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China's Highway System Growth Paves the Way to a Stronger Economy

Economics / China Economy Apr 01, 2011 - 06:40 AM GMT

By: Money_Morning

Economics

Best Financial Markets Analysis ArticleKerri Shannon writes: What some have called "the worst traffic jam in human history" happened on the Beijing-Tibet Highway in August 2010. It trapped some drivers for more than 20 days and stretched more than 60 miles (97 kilometers).

The mess was so severe that local residents turned into vendors and profited from selling water, noodles and nuts to stalled travelers.


The cause of the auto standstill was thousands of trucks transporting coal from Inner Mongolia's coal fields to power plants in Beijing's suburbs to satisfy the country's surging electricity demand. The lack of railways connecting the two regions often results in trucks crowding highways, and excessive road damage from heavy vehicles blocks parts of the highway from maintenance.

China's crowded roads have forced cities like Beijing to limit registrations for new cars and impose driving time restrictions on car owners. In Beijing, a city of 20 million, the total number of vehicles is expected to hit 7 million by 2015. The number of vehicles in Chinese capital increased by 1,900 a day on average in the first six months of 2010, officials said last year at a transportation seminar.

"We're making another Great Wall, it's just that this one is made of cars," Gan, a taxi driver, complained to The Hinduduring one of Beijing's traffic jams.

Even if drivers know that a route is likely to be backed up, China's road network offers few alternatives for travel. Truck drivers sometimes have little choice but to brave the crowded highways and risk delaying their business.

Skeptics of China's surging auto industry growth cite the crippling traffic as an enormous roadblock.

But China's highway system is changing. Despite news of never-ending traffic jams, the country has an expansion plan underway.

"As for roads, don't be misled by what's happening here," Money Morning Chief Investment Strategist Keith Fitz-Gerald said in an interview. "China is building the largest road network in the world. It's a numbers game that's going to support cars, buses and all forms of trucking for years to come, together with their underlying suppliers."

China's infrastructure expansion plan is not only going to relieve drivers, but will offer profits to the industries and investors who get in on the growth.

Road Expansion Bridges the Income Gap
China plans to finish a highway network suitable for the entire Chinese population by 2020. China included highway and infrastructure expansion as key part of its 12th Five Year Plan, effective from 2011 - 2015.

He Jianzhong, spokesman for China's Ministry of Transport, said the country is considering building two road networks: One with low-charge tolled roads, mostly expressways, and the other with non-tolled common roads.

Chinese Minister of Transport Li Shenglin predicted that total expressway length would surpass U.S. highway length over the next five years.

China's total highway length increased from 41,000 kilometers to 74,000 kilometers during its previous Five Year Plan ending in 2010. New construction projects include building seven highways starting from Beijing, nine highways running north and south, and 18 running east and west.

Industry experts say the western region's current state of transportation is far behind the country's pace of economic development.

"There are many places in the western region that still do not have highways, which makes it more difficult for the local people to travel," said Li Guoli, an employee at the China Communication Construction Company (CCCC), which works on many highway and railway projects. "For example, there is no highway between Changzhi and Linfen, the coalmine city, which puts a lot of pressure on coal transportation."

A key part of the new Five Year Plan is boosting consumption and creating a larger domestic market. One way to do that is to branch out to the most rural areas of China through highways and railways. The expanded highway network could spread resources out to rural areas, bridging the income gap and narrowing the divide between rural and urban policies.

"The western regions need highways to make travel easier, or it would be impossible for people there to get out of poverty," said CCCC's Li.

Facilitating travel in China's inland provinces allows workers to find jobs closer to home instead of having to travel to the coast for few employment openings. They spend less money on traveling and more time with their families. Fewer job-related expenses allow households to spend more as consumers, supporting China's domestic consumption growth. It also helps contribute to a more balanced economy.

"The changes currently going on in the rural China are tremendous and underreported, especially in the Western media, whose focus is always on the large cities like Beijing and Shanghai," said Professor Kay Shimizu of the Weatherhead East Asian Institute of Columbia University. "Actually the changes in rural China are going to be the engine of China's economic growth in the next five or ten years, and of course China will face tremendous challenges. I think China is well-equipped to tackle them."

