I just came accross the website and current discussion. it’s great. thanks.

concerning NPLs, a recent study by Tong Li (China’s Nonperforming Loans: A $540 Billion Problem Unsolved) is very useful but scary when one goes through it. NPLs have been, are and probably will be a matter of concern, the end of this year being a interesting point in time (see article). Clearly there will be an issue with NPLs but as problem unfolds government will be ready to intervene and pump money into the sick system again. Losses will appear but not on companies’ balance sheets, rather governement write-down will seem more economically sound to investors.

As regards to quality of GDP, it is true that misallocations are unecessary and not sound but as China’s 30 years development strategy has showed, quick gains are possible even with bad allocation. Yet it seems that quality has become an issue for the governement since a long time ( for example environmental ministry has been settled in the 1990s as part of recognition of the importance of preserving natural assets). That said environmental laws enforcement has not been an easy task as local governments are more concerned by numbers that they are by social/enviromental ideologies.
To make it short misallocation (and therefore low quality growth) has been at the heart of the world recovery, pushing commodities higher. Real estate is looking stretched (living habitat square meters have reached Asian mean) so the current overcapacity could well bid for another bubble formation.
What could stop that on the short to medium term?

Greg: Three Gorges Dam the ultimate “white elephant?” Says who? I supposed this is “conventional wisdom” in the West, or at least in certain circle of the western media. But it’s completely the opposite at least in China.

The main purposes of the Three Gorges Dam are electricity generation, flood control and water transport. It started construction in 1997 and is completed this year. The electricity it generates is equivalent to those generated by 50 million tons of coals; 3,000-ton ships can now directly sail to Chongqing from Shanghai compared with only 1,000-ton ships taking much longer times before, providing a very inexpensive and the lowest-cost mode of transport for the land-locked 100 million population in Chongqing/Sichuan; the 1998, once-in-a-century flood that had threatened the lives of 15 million people in the middle- and lower- streams of Yangtze River can now be dealt with easily.

And the Three Gorges Dam is not a product of communist revolution. It was first proposed by Dr. Sun Yat-sen, founders of Nationalist Party and Republic of China, in 1919, in his famous “A Blueprint of Nation Building.” It was studied and investigated jointly by the Nationalist government and US experts in the 1940’s with a proposed design. It was again investigated and surveyed by the Communist government with the help of Soviet Union experts in the 1950’s. The project had been researched and studied for nearly 50 years before it was finally put to vote in 1992 by the National People’s Congress – the first national infrastructure project ever that had to be approved by the national legislature.

The total cost of the project is less than the Beijing-Shanghai High-Speed Rail project (although I think it’s actually costing more after adjusting for inflation). The ROI and economic benefits are indisputable.

There have been concerns and controversies, mainly about environmental and ecological impact, the human rights of the 1.3 million people that have to be relocated, and the viability of certain engineering aspects. In certain media, you won’t read the benefits and success of the project, all you read is the dissenting voices and the supposedly negative impact of the project. The people who are against the project were often termed as “dissident.” No wonder, after a while, it would become an established fact that the Three Gorges Dam has become the ultimate “white elephant,” to say the least.

Greg: Here is the ranking of the world’s busiest airports (http://en.wikipedia.org/wiki/World%27s_busiest_airports_by_passenger_traffic). Beijing was at 4th place based on traffic from January to July; it was at the 8th place in 2008 and 9th in 2007. Earlier last year before the financial crisis, CAAC had frozen the approval of new flights at Beijing airport due to capacity constraints. I’m sure you understand that you need a lot of infrastructure to support a large airport and you don’t just build a new airport as soon as the two existing smaller terminals were out of room. You build a second runaway and you build a third terminal.

By the way, Beijing is planning to build a second large airport in the south.

I would challenge anyone who calls Beijing Capital Airport is wasteful infrastructure building.

Houhui: There is a problem with opportunity cost though. EG – Even in Beijing a lot of schools are not exactly well furnished in terms of equipment, classrooms and IT. I dread to think what the situation is like in small towns and villages.

