China stimulus

Why and how Beijing became one of the world’s more unmanageable major cities

Beijing Bactrian camel

What if most of what we think about government spending was wrong? What if government money causes, rather than cures,  pollution, unaffordable and substandard housing, impossible traffic, more expensive and less available healthcare? Sounds impossible, right? Not if you live in or have traveled to Beijing lately. The city’s now infamous urban problems are at least in part the result of a deluge of government spending since the onset of the financial crisis in 2008. Direct central government funding doubled to over Rmb 14 trillion ($2.2 trillion) over this period while local governments borrowed an additional Rmb 13 trillion ($2.1 trillion) to finance their spending.

The government money, of course, wasn’t meant to turn Beijing into an urban sprawl with a population larger than every state in the US except California. In fact, most of the government stimulus was targeted for big projects outside the capital. But, in China, the nature of things is that much of government spending travels on a round-trip ticket. It is dispensed in Beijing and then a big part of it eventually returns home. And no, this isn’t all in kickbacks. A large part is from the build out of a huge new infrastructure in Beijing to support, steer and encourage the distribution of more government cash.

In the last five years, it seems like everyone rushed to open or expand offices in Beijing:  companies of all sizes from all part of China and the world; governments from the smallest local hamlet 3,000 kilometers away to provinces with populations larger than every country in Western Europe also staffed up. Result: commercial and residential real estate prices skyrocketed to the point now where they are among the highest anywhere in the world.

More people begets more cars, more cars begets more traffic, more traffic begets restrictions on the days-per-week any car can be on the road, which in turn begets Beijingers buying an extra car to get around the prohibition. End result: pollution that is now substantially caused by auto emissions, not as in the old days by nearby-factories burning coal. Many polluting factories have been shut down, which added to the available land for development into commercial and residential property in and around Beijing, particularly in areas you need a car to get to.

Here are the two charts, showing residential real estate prices and cars registered in Beijing from 2008 through last year. The numbers are likely underestimates. But, they show the trend.

data

 

The torrent of government cash had all kinds of spillover effects that have altered Beijing permanently. More restaurants, higher prices, more wining and dining, leading to prohibitions last year, as part of the big anti-corruption crusade, on government officials accepting invitations to party outside the office. This then drives the behavior underground, so high-end restaurants empty out, while more expensive and exclusive “members only” clubs flourish.

Beijing has morphed into the financial capital of China. That’s attracted a large group of players to move from Shanghai and Hong Kong to get a piece. PE funds, private bankers, lawyers, consultants, so-called “guanxi merchants” who arrange access to government officials. Among my circle of friends in PE industry, I can count 15 who have moved to Beijing in recent years, to get closer to the action, and only one who left, who finally couldn’t take the crowds, pollution, high cost.

Beijing’s precise population is unknown. The official number is 21.1 million. Some in government say 25 million. Others claim the real number is closer to 30 million, when you count more recent migrants living rough, plus the huge throngs in Beijing for shorter periods, either for work or pleasure.

Since 2008, far more of China’s total economic activity is decided by government bureaucrats in Beijing. Overall government spending has more than doubled. Result, more people need to travel to Beijing more often.

Look at passenger numbers at Beijing’s Capital Airport. Between 2008 and 2013, this already crowded-facility saw passenger numbers increase by a remarkable 50%. It is, as of March this year, now the busiest airport in the world, eclipsing Atlanta’s Hartsfield. Capital Airport is now breaking under the load, and so Beijing is about to embark on building an even larger new airport in the southern part of the city. This mammoth $11 billion project by itself could support a lot of Beijing’s gdp growth in the coming few years. But, it will be just the cherry on top.

Beijing has the best hospitals in China, so people come from all over the country to try to get admitted for medical treatment. This has led to price increases and longer waiting times. Equally, those with a serious grievance about their local government, or who feel maltreated, will often gather up their documents go to Beijing to try to get redress. This trek to Beijing has been around since the days of the Emperors. As China’s government grows in power and economic clout and ordinary Chinese have the money to fight back, those seeking to petition central government’s help increase.

To serve all the new arrivals and visitors, Beijing continues to expand its Metro system. The average daily ridership is now 10 million, about triple London’s, and also triple the amount five years ago in Beijing.  Waits at rush hour to get into some stations can be horrific, so the government recently proposed to raise fares. Beijing currently has the cheapest public transportation of any big city in China.  While some may leave Beijing, the likely result of higher Metro fares will be more people trying to buy a car.

How bad is traffic in Beijing. Horror stories abound. A more reasonable evaluation: the manager of a big telecommunications company I know told me recently if he doesn’t leave his house by 7am, it will take 90 minutes to drive 10 km from his house to his office. That’s about speed of sedan chairs used to carry emperor and his cohorts within the Forbidden City.

To be sure, Beijing is not Dhaka. Since 2008, many aspects of the city’s infrastructure have been upgraded. It is a thoroughly modern city, with scarcely a trace of either poverty or blight. When I first visited the city in 1981, Bactrian camels were still occasionally seen on the streets hauling cargo.