China also plans to boost production of ports, airports and train facilities to reduce reliance on roads and allow newer roadways to last longer. China's roads transport 74.1% of the country's freight traffic and 94.5% of passenger volumes, according to data from the Ministry of Transport.

China invested more than $713 billion (4.7 trillion yuan) in land and marine infrastructure during the previous Five Year Plan and will maintain that pace over the next five years.

Growing Too Fast?
Not everyone favors this rapid construction rate. Some experts think developing highways in China's rural areas will produce such a small return on investment that the project isn't worth its high cost.

The high cost of China's highway expansion also has kept toll fees higher than drivers expected, according to China's Global Times.

But others say that while a short-term return on investment might not be realized, the long-term benefits of infrastructure growth are far more important to China's economic future.

"In the short term, it might be difficult to make profits, but profits are not the top priority for state-owned enterprises sometimes," said CCCC's Li.

Many say transportation conditions in rural areas are so underdeveloped that new construction is necessary for sustainable future growth. If the country doesn't start soon it could drastically fall behind its transportation needs.

"Take Xianyang airport as an example," Zeng Peiyan, former vice premier in charge of industrial development, wrote in a book published last year on Chinese development. "The local authorities used to be questioned for expanding the scale of the airport from a 2-million-passenger flow to 7 million, but when the project was finished, the passenger flow had increased to more than 7 million."

The expansion efforts also will bring more employment opportunities to Chinese workers. Every $15 million (100 million yuan) invested in highways will create 3,900 jobs, according to a report by China Youth Daily.

Private companies will benefit from the growth as China has so many infrastructure development projects underway that state-owned enterprises can't handle them all and have started turning to contractors. This will reduce the financial burden of construction on the Chinese government and allow private businesses to grow.

More Roads, More Profits
China's expansion plans open profit opportunities in a number of sectors.

Each mile of highway requires 1,000 tons of iron and steel, according to a report in the China Youth Daily. Phil Newman, chief operating officer of the metals consulting group CRU, told Reuters that 95.1% of global steel production growth from 2007 to 2021 will occur in Asia, with China the dominant force.

This will strengthen investments in the global steel industry, like the exchange-traded fund PowerShares Global Steel Portfolio ETF (Nasdaq: PSTL). This fund tracks the price and yield performance of the NASDAQ OMX Global Steel Index, investing at least 90% of assets in the stocks, ADRs and GDRs of companies that comprise the underlying index.

China's infrastructure development also will strengthen its fast-growing auto industry, relieving painful Chinese traffic as a menace to auto market growth.

"The limiter of Beijing traffic isn't what the West thinks," said Money Morning's Fitz-Gerald. "True, conditions are terrible and Beijing traffic makes Los Angeles look positively organized, but it still works just like any other major city in the world - London, New York, Tokyo and even Los Angeles. All are implementing some form of limited driving access, parking priorities and the like."

China became the world's largest auto market last year as a rising middle class bought more cars and trucks than ever before, and analysts expect the trend to continue.

"Private vehicle ownership is still low in China, and we expect that the number of first-time car buyers will increase sharply in the next few years," said Shirley Ng, a director in the automotive division of Nielsen China.

China will need more steel for its auto manufacturing, benefiting POSCO (NYSE ADR: PKX), South Korea's largest steel producer. POSCO recently started building a new plant in the Guangdong Province of southern China to produce galvanized steel sheets for cars. It also made a deal with the Guangdong government to collaborate on projects involving stainless steel production, electric vehicles and green city construction.

Another auto-related stock to look at is China Yuchai International Ltd. (NYSE: CYD), which is engaged in the manufacturing and sale of diesel engines that are mainly distributed in China.

"CYD benefits from three uniquely Chinese trends: rising consumer purchasing power, the Chinese infrastructure build out, and the development of transportation within China to move people, goods, and services around the nation," said Fitz-Gerald.

Fitz-Gerald also sees foreign automakers that market to Chinese consumers profiting from continued auto growth.

"General Motors Co. (NYSE: GM), Ford Motor Co. (NYSE: F), Volkswagen AG (PINK: VLKAY), Audi and other international makers are already benefiting significantly from this trend and all have substantial manufacturing plants inside China," said Fitz-Gerald..

GM sold more than 2.35 million cars and trucks in China last year, beating U.S. sales (2.2 million) for the first time in the company's history.

Source : http://moneymorning.com/2011/04/01/...

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