July 7, 2011 / 5:14 AM / 8 years ago

Exclusive: China may cut spending on strategic industries

BEIJING (Reuters) - China may rein in plans to invest heavily in seven new strategic industries, including high speed rail and wind power, scaling back cutting-edge projects for industries suffering from old-fashioned problems such as corruption and overcapacity, sources said.

Beijing originally planned to invest up to $1.5 trillion over the next five years in the seven sectors, hoping they would grow into a pillar of economic growth and help shift the world’s second-largest economy away from one centered on manufacturing cheap goods.

The pullback on spending stems partly from worries about corruption in the country’s high-speed rail project and overcapacity concerns in the wind power sector, said two sources with ties to China’s Communist Party leadership and knowledge of the plan.

“The government is now reconsidering the seven new strategic industries plan,” one source told Reuters, requesting anonymity because he was not authorized to speak to reporters.

“The (size of the) retrenchment is still under deliberation,” the source added.

Beijing has long used infrastructure spending to generate jobs and economic activity, most recently tapping government coffers to stave off the effects of the global financial crisis.

While high rates of fixed asset investment have helped maintain strong growth, some economists, such as Nouriel Roubini, have argued that China’s current levels of investment are unsustainable.

These days, China is more concerned about taming inflation and managing a mountain of debt piled up by local and provincial governments that the country’s state auditor estimates at 10.7 trillion yuan ($1.65 trillion).

The strategic industries cover high-end equipment manufacturing, alternative energy, biotechnology, new generation information technology, alternative fuel cars and energy-saving and environmentally friendly technologies.

Analysts welcomed the news, which could mean less borrowing by local governments and faster consolidation of sectors like wind power.

“A lot of these projects are in already question because of their (debt) liability and safety standards,” said Kevin Lai, an economist with Daiwa in Hong Kong.

“The question that needs to be asked is: Is (investment-driven expansion) the kind of growth that China really wants?”


Lower spending in high-speed rail is directly related to the departure of the railway minister, sacked this year under a cloud of corruption, said the sources.

The former minister, Liu Zhijun, spearheaded China’s high-speed rail expansion until he was removed in March for “disciplinary violations,” a charge commonly used to denote corruption. There were no further details.

Premier Wen Jiabao in April warned against corruption tied to big projects, telling “cadres, their families and staff as well as heads of state-owned enterprises, state financial institutions and academic institutions not to intervene in or manipulate bids in any form.”

The ministry has denied any plans to cancel or downgrade rail lines. But the new Minister Sheng Guangzu put investment in railway infrastructure in 2011 at 600 billion yuan ($92 billion), compared with Liu’s pledge of 700 billion yuan.

Liu’s tenure saw rapid development of China’s high-speed rail network, surpassing Japan’s storied bullet trains to become, at 8,400 km (5,000 miles), the world’s longest. Liu had planned to boost the network to 50,000 km (30,000 miles) by 2015. Sheng told the official People’s Daily that it would build a slightly more modest 45,000 km.

The ministry, already deep in debt, still expects to spend another 2.8 trillion yuan between now and 2015. But some analysts believe the investment surge has left it with an unsustainable debt burden.

Even so, China is unlikely to shelve high speed rail.

“The central government is of the view that high speed rail construction will still continue (but) investment will be evenly spread out, the pace of construction will be a bit slower and research will be more comprehensive,” said Dong Yan, researcher at the state-linked Institute of Comprehensive Transportation.


Also to be pared back are plans for wind power. Shao Bingren, committee vice chairman for a top parliamentary advisory body, has warned the wind power industry is already suffering from overcapacity. The state planning National Development and Reform Commission and the National Energy Administration plan to build seven wind power plants in western China with generation capacity of at least 10 million kilowatts each, according to the country’s 12th five-year plan. But critics say these projects could be ill-advised — requiring heavy spending in power grids because wind and solar power plants are located mainly in western, inland regions, while the manufacturing bases are concentrated in faraway coastal provinces. “Many investors and local governments are not mentally prepared and think new energy is all-purpose, clean, conforms with the country’s needs and very profitable,” Shao wrote.

A pullback on investment in the wind sector would be positive for major turbine makers, said Peter Yao, analyst at BOCI Research in Hong Kong.

“If they raise the bar and consolidate the industry it is actually positive for the leading players like Goldwind (2208.HK) and China High Speed Transmission (0658.HK),” he said.

“But for Longyuan (0916.HK) it is obviously negative, as wind farm developers will face higher costs to develop new farms.”

Longyuan shares fell more than 5 percent on Thursday, while Goldwind shed 2.2 percent and CHST fell 1 percent. Currently, the value-added output of the seven strategic industries together account for about 2 percent of gross domestic product. The government has said it wants them to generate 8 percent of GDP in 2015 and 15 percent by 2020.

That percentage may drop under the scaled back plans.

($1 = 6.465 yuan)

Additional reporting by Zhou Xin, Jenny Su, Farah Master and Gui Qing Koh; Editing by Brian Rhoads and Lincoln Feast

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