China may be looking at spending 600 billion yuan on extending its already over-indebted toll road network. This is another sign, to this Bystander’s eye, that an economic stimulus package in the form of transport infrastructure spending is in the making, but it also raises a red flag about tackling slowing growth this way.
Caixin quotes transport ministry spokesman He Jianzhong saying that the country’s toll roads’ aggregate debt, at 2.32 trillion yuan in 2011, was equivalent to 64% of its accumulated investment of 3.65 trillion yuan, still well short of the 80% he said banks use as a red line when determining whether to grant loans. He says that means toll-road building “still merits bank lending” — 600 billion yuan-worth by our back-of-the-envelope calculation.
Setting aside the thought that there is more sophistication to Chinese banks’ credit risk analysis than that calculation (not something we do with full confidence, it is true), we are surprised that toll roads, some of which are not even earning enough from tolls to cover their existing debt service, would be the recipient of such new investment. The whole system is troubled. Recent political pressure has been to cut the cost of tolls, which are expensive and unpopular with drivers, and to crackdown on illegal toll taking. All this puts further financial pressure on toll-road builders and operators.
Some new toll-road lending has already gone to refinance old loans incurred in the three-year road building frenzy that followed China’s post-2008 global crisis stimulus spending. It is a microcosmic warning of the long-term dangers of relying on fixed-asset investment to generate growth, as China has done. In the end the debt becomes unsustainable.