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On Monday the State Council released an opinion promoting municipal investment over the next two years. This opinion is likely to add fuel to the ongoing debate over the role of infrastructure investment in supporting broader economic growth in China. Many already view renewed growth in infrastructure investment as a major contributor to the rebound in industrial production last month. In August accumulated industrial output growth rose to 10.4 percent compared with the same period last year up from 8.9 percent growth in June. Yet in spite of the widespread acknowledgement that infrastructure investment is once again increasing, measuring the increase is not so easy.
There is no standard definition of infrastructure. In the United States, the definition of infrastructure has been debated for 30 years. Some measures of infrastructure look exclusively at government funded or operated facilities, while others also include private investment. Some measures focus exclusively on capital intensive systems with high public investment (i.e. public transit, wastewater treatment, roads), while others incorporate social facilities such as schools, hospitals, and recreational facilities. Similar in China, the amount of infrastructure investment varies significantly depending on definition. Some measures show investment as high as 28 percent of GDP while others show investment as low as 3.4 percent of GDP.
The narrowest published measure of infrastructure investment originates with the Chinese Ministry of Housing and Urban Development (MOHURD). Its series on fixed asset investment in city infrastructure includes water supply, gas, heating, roads and bridges, waste water treatment, flood prevention, parks and greenery, sanitation, and public transit systems. City infrastructure investment in China is actually quite modest. Investment in city infrastructure across the country has averaged close to 3 percent of GDP for the past 10 years. This year it is likely to rise to 3.4 percent from a low of 2.9 percent in 2011. While providing a good measure for urbanization at the local level, this definition is incomplete because it leaves out larger national infrastructure systems.
In 2009, the National Bureau of Statistics (NBS) in a one-time publication provided a broader measure of infrastructure for the years 2003-2008. The NBS definition of infrastructure includes infrastructure investment in transport systems, energy production and distribution, telecom, water production and distribution, wastewater, and sanitation as well as social facilities such as hospitals, stadiums, and schools. This series also includes sectors that support infrastructure investment – “foundational industries” - such as fixed investment in agriculture, steel production, iron ore mining, coal mining, oil/gas exploration and refining. In 2008 – the last year NBS provided data on this series – investment in foundational industries and infrastructure investment was already 20.3 percent of GDP. If we use this method to extrapolate to today investment is likely to be around 27.7 percent of GDP by the end of this year up from 24.1 percent in 2011.
However, the NBS measure inflates the size of infrastructure investment. Foundational industries produce goods for use in manufacturing as well as infrastructure. This leads to double counting because goods produced by foundational industries are part of the expenditures associated with infrastructure investment.
This is why most economic literature tends to exclude production facilities and focus more on large, capital-intensive networks. For example, the World Bank defines infrastructure as “the basic framework for delivering energy, transport, water and sanitation, and information and communication technology services to people.” This measure excludes social facilities and foundational industries which are included in the NBS definition. Chinese infrastructure investment – applying the World Bank definition – is still quite large and rising. Infrastructure investment averaged 13.8 percent of GDP over the past decade. It is likely to rise to 16.4 percent of GDP.
To put this into perspective, infrastructure investment in China – by the World Bank definition – is no longer the largest contributor to fixed asset investment growth. Since 2007, manufacturing has grown much faster than infrastructure investment and by the end of this year is likely to reach 25.6 percent of GDP. In recent years, real estate investment has also grown faster than infrastructure investment.
However, infrastructure investment - by any measure - is making a moderate comeback this year and is now growing at the most rapid rate since the 2009-10 stimulus. In 2009 the government directed Rmb 4 trillion to support the domestic economy during the worst of the global financial crisis. Much of these funds were directed toward local infrastructure projects such as urban transit. Municipal infrastructure investment grew by 44.4 percent in 2009 alone double the average annual growth rate of the preceding decade. The rapid growth was not sustained. Policymakers, concerned with the rapid growth in local government debt, called on banks to restrict lending to local infrastructure projects at the end of 2010, growth slowed dramatically in 2011. Infrastructure investment growth began to recover in 2012 and has continued to rise throughout this year as policymakers have gradually re-opened local investment in certain areas. In August the accumulated growth of infrastructure investment grew more rapidly than urban real estate or manufacturing investment.
No matter what definition you use, it is clear infrastructure investment will continue to play an important role in the Chinese economy. Premier Li Keqiang considers infrastructure investment as a core part of the urbanization process in China. Yet not all infrastructure investment is made the same. While some would criticize China for over-investment in real estate, steel production facilities, or high speed rail, few would suggest China has invested too much in water treatment facilities, schools, or hospitals. The most recent guiding opinion has placed a greater emphasis on services for urban residents such as upgrading water distribution, wastewater management, flood prevention, and telecommunications infrastructure. If infrastructure grows rapidly in these need areas it will be a positive development. This makes accurately defining and measuring infrastructure important to analyzing the opportunity costs of continued fixed investment growth under the Xi and Li administration.