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Zhou Qiren: Economic nature of government-led investment

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Peking University, Apr. 9, 2011: Professor Zhou Qiren, dean of the PKU National School of Development, wrote in his blog on the effect of “government-led” characteristic on currency movement and monetary policy and discussed the economic nature of government-led investment. Excerpts follow:



“Government-led” is a common word in reports on China’s economy and appears everywhere in the economic life. Nowadays, theories and policies speaking highly of “government-led” are popular among theorists, who argue that the "government in competition" is not only the indispensible part of the miracle of the Chinese economy, but also the real secret of the "China model," even the best economic system for mankind than ever. I reserve the right to disagree.


Statistics show that direct government investment has decreased its ratio sharply in the total social investment. But investment projects included in fiscal budget are only a small part of all the government-led investments. Beyond fiscal budget, there is investment by the state-owned enterprises, which is not categorized into government-led investment in general in China. However, in fact the state-owned enterprise investment turns out to be freer as it works in similar ways with government-led investment except for the exemption from the examination and discussion of the National People's Congress.


According to Sheng Guangzu, China's newly appointed railway minister, the fare of Beijing-Shanghai high-speed railway is estimated by the construction cost and operating cost, which will finally be submitted for approval in line with the procedures prescribed in the Price Law. This pricing law is the so-called “cost pricing.” The lower the cost is, the lower the fare is as well. The media and public should not complain about the high fare because the Ministry of Railway makes no money from the passengers.


So how is the cost determined? What determines the “construction cost” of the high-speed railway? Let’s take the Beijing-Tianjin High-speed Railway for example. It is reported that the original aim of the Inter-city Rail Transit, which got 12.34 billion yuan project budget from the National Development and Reform Commission in 2004, was to meet the requirement of trains under 200 km/h during the design section. However, it cost 9.21 billion yuan more with the average investment reaching 185 million yuan per kilometer when opened to traffic in 2008. The main reason for the sharp rise in the “construction cost” is the increase of the train speed from under 200 km/h to 350 km/h. A conclusion is drawn that the high-speed train saves the passengers only 15 minutes at the cost of 9.2 billion yuan more investment.


The fare of Beijing-Tianjin high-speed railway skyrocketed because of the increased investment based on the “cost pricing.” Although it costs 58 yuan for a second-class seat and takes only 27 minutes from Beijing to Tianjin, even faster than from PKU to the Beijing South Railway Station by subway. But the high ticket price finally constrains the demand. It’s reported that the passenger traffic of the first year reached 18 million, lower than the expected 300 million, on the condition that all EMUs were canceled between Beijing and Tianjin.


It’s no surprise that the Ministry of Railway has a strong desire to build the fastest high-speed railway in the world. However, how was this ambition approved by the state? The mystery lies in a few words. “High-speed wheel-rail at 380 km/h” was reached after decades of debate on high-speed railway among opposing forces in 2006. Liu Zhijun, China's then railway minister who was sacked in February, just put “Passenger Dedicated Line at over 200 km/h” in the Development Plan Outline for the Medium and Long Term Railway Network, which avoided the controversy about high-speed railway with ease, was approved the State Council in 2004 and became the national railway development plan. The mystery is that “Passenger Dedicated Line” is no equal to “High-speed Railway.” As for the speed, the Ministry of Railway has the final say after the approval.


What’s more, the high-speed railway plan gained benefits from the 4 trillion stimulation plan and huge credit in coping with the financial crisis by the Chinese government. With no different voices, the national railway mileage planned to increase from 100,000 km to 120,000 km while the passenger dedicated line planned to increase from 12,000 km to 16,000 km. The Ministry of Railway announced that China would build 13,000 km passenger dedicated line and inter-city railway before 2013 and have the longest railway mileage in the world soon.


All of the numbers mentioned above, from under 200 km/h to 350 km/h, from 100,000 km to 120,000 km railway mileage, from Beijing-Shanghai High-speed Railway to the world’s largest high-speed railway network stretching all over the country with the traffic mileage reaching 16,000 km, are all connected to relevant “construction cost and operating cost.” It will determine the future ticket price of Railway Passenger Transport in China based on “cost pricing.”


What puzzles us is what the economic base of the huge investment in the world’s fastest railway network in a country with the per capita GDP ranking only 100th in the world. It’s possible that China will have the largest economic output in the world in the near future. But nobody has forecasted that China’s per capital GDP will rank first in the world in the foreseeable future. Everyone wants to save time when in a hurry, but few will like the fasted speed in the world if the cost of the saved time is far more than the benefit you could gain in such time.


This passage aims to help further understand the economic nature of the government-led investment via the high-speed railway investment example. Anyway, this investment is not based on the relative price of the market, nor the guessed future demand, nor the expected willingness and ability to pay. What is worse, the decision for thus investment has no secure responsibility relation with the final result. What Liu Zhijun’s case teaches us is that he can’t take any responsibility when the media and public are eventually able to demand for his accountability. However, the investment decision under such system continues to determine the cost of future customers and has a consequence on the choices of prices, demand, and alternative consumption in the future. This is part of the micro foundation of macro economy in China. We need to think how to make effective regulation to the financing, investment, and credit demand under such system.



Written by: Zhang Hao
Edited by: Su Juan
Source: Economic Observer