【原创】China’s Infrastructure Development and ...

China’s Infrastructure Development and Supply-Side Structural Reform

Li Pengfei

Institute of Industrial Economics (IIE), the Chinese Academy of Social Sciences (CASS), Beijing, China

Abstract: Despite significant improvements in transport, energy and information communication technology (ICT) infrastructures, inadequacies still exist in China’s infrastructure development in light of emerging demand and industrial transition and upgrade. China lags far behind advanced economies such as the United States, Germany and Japan in terms of the quality of transport infrastructures except railroad; electricity infrastructure is insufficient and service efficiency needs improvement; ICT infrastructure requires all-round upgrade and gaps in Internet bandwidth are striking. This paper suggests that, based on the needs of supply-side structural reform, China must reform its investment and financing systems to enhance the efficiency of infrastructure investment. Efforts must be made to enhance air transport and port infrastructure to support industrial upgrade; to develop the energy Internet to address emerging demands; and to forge a new generation of ICT infrastructure with industrial Internet as the priority to prepare China for the new round of industrial competition.

Keywords: infrastructure, supply-side structural reform, industrial Internet, industrial competition

JEL: O18

       Rapid growth of China’s infrastructure investment since the early 1980s has led to substantial improvements to such infrastructures as transport, telecom and energy supply, which fueled China’s economic rise (Zong Jiafeng & Li Jing, 2006; Zhang Jun et al., 2007; Wang Renfei & Wang Jinjie, 2007; Zheng Shilin et al., 2014). Nevertheless, it must be noted that demand for infrastructure varies across different stages of economic development. In a traditional society where agriculture holds sway, such facilities as irrigation, flood protection and waterways are the most important infrastructures. After the Industrial Revolution, mass production led to an upsurge in demand for energy and transport. Since the ICT revolution, broadband and Internet infrastructures became all the more relevant as digital, ICT-based and smart ways of work and life prevail. In the context of the new round of industrial revolution and China’s “new normal”, aligning infrastructure development with supply-side structural reform is an important subject of research. By taking stock of the development of China’s transport, energy and ICT infrastructures, this paper identifies the weaknesses and priorities of China’s infrastructure development.

1. Current Status of China’s Infrastructure Development

Since 2003, China’s infrastructure development has entered into the stage of rapid development on all fronts (Ren Yan, 2013). Transport, energy and ICT infrastructures have all experienced growing reinvestment volumes yet the pace of investment growth differs across industries. Despite remarkable improvements, efforts are still needed to address emerging demands and support industrial transition and upgrade.

1.1 Infrastructure Investment Keeps on the Rise amid Remarkable Industry Disparities

After falling from 637.65 billion yuan in 2003 to 514.834 billion yuan in 2004, total investment in transport, energy and ICT infrastructures as main infrastructures in China rose to 4,033.985 billion yuan in 2014, an increase of over six times across a span of 11 years, or 18.26% on an annual average basis. Nevertheless, such investment growth was dwarfed by total investment in fixed assets during the same period. From 2003 to 2014, China’s total investment in fixed assets spiked from 5,556.661 billion yuan to 51,202.065 billion yuan with an annual average growth rate of 22.37%. Investment growth in critical infrastructures slower than the growth of total investment in fixed assets is believed to have caused an inadequate supply of infrastructure. Due to the strong positive externalities of infrastructure and significant constraints arising from the bottleneck of infrastructure, such inadequate supply will negatively impact cost abatement in supply-side structural reform.

By industry, transport represents the highest share of infrastructure investment, followed by energy and ICT infrastructures, and the gaps among them kept expanding over recent years (see Figure 1). In 2003, investment in transport, energy and ICT infrastructures accounted for 51%, 32% and 17% of total investment in critical infrastructures respectively. In 2004, as spending on energy infrastructure fell to 34.145 billion yuan, down 83% over 2003, the share of energy infrastructure investment dropped to 7% while transport and ICT infrastructures accounted for 71% and 22% respectively. Since 2005, energy infrastructure investment has maintained steady growth with the share in total investment in critical infrastructures in the range between 33% and 44%. Investment in transport infrastructure has been on the rise for many consecutive years, particularly after 2011. In 2012, 2013 and 2014, growth in transport infrastructure reached 20%, 33% and 25% respectively. However, ICT infrastructure investment grew slowly, totaling 167.294 billion yuan in 2014. Despite an increase of about 60% over 2003, it was only equal to 7% of investment in transport infrastructure in the same year. In the context of extensive ICT application, the limited growth and share of ICT infrastructure investment inhibit China from sharing the dividends of the ICT revolution.