For first time since 1949, the leader of the country, Xi Jinping,  is Beijing born and bred. Since he was a boy, Beijing’s population has about quadrupled, while China overall has almost exactly doubled.  Will he try to shift gears, slow or even reverse the growth in the city’s population? It won’t be easy. Government stimulus spending, once turned on is notoriously hard to scale back in any serious way. Do so and overall GDP growth will likely suffer.

In its 3,000 years as China’s major urban outpost on the country’s northern perimeter,  Beijing has experienced countless invasions, barbarian pillages, conquests, uprisings. But, nothing in history has altered Beijing as quickly, deeply, and perhaps permanently as five years of bounce-back and kickback from trillions in government pump-priming.

 

 

 

Why Is China Booming? Surprise, It’s Not the Stimulus

China First Capital blog post -- Qing Dynasty stupa

Launched amid much worldwide rejoicing when the financial crisis struck last year, China’s Rmb 4 trillion ($585 billion) stimulus package is given much of the credit for China’s continued strong economic performance this year. China’s GDP growth is likely to exceed 8%, and the domestic stock market is up by over 70% since the start of the year. 

A Keynesian miracle? To read a lot of the financial commentary on China, you might well conclude this is so, that government spending has single-handedly kept the economy jaunty, while both firms and consumers sank into a deep funk. It’s a great story, and provides a simple explanation for how China dodged the bullets that struck all other major economies. Other countries looked on enviously, and urged China to continue the fiscal pump-priming to help out the overall world economy. 

Problem is, the analysis is flawed. China’s stimulus plan is not all it’s cracked up to be. While the additional government spending has clearly played a part, it is not the only reason why China’s economy has remained so sound this year. The unsung heroes of China’s economic success this year are its ordinary consumers. It’s their continued confidence and increased spending that have really made the difference. 

Economic statistics are notoriously iffy in China. The further one gets from the economic lever-pullers in Beijing, the harder it becomes to track economic activity. That’s another reason why the stimulus plan was so often singled out as the main spur to China’s growth. It’s easier to calculate how much additional the Chinese government is spending building expressways than it is to see how many pairs of socks or bowls of noodles Chinese are buying. 

Another reason: a lot of the economic commentary comes from folks who believe that governments really are responsible for what happens, good and bad, in an economy. Again, it’s just so much simpler to view things this way, that powerful government men can pull out their checkbooks and spend their way to national prosperity. These are often the same people who will tell you, wrongly, that Roosevelt’s New Deal spending lifted the US out of Depression.

China’s supporters and detractors both give the government too much credit. There are those who are convinced China’s economic growth is all some kind of fraud, cooked up by the central government, and that once the extra government spending is dialed down, the economy is certain to crash. 

Again, pure hogwash. 

In China, the government rightly deserves credit for excellent economic management, for creating the circumstances, both marco and micro,  that allow the Chinese economy to continue to thrive. I’ve said it frequently, including in public forums: China is the best-managed major economy in the world. 

But, again, let’s also commend the country’s one-billion-plus consumers, too often seem as miserly skinflints, saving up all their money for their great-grandchildren’s rainy days. It just ain’t so. China’s consumers, with an ever-increasing choice of products, services and shops, are spending ever-increasing sums on improving the quality of their lives. Newer and better housing. New cars. Holidays. New wardrobes. You name it. 

I see it every day here, the untethered exuberance of the Chinese consumer. It’s true that in the early part of this year, there was a relative lull. Back then, shops were working harder to attract customers, by putting a lot of their goods on sale at steep discounts. About four months ago, the situation began to change markedly. No more major knockdowns. Prices now all seem to carry list price, and the prices for many common consumer products are as high, or higher, than in the US. 

Not much of this, it goes without saying, gets noticed by the world’s financial commentariat. Car sales in China are at an all-time high, and China is now the world’s largest car market. But, listen to the commentators, and they’ll tell you it’s the result of some small government tax breaks on new car purchases. Helpful, yes. The main spur? No. Car prices in China are still, in dollar terms, generally much higher than in the US. Based on a percentage of average disposable income, car prices in China are probably among the most expensive in the world. Same goes for property prices. Yet, Chinese keep buying. 

They will keep buying, at or near this record pace, long after any tax breaks phase out.  Chinese want the new cars to drive on the new expressways to carry them to the new shopping malls to buy the new furniture for their new apartments. 

Of all the economic statistics I’ve seen lately, the one that best captures what is going on now in China is this: revenues in China’s restaurant industry were up 18% during the first half of 2009, to over $120 billion. That’s not due to stimulus, or bank loans, or tax concessions, or a government mandate to entertain more. It’s largely because Chinese are out having a good time, more often, and spending a lot more doing so than they did a year ago. 

It’s one of the best barometers of a nation’s mood, restaurant spending. In China, the mood is buoyant, the outlook bright, and the woks are working overtime.