Tag Archives: infrastructure spending

New Reality of China’s Failing Economy Is Coming Soon, by James Rickards

James Rickards sees trouble ahead for the Chinese, and consequently for the global, economy. From Rickards at dailyreckoning.com:

I’ve written for years that Chinese economic development is partly real and partly smoke and mirrors, and that it’s critical for investors to separate one from the other to make any sense out of China and its impact on the world.

My longest piece on this topic was Chapter Four of my second book, The Death of Money (2014), but I’ve written much else besides, including many articles for my newsletters.

There’s no denying China’s remarkable economic progress over the past thirty years. Hundreds of millions have escaped poverty and found useful employment in manufacturing or services in the major cities.

Infrastructure gains have been historic, including some of the best trains in the world, state-of-the-art transportation hubs, cutting edge telecommunications systems, and a rapidly improving military.

Yet, that’s only half the story.

The other half is pure waste, fraud and theft. About 45% of Chinese GDP is in the category of “investment.” A developed economy GDP such as the U.S. is about 70% consumption and 20% investment.

There’s nothing wrong with 45% investment in a fast-growing developing economy assuming the investment is highly productive and intelligently allocated.

That’s not the case in China. At least half of the investment there is pure waste. It takes the form of “ghost cities” that are fully-built with skyscrapers, apartments, hotels, clubs, and transportation networks – and are completely empty.

This is not just western propaganda; I’ve seen the ghost cities first hand and walked around the empty offices and hotels.

Chinese officials try to defend the ghost cities by claiming they are built for the future. That’s nonsense. Modern construction is impressive, but it’s also high maintenance. Those shiny new buildings require occupants, rents and continual maintenance to remain shiny and functional. The ghost cities will be obsolete long before they are ever occupied.

Other examples of investment waste include over-the-top white elephant public structures such as train stations with marble facades, 128 escalators (mostly empty), 100-foot ceilings, digital advertising and few passengers. The list can be extended to include airports, canals, highways, and ports, some of which are needed and many of which are pure waste.

To continue reading: New Reality of China’s Failing Economy Is Coming Soon

Infrastructure Plan Is Dominated by Profits for Wall Street, by Leonard Hyman and Bill Tilles

Trump’s infrastructure plan is more concerned with its financing than what will actually be built. From Leonard Hyman and Bill Tilles at wolfstreet.com:

Private equity tail wagging the public infrastructure dog?

About two years, we came across an article discussing infrastructure in a relatively obscure engineering journal. The authors of the piece were Wilbur Ross, now Commerce Secretary in the Trump cabinet, and Peter Navarro, a Trump economic advisor.

What struck us about the piece, supposedly elaborating their infrastructure plan, was that there was really nothing in particular that they wanted to build – nothing that would excite the imagination: no space race, or federal highway initiative, and heaven forbid certainly no new deal.

Thinking about it in accounting terms, the asset side of their infrastructure balance sheet was a compete blank. But the liability side of the ledger was the real focus of the Ross/Navarro exercise. They provided an answer to a question that almost no one was asking: How much leverage can one get away with and still control a federal infrastructure project? Their answer was 6-to-1.

On Monday, the White House released its long awaited “Legislative Outline for Rebuilding Infrastructure in America.” It boils down to this: The federal government claims it can facilitate a $1.5-trillion program with only $200 billion of federal money. That’s a leverage ratio of 7.5-to-1. That’s it.

And they still can’t be bothered in the text to name even one actual project they care about.

But the leverage – the debt, that is – is supposed to come from state and local sources, which are not exactly flush with cash. The states could have financed many of these projects if they had wanted to by charging tolls. The document released by the White House is anything but clear on how private investors would horn in on the goodies so to speak.

But it looks as if private investors could collect incentives for their own projects and do all sorts of lease deals with the governments that financed the projects. We would expect investment firms of every stripe to be interested. Terms this generous are seldom on offer.