1.2 Transport Infrastructure Network Improves While Transport Hubs and Integrated Services Lag behind

Decades of rapid development have brought growing sophistication to China’s transport infrastructure. (1) Railway and especially high-speed railway scored major progress with a swiftly expanding railway network. In 2015, the operating length of China’s railway system reached 121,300 kilometers, ranking second in the world. The operating length of high-speed railway with a designed hourly speed above 250 kilometers surpassed 19,000 kilometers, representing over 60% of high-speed railway length in the world. Today, the high-speed railway network has connected more than half of Chinese cities with a population above 500,000. (2) Road infrastructure developed fairly rapidly with continuous extensions of road networks. In 2015, the total road length in China reached 4,577,300 kilometers, ranking second in the world; of which, the total length of expressway reached 123,500 kilometers, ranking first in the world. Road improvements substantially increased the accessibility of road transport in China. In 2015, 99.99% of Chinese towns and townships and 99.87% of administrative villages had access to roads. (3) Water transport infrastructure gradually improved. Over recent years, improvements have been made in the size, operation and modernization of Chinese ports. In 2015, China had a total of 31,259 commercial berths, including 2,221 berths above 10,000 tons, with a total throughput capacity of 7.9 billion tons or 188 million TEUs (twenty foot equivalent units). Progress has been made in the development of inland waterways. In 2015, the total length of navigable inland waterways in China reached 127,000 kilometers. (4) Bottlenecks in air transport significantly eased. Recent years have seen constant improvements in the layout of airports in China. In 2015, the number of airports in China registered 214, including 206 airports and 204 cities with regularly scheduled flights (see Table 1).

Nevertheless, the level of transport in China remains relatively low. According to the experience of developed countries, the construction and operation of transport infrastructure can be roughly divided into four stages including separate development, interconnection, integration and sustainable development. Despite major improvements in the interconnection of operation and construction of integrated transport hubs in prosperous regions, China has yet to integrate multi-modal transport in a seamless manner and achieve sustainable mobility.

1.3 Robust Development of Energy Infrastructure Challenged by New-Energy Demand

Energy shortage used to be a major bottleneck in China’s industrial development. With the development of market economy, market-based means have been extensively adopted to develop energy infrastructure and increase energy security. Take electricity for instance. After the dawn of the new century, especially since China’s reform in 2002 to separate power plants from power grids, eliminate monopoly and introduce competition, China’s installed power capacity and power grid swiftly expanded.

By the end of 2015, China’s total installed generation capacity reached 1,507 gigawatts, ranking first in the world; of which, the generation capacity of non-fossil fuels amounted to 516.42 gigawatts, accounting for 34.3% of total installed capacity. In the installed capacity of non-fossil fuels, hydropower, nuclear power, grid-connected wind power and solar power reached 319.37 gigawatts, 27.17 gigawatts, 128.3 gigawatts and 41.58 gigawatts respectively. China’s total installed generation capacity amounted to 517 gigawatts in 2005, which almost tripled in the ensuing decade (see Table 2). Grid-connected wind and solar power developed by leaps and bounds, making China the largest producer of renewable energy in the world.

By the end of 2015, the length of power transmission lines and the capacity of public power transformation at and above 220 KV in China reached 610,900 kilometers and 3.132 billion KVA (kilovolt-amps). Compared with 2005, the length of power transmission lines increased by 2.4 times over the decade and the capacity of power transformation equipment grew by 3.69 times (see Table 2).

