Investment in infrastructure has long been seen as an engine of economic expansion. Yet China faces difficulties when trying to meet both goals – stimulating spending while reducing local government debt – at once.
Infrastructure plays a vital role in economic development by increasing productivity, improving competitiveness and raising living standards. Key segments in the infrastructure industry include social services, transportation, water services, energy production from mines/coal mines/telecommunication networks/manufacturing.
1. Electricity
China’s vibrant infrastructure sector is a primary driver of economic expansion. Investment in infrastructure projects serves both as an anticyclical macro stabilisation measure, and can promote long-term productivity growth, provided quality projects are developed with their goals in mind.
China is investing heavily in green energy technologies like solar PV, electric vehicles (EVs) and batteries. Our analysis indicates that manufacturing capacity in these sectors has expanded quickly while investments into clean-energy infrastructure such as electricity grids has also seen increases.
China currently faces numerous half-completed megaprojects that offer little return on investment and have contributed to local government debt problems in recent years, making it unlikely that they will remain leaders of global infrastructure investment for much longer.
2. Water
As China continues its unprecedented infrastructure boom, its financing could become more selective. Restrictions on debt and lending could ease slightly while funding will focus on sectors that support Beijing’s long-term goals; investments in projects that may be seen as risky will remain banned from investment.
No matter if its the Yangtze River’s vast waters that sustain iconic species like the finless porpoise or China’s vast reservoir of hydroelectric power that keeps its economy running and electrified – water infrastructure will play a pivotal role in future economic growth. A dynamic multisector model shows this to be true due to positive externalities from aggregate infrastructure spending which boost production efficiency and productivity – this phenomenon helps explain why China’s infrastructure investment has had such an outsized effect on economic expansion.
3. Transportation
Transportation infrastructure is vital to economic development as it supports trade – one of the primary sources of wealth creation. China has made considerable investments in its transportation system – particularly ports/harbours, airports and railways.
As China moves to an upper middle income economy, transportation infrastructure demands will only grow exponentially. That is why its government has devised an aggressive plan for expanding roadways (including an increase in expressway mileage), railway operating miles and passenger airports.
China may also ease debt limits on local governments and property developers to encourage infrastructure spending, but only on projects essential to its long-term goals. Otherwise, they risk repeating some of the mistakes seen during the global financial crisis construction boom when excessive borrowing pushed more productive investments out of consideration.
4. Agriculture
China’s infrastructure boom has played a critical role in its phenomenal rise, from railway tracks to skyscrapers. Now, however, Chinese investment in other nations’ infrastructure projects as part of an effort to become self-sufficient and further develop high-technology sectors is also on the rise – but many projects that rely on Chinese workers may face labor issues in due course.
Additionally, the model shows that while infrastructure investment was an essential driver of Chinese growth during 2003-2016 period, it may have exceeded socially optimal levels over time. This finding aligns with China’s structural changes – decollectivization and reforms to village enterprises have reallocated resources away from agriculture and into infrastructure-intensive sectors to further spur its economic expansion.
5. Healthcare
China’s recent focus on healthcare infrastructure reflects a wider commitment to global health and development that is intimately tied with economic growth. China has long provided physicians and specialists for international disaster relief efforts while its research institutions have made considerable contributions towards building up global R&D capacity.
China has made significant investments in grassroots infrastructure, including community health centers and public-health stations per million urban residents (up by an average of 20% since 2010). Furthermore, urban environmental infrastructure development is rapid with rising sewage treatment capacity, daily waste incineration capacity, solid waste disposal capabilities and improvements in monitoring and supervision capabilities.
Multinational companies can use this trend to expand their businesses in India, but should carefully consider all of the forces shaping this market and take a comprehensive approach when formulating an investment strategy to navigate unchartered waters.
