it gives us a way to guess how much longer it may take for China's economy to overtake that of the United States.
High-speed train wreck?
No doubt about it, the Chinese high-speed rail system is one of the wonders of the world. China began this year with 5,014 miles -- 8,069 kilometers -- of high-speed rail already in operation. In 2011, China will build out major connecting lines that will turn this into a true high-speed network. For example, by the end of December, a 664-mile (1,069-kilometer) line between Beijing and Wuhan will complete the north-south route between the Hong Kong border and Beijing. By the end of the year, the final links will be in place to connect Shanghai with Chengdu. Imagine a 1,250-mile trip through some of China's highest mountains and across some of its deepest river valleys at speeds of up to 180 mph (290 kph).
By the end of 2020, China plans to have built a high-speed rail system of 9,600 miles, or 15,450 kilometers.
A system like this doesn't come cheap. Over the next four years, China will spend an estimated $500 billion on high-speed rail.
You'd have to be completely naive about the way government spending works in Beijing or Washington to believe that so much government cash wouldn't draw a trainload of officials looking to grease their own pockets.
Investigations into that graft started with Ding Shumiao, a well-known businesswoman in the railway equipment industry, who in January 2011 was accused of taking $120 million in "fees" to arrange railway projects. From Ding, the investigation grew to include Liu Zhijun, who was the minister of railways until February and is a friend of Ding's. Zhang Shugang, the deputy chief engineer and director of the transportation bureau of the Ministry of Railways, is also under investigation. He was suspended from his post in February.
But what's interesting to me about what the investigation has revealed isn't the kickbacks and other forms of payoffs -- or even the amounts involved. $120 million is surely a lot of cash, but it's not enough to make the difference between a high-speed railway system that is economically viable and one that's a white elephant.
What the investigation also shows is that the decisions about the design of the system were driven at every step of the way by the desire to produce extra revenue for everyone involved, ranging from the state-owned companies that built the system to the real estate developer who would make a killing if the high-speed line extended to his or her city.
So, for example, over and over again, officials demanded that trains be able to achieve top speeds even if it meant spending more on rail beds, employing viaducts to speed construction (since elevating the track meant avoiding protests about appropriating land) and extending the network to as many towns as possible.
This has all resulted in a very big network with relatively high costs that includes some routes that will never pay off.
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Which party does ge and oboma belong to? What is it, 2.4mil from ge to the dems last year and 10.5 mil over the last five. What's up with that?
As far as China goes, if we can't stop them from stealing everything from brands to military secrets, who knows, maybe they will surpass us. All and I mean all of our politicians are pouring our country's wealth into China's hands, I think their all mutts.
Whether that corruption will cause the ultimate harm Jubak thinks it will remains to be seen.
<<At least in the States, we know who's giving us the shaft, and by how much.>>
Boscoe, we don't know who is giving us the shaft unless you want to say a generality. As long as the Federal Reserve has its books closed then you will never know. A small peek forced by Congress to see some of the money flow shows 2 fabulous stay at home mothers get nine loans totaling some $220 million. Wish I could hyperlink - both tied to Morgan Stanley big wigs.
The author is worried about the money flow in China but if he gives any weight to peak oil theory then China is miles ahead of the U.S. and China will surpass the U.S. sooner if peak oil theory plays out. Many of general population in China acknowledge the need to move towards electric based transportation while the U.S. clings to an oil based economy that, as T.Boone Pickens states, will be the greatest transfer of wealth in history. Those who do not realize peak oil and depletion are two separate definitions should read up before responding. The cheap SWEET crude oil reserves are depleting fast ($2/$3 cost of extraction of sweet from the saudis is on the decline) and the heavy, sour and harder to find/extract oil is what we have to replace it with while trying to meet the additional rapidly rising global demand. Simple economics tell you peak oil is real. The chinese are ahead of the game and the true grit here is moving continental transportation away from gas guzzler jets(and cars to an extent) to high speed electric trains. If (IF is very important) oil moves to +$200 plus sooner than later then which economy will perform better? The one with less reliance on oil.
Throw that curveball of increasing airports for China out there, 175 increased to 230. You should then context this with the fact that China has approximately the same land mass as the U.S while having nearly 20,000 registered airports. China, a growing economy with a growing middle class will demand additional transportation. One must realize China has a largely poor rural class that has been and is being pushed from ag subsistence farming to urban manufacturing setting. I should also mention China has 5X the U.S. population on the same size land mass. Not a bad subject for the article but perception appears to be lacking overall.