While recognizing the achievements in China’s energy infrastructure, inadequacies still exist in the context of continuous socio-economic developments in the “new normal” and the need to support supply-side reform. For new-energy vehicles identified as one of China’s strategic emerging industries, for instance, the lack of charging posts and other facilities poses a barrier to the industry’s development. While advanced economies strive to build smart grid, similar efforts in China are slow due to factors like inadequate power distribution networks, resulting in energy needs not being met.

1.4 ICT Infrastructure Develops to a New Level Yet Remains Insufficient to Support Integration between ICT Application and Industrialization

Tremendous progress has been made in China’s ICT infrastructure development since the 1980s, particularly after the dawn of the new century. (1) By the end of 2015, the total length of optical fiber cables in China registered 24.873 million kilometers, which is over six times the level of 4.07 million kilometers in 2005; of which, the length of long-distance optical fiber cables totaled 960,000 kilometers in 2015, up 33% over the level of 723,000 kilometers in 2005. (2) By the end of 2015, the number of mobile communication base stations in China totaled 4.668 million, which is over three times the level of 1.398 million in 2010; of which, the number of 3G/4G base stations in China reached 3.207 million by the end of 2015, accounting for nearly 70% of all base stations, up 35 percentage points over 2010. (3) In 2015, the number of broadband Internet access ports in China totaled 470 million, which was over seven times the level of 64.8636 million in 2006 (see Table 3). Optical fiber cables swiftly replaced copper cables. In 2015, the number of xDSL ports fell by 39.037 million over 2014, down to 98.705 million, with the share in total Internet access ports down from 34.3% in 2014 to 20.8%. In 2015, the number of optical fiber ports rose by 106 million, amounting to 269 million with the share up from 40.6% in 2014 to 56.7%.

Despite progress on all fronts, China’s ICT infrastructure remains insufficient to support integration between industrialization and ICT application. The reason is that China has followed the approach of creating an “information expressway” that connects individuals and computers. Yet the new round of technology revolution is defined by smart manufacturing. Supported by network connection, data analysis and security protection, smart manufacturing supports smart decision-making and dynamic optimization from individual machines to production lines, workshops, factories and entire industrial systems (Chen Zhaoxiong, 2016). The concept of ICT infrastructure that developed in the 1990s cannot meet the needs of industrial upgrade in the context of the new industrial revolution. It is imperative for China to develop a new generation of network infrastructure characterized by broadband and ubiquitous connection, cloud computing and information application.

2. Weaknesses in China’s Main Infrastructures

    According to the Global Competitiveness Report 2015-2016 (hereinafter, the report) released by the World Economic Forum, global business leaders and experts expressed in a survey that inadequate supply of infrastructure is the fourth most problematic factor for businesses behind inadequacy in innovation, access to finance and administrative efficiency. For the United States, Germany and Japan, the inadequate supply of infrastructure ranks as the ninth, ninth and tenth most problematic factor for doing business. Although infrastructure remains a bottleneck for the United States, Germany and Japan, the negative effect has diminished. In the tertiary index of “infrastructure” under the Global Competitiveness Index in the report, the Chinese mainland scores 4.73 (out of 7), ranking 39^th among 140 economies; the United States scores 5.87, ranking 11^th; Germany scores 6.12, ranking seventh; Japan scores 6.21, ranking fifth (WEF, 2016). Hong Kong, Singapore, New Zealand and the United Arab Emirates rank above Japan. However, these economies are significantly different from the Chinese mainland in terms of geographic area, economic size and industrial structure. Hence, it makes more sense to compare China with the United States, Germany and Japan in the areas of transport, energy and ICT infrastructures.