Greg: Chinese government has eliminated all tuition and fees in the country (both in urban and rural areas) for nine-year education in the last few years and has increased educational expenditure substantially recently. I completely agree that China needs to spend more in education, especially in primary and secondary education. But I would pit education spending against infrastructure spending – China needs both. Just because China should and can spend more in education doesn’t mean majority of the infrastructure spending is wasteful, the latter point is what China-skeptics are trying very hard to convince people opposite to the facts.

Houhui: I suppose educational investment takes even longer to pay off than airports / infrastructure. We are about to be treated to even more subway lines though, i think Beijing line 9 and 15 are well under construction.

Greg: Do you have a better and realistic suggestion for Beijing to deal with the city’s transportation needs and traffic congestion?

Houhui: In Shanghai we still have the world’s only commerically operated Mag-Lev train. I think the previous one in the UK in the 1980s went bankrupt and shut down. I am not sure, but i think that this one in Shanghai is still not breaking even, let alone covering the initial investment. I was very glad when they scrapped the ridiculous plan (some would say as the Tuanpai stepped up pressure on the Shanghai group) to build one from Shanghai to Hangzhou – the cost difference from a normal high speed train to the mag-lev was tremendously large, and the journey time was less than 20 minutes difference.

Greg: Shanghai’s Mag-Lev has been a money-losing white elephant, no question about it. I have also always been critical of the project and believed it has partially to do with the vanity of the Shanghai Municipal government. The reason they wanted to extend it to Hangzhou is because they believe it would bring more passenger traffic to the point where the whole Mag-Lev lines would break-even. Apparently, not many people support the idea; least of all, the Ministry of Railway completely ignored it and is building the conventional high-speed rail from Shanghai to Hangzhou now.

But to be fair to Shanghai’s Mag-Lev project, you need to understand the historical context of such a project. China’s high-speed rail dream dated back much early to Deng Xiaoping’s famous ride on Japan’s bullet train in 1978 when he visited Japan. Since the early 1990’s, there had been a nation-wide, heated debate on what kind of high-speed rail technology should China adopt to build its upcoming national high-speed rail network: mag-lev or conventional. The Ministry of Railway is in the conventional camp. The all-important Beijing-Shanghai high-speed rail was postponed again and again due to the debate.

Unable to make a decision, the central government decided to work with Germany to build an experimental mag-lev line to gain experience and to develop more indigenous mag-lev technologies to reduce the cost. Zhu Rongji visited Germany and rode on Germany’s experimental mag-lev line. Shanghai was willingly selected as the test site. The Shanghai Mag-Lev line started construction in 2003 and was completed in 2004. In the end, it turned out that mag-lev is too expensive to build and operate; plus Germany refused to transfer more technologies.

In 2004, the State Council approved the Mid- and Long-Term Railway Plan. In 2005, the Ministry of Railway started to build the Wuhan-Guangzhou and Zhengzhou-Xian high-speed rails (all 350 km/h railway), both are national trunk lines. In April 2008, construction of the high-profile Beijing-Shanghai high-speed rail started and Premier Wen Jiabao attended the opening ceremony. The debate between mag-lev and conventional high-speed rail technologies was thus settled.

I guess I’m trying to provide some background information so that people outside China or people who don’t know much China can better understand and appreciate the cautious and thoughtful process that China follows in building its large national infrastructure. To be sure, there are and will be wasteful infrastructure projects in a large, complex and rapidly-changing country like China, but to portrait much of China’s infrastructure investment as hugely wasteful driven by a bunch of reckless and retarded commies who have no professional competency and no regard to the country and people’s welfare is – what do I say?

I’m exaggerating, but you get the point.

By the way, in reference to education in Beijing… what specifically did you see missing in Beijing schools, in terms of facilities? Obviously, rural Chinese schools could always use more funding. Fundamental reforms in education are probably necessary, but IMO, the great majority of urban Chinese schools do not need more money thrown at them.

It’s been several years since I visited a school, but even 10 years ago second-line cities had computer labs that were fully stocked with modern computers. And urban teachers are being paid very well, including significant raises this year (speaking from personal experience with family/friends).

I think the whole idea of China needing to invest much more in education is misleading, frankly. More equitable education, sure. But China is already pumping out more university graduates than the economy can usefully absorb… would it really help to double their number? The bottleneck here lies in that Chinese enterprises need time to absorb the existing talent, and climb up the value chain where higher education is useful.