The high speed trains are not to nowhere. They are just another integral part of building a stronger competing global power.
Jim, good article.
I’ve been looking at the exponential growth in Chinese imports into Brazil. Usually when this happens domestic manufactures have trouble competing with the cheaper Chinese imports. Could you give me a hand identifying any Brazilian companies and/or industries that will suffer or possibly gain from this trend?
Exponential growth in cheap imports can do a lot of damage quickly. What do you think the government reaction will be?
Bosco, you missed the whole point. High speed rail is about MASS transit. Read a little closer in my remarks and you will see I noted the rail is to reduce dependence on air travel (which will also reduce some travel by car). They are trading in bicycles for vehicles as I agree they are rapidly industrializing but have a long way to go before they build dependence on oil like the U.S. has currently.
The very fact that GM is selling record numbers in China with a population 5X the U.S. should give you a telling sign on peak oil concepts. The high speed rail is just one step they have taken to reduce building further reliance on oil. Imagine the U.S. with 5X the numbers of cars on the road in the same size land mass. That is why you have seen past stories about people abandoning their vehicles for hours on the highways in China. The mobile noodle vendors riding bicycles through these vehicle gridlocks were making a killing according to one article!
As far as EV's go I will follow Buffett's lead as he stated in 2009 that transportation will convert to electric in 20 years. He has targeted recent investments in BYD, GE and BNSF. You need some moderate thought to see the keen angle for BNSF.
I am far from Chinese - German and Native American ancestry. Chinese leaders have perception of the squeeze coming for oil while the oil lobby holds us hostage here in the U.S. Even our own Dept. of Defense has concerns of global oil supply shortages in the next couple years. We are not alone as a couple European defense departments have released similar notes as well. The U.S. used to rely on a national rail system for mass transit of people but it died with the national highway system. As oil costs balloon we will see a movement back but it will be electrified rail. The problem is they take time to build with our bureaucratic system of approval and fighting the tree hugging all along the way. We won't take action until after economics force it by fist down our throats (while big oil fills their pockets) all the while the chinese already have their electrified rail system in place. Wish I could hyperlink an article in 2009 by Rose of BNSF that discussed right of way for electric grid and costs/contemplation/cost benefits of electrifying the freight rail system as well. They did not have the money required for conversion but I know a new owner since that time that has some pocket change....
China building modern railway for future expansion, less oil dependent, less pollutions, job creation, convenient, cheap transportation for its people, no need to pay for insurance, etc.
Our gas price is more than $4/gallon and remain high for the rest of 2011. Always depend on oil and oil producers, drag economy down, high pollution, more congestion, more pollution, more expensive,etc.
China will fix corruption with 5000 miles in operation...while our railway officials continue to waste money and resource. no where else to go.
I guess Jubak think's that Amtrak has been a money maker for the US. He is clueless about what is going on in China but people still read his garbage. I am American by the way but lived in China for 6 years. Jubak, if China runs out of money they can always cash in the chips they have here in the
states. A TRILLION dollars should get them by until after the Wal-Mart season is over. Maybe you should worry a bit more about how the American people will get by until Obama is out of office.
Regarding misallocation of capital, you would hope that the Chinese would've learned from the U.S. how catastrophic it can be. We'll be dealing with the greed that wasted massive capital during the housing bubble for decades.
Your comparing Amtrak to China's rail??? Amtrak is a toy train in comparison. lol. Jim Jubak is helping us to decide how much, how often and how far to invest in Chinese companies. These rails were just one example. C'mon use your brain. He's a mutual fund manager, he's not the local crony politician YOU voted for.
Thank you very much for posting and giving me the repro steps. I have passed on your issue to the team in charge of commenting. They are dealing with some big issues right now that are different then the one you described but they will open a bug and hopefully we can get this fixed.
Have a great weekend!
If you are trying to isolate the posting problem and are willing to take the advice of an old pro, then post, than edit your post, post it, and than try to edit your post again. You will not be able to type anything. The text box locks up. My guess is that an object is not getting re-instantiated/refreshed and passed to the browser. Refresh the screen and you can edit posts again.
I just re tested it and it is still broken. The presentation seem intermittent, but it is quite duplicable.
Very interesting, the problem transends into the text box in the report-->note to moderator-->modal message popup, too. Base class?
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