2.1 Significant Quality Gaps of Transport Remain except Railway

According to the report, the quality of transport infrastructure and services is measured by five subindexes including the quality of roads, quality of railroad infrastructure, quality of port infrastructure, quality of air transport infrastructure and available airline seat kilometers (see Table 4). (1) China scores 4.7 (out of 7) for the quality of road infrastructure and services, ranking 42^nd among 140 economies. Given China’s global competitiveness index score of 4.9 and overall ranking of 28^th, the quality of road infrastructure and services is a weakness. By horizontal comparison, the scores of the United States, Germany and Japan for the quality of road infrastructure and services are 5.7, 5.7 and 6.0, ranking 14^th, 13^th and eighth respectively. China falls far behind these countries. (2) With regard to the quality of railroad infrastructure, China scores 5.0, ranking 16^th. This indicates that after years of development, China’s railway infrastructure is no longer a bottleneck and well supports its economic and social development today. Of course, the quality of railway infrastructure in China still has room for improvement compared with Germany and Japan. (3) For the quality of port infrastructure and services, China scores 4.5, ranking 50^th and falling far behind the United States, Germany and Japan. For China as a trade-dependent country, inadequate port infrastructure will cause significant negative impacts. (4) For air transport infrastructure, China scores 4.8, ranking 51^st and behind the United States, Germany and Japan. As for available airline seat kilometers, China ranks second among 140 economies only after the United States. Given the average quality of air transport infrastructure, it is likely that China has improved airline seat kilometers by increasing the density of air routes. From this perspective, great potentials still exist in the development of China’s air transport infrastructure. In summary, China’s gaps are the greatest for port infrastructure, followed by air transport and roads, while the gaps of railway infrastructure are the smallest.

2.2 Inadequate Power Grid Infrastructure and Service Efficiency

Given the differences of size, resource endowment, development stage and industrial structure, requirements for energy infrastructure vary across countries. Nevertheless, as an indispensable energy input for modern society, electricity plays an essential role in our everyday life. Thus, the level of energy infrastructure can be assessed through a comparison of power supply quality. According to the report, China scores 5.3 for the quality of electricity supply, ranking 53^rd among 140 economies, which is below China’s overall ranking of 28^th in the global competitiveness index. On this subindex, the United States, Germany and Japan all rank 6.4. Compared with these countries, China’s electricity infrastructure needs improvement. Considering that China’s installed generation capacity already ranks first in the world and considering the declining operating hours of thermal power units in recent years, the major bottleneck of electricity infrastructure should be power grid and especially power distribution network. In addition, the service efficiency of electricity infrastructure operators can be assessed by the time required to get electricity. According to the world development index released by the World Bank, the time required to get electricity for China was 143.2 days in 2015, which was far above the world average level (97 days) and the average level of upper middle income countries (90 days), and ranked 178^th among 200 economies in the world. The time required to get electricity for the United States, Germany and Japan was 89.6 days, 28 days and 97.7 days respectively. Despite the lackluster service efficiency of electricity infrastructure in the United States and Japan, which respectively ranked 110^th and 127^th (see Table 5), their rankings were still somewhat higher than China’s. Thus, there is still great room for improvement in the service efficiency of China’s electricity infrastructure.

2.3 Information Communication Infrastructure Needs Full-Scale Upgrade and Internet Bandwidth Gaps Are Striking

    Since the 1990s, ICT infrastructure with “information expressway” at the heart has become a priority for advanced economies. Due to the dominance of conventional telcom operators and insufficient government-led investment, China’s ICT infrastructure lags far behind developed countries and falls short of its social and economic needs. (1) China has certain gaps with the United States, Germany and Japan in such indexes as mobile telephone subscriptions, fixed telephone subscriptions and Internet users. Among them, the percentage of Internet users represents the greatest gap. Only 49.3% of Chinese citizens are Internet users, ranking 70^th among 140 economies, while this figure is 87.4%, 86.2% and 90.6% respectively for United States, Germany and Japan. (2) Regarding broadband Internet subscriptions, the number of fixed broadband Internet subscriptions per 100 persons in China is 13.6, which is far below 30.4 for the United States, 35.8 for Germany and 29.3 for Japan. The number of mobile broadband subscriptions per 100 persons in China is 41.8, which falls even farther behind 97.9 for the United States, 63.6 for Germany and 121.4 for Japan. (3) As for broadband Internet infrastructure, the average Internet bandwidth per user in China is only 5.0kb/second, ranking 119^th among 140 economies, which also is far behind the United States, Germany and Japan (see Table 6). Therefore, China’s ICT infrastructure falls behind advanced economies on all fronts. In today’s context of broadband and ubiquitous connection of ICT, China’s Internet bandwidth urgently needs upgrade.