To continue reading: Infrastructure Plan Is Dominated by Profits for Wall Street

All Aboard! Trump’s Express Train to the Future, by Bill Bonner

There’s got to be a catch to borrowing a lot of money, even at low interest rates, for the federal government to “invest” in infrastructure projects that produce uncertain returns. From Bill Bonner at bonnerandpartners.com:

Yesterday, the Dow punched up above 19,000 – a new all-time record.

And on Monday, the Dow, the S&P 500, the Nasdaq, and the small-cap Russell 2000 each hit new all-time highs.

The last time that happened was on the last day of December 1999.

Just a few months later, the dot-com bubble burst and the tech-heavy Nasdaq lost 80% of its value.

And the U.S. stock market, overall, lost about 50%.

Free Money!

But investors are bullish. They believe President-elect Trump will be good for stocks.

He is supposed to arrive in Washington for his inauguration and march directly over to the Capitol to demand a tax cut.

This will return over $6 trillion to the private sector over the next 10 years… not to mention a proposed $1 trillion splurge on “infrastructure.”

As Trump’s chief adviser (and former Goldman alum), Stephen Bannon, explained to Michael Wolff of The Hollywood Reporter last week:

“Like [Andrew] Jackson’s populism, we’re going to build an entirely new political movement,” he says. “It’s everything related to jobs. The conservatives are going to go crazy. I’m the guy pushing a trillion-dollar infrastructure plan. With negative interest rates throughout the world, it’s the greatest opportunity to rebuild everything. Shipyards, iron works, get them all jacked up. We’re just going to throw it up against the wall and see if it sticks.”

Whew!

Everybody’s talking about the feds’ opportunity to “invest” free money.

It makes us nervous; we know how hard it is to get a good return on investment – especially when you don’t know what you’re doing.

To continue reading: All Aboard! Trump’s Express Train to the Future

 

China’s Infrastructure Planners are on a Road to Nowhere, by Bloomberg News

If you spend two yuan for one yuan worth of growth, it doesn’t work out so well. From Bloomberg News at bloomberg.com:

For all the roads, bridges and railways that China builds every year in an effort to keep the economy humming, the massive splurge may not be having the desired effect.

That’s because more than half of China’s infrastructure investment has destroyed economic value instead of generating it, according to a study from the University of Oxford’s Saïd Business School.

“The evidence suggests that for over half of the infrastructure investments in China made in the last three decades the costs are larger than the benefits they generate,” according to Atif Ansar, one of the study’s co-authors.

What’s more, unless China shifts its focus to fewer and higher quality types of public works that leave a positive legacy “the country is headed for an infrastructure-led national financial and economic crisis, which is likely also to be a crisis for the international economy,” according to the analysis that’s published in the Oxford Review of Economic Policy.

China spent more than $10.8 trillion in infrastructure in the last decade alone, according to Bloomberg calculations based on official data of investment in categories such as transport, storage, power supply and water conservation.

The Oxford study’s findings jar with views that China’s aggressive government-led infrastructure spending is vital to keep growth on track. Researchers examined 21 large rail projects and 74 road projects whose starting dates ranged from 1984 to 2008. They then compared the economic value of those to 806 transport projects built in rich democracies.

Instead of finding a long lasting, positive economic legacy, the Oxford study found that 75 percent of the transport projects in China exceeded budget. While one third of the roads built were congested, 41 percent of them have low usage. Both extremes are equally undesirable because “large unused capacity equals waste, as does too little capacity,” according to the paper.

The buildup has also exacerbated China’s swelling debt as cost overruns equal about a third of the nation’s $28.2 trillion debt mountain, according to the paper.

To be sure, proponents can argue that without massive infrastructure spending after the 2008 global financial crisis, the world’s second largest economy would have sunk into a deep trough, taking global trade with it.

Still, the evidence from the Oxford study is that, when it comes to China, sometimes less can be more.

“China’s infrastructure investment model is not one to follow for other countries but one to avoid,” the researchers wrote.

http://www.bloomberg.com/news/articles/2016-09-12/china-s-infrastructure-planners-are-on-a-road-to-nowhere