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Chinese cities face subway delays as Beijing targets wasteful spending, high debt levels SCMP

Rich hubs, including Ningbo and Suzhou, are hitting regulatory roadblocks as the central government prioritises fiscal discipline over infrastructure-led growth

China is tapping the brakes on some subway expansions, including in certain affluent cities – a decision that analysts said reflects a shift from the debt-fuelled infrastructure boom of the past to a new era of fiscal discipline and investment efficiency.

Rich eastern hubs such as Ningbo and Suzhou are among those facing regulatory roadblocks in securing Beijing’s approval for new lines as policymakers scrutinise loss-making projects.

In an online response to public inquiries, the Ningbo Municipal Development and Reform Commission said this month that the city’s ridership metrics “need further improvement” and currently fall short of the conditions required for submission to the country’s top economic planner for approval.

The local commission noted that Beijing had issued stricter standards and was requiring previously approved but unbuilt projects to be resubmitted for vetting.

“Since subway operations in most Chinese cities are loss-making and require subsidies, the fact that their funding sources are now extremely limited means the government has to tighten up,” said Zhao Jian, director of the China Urbanisation Research Centre at Beijing Jiaotong University.

This stricter oversight, once more common among smaller or less-developed cities, has been extended to economic powerhouses. Suzhou, located in Jiangsu province, west of Shanghai, has a population of nearly 13 million and boasts one of the nation’s highest gross domestic products.

Those who have seen my posts will know that I have said for months that the outsized local government debt is eventually going to affect public services.

In fact, back in 2021, the central government has already stopped approving construction of subway systems in cities that do not already have them, so the total number of China’s subways will stay at 54 cities for the foreseeable future. Back in November, Harbin, Qingdao and Yinchuan have just been denied their subway expansion plans, and other projects under construction are being halted. This signaled the end of rail/subway expansion in China, especially for Tier 2/3 cities and below. Now this restriction is reaching even the rich economic hubs, which tells you the true financial situation of many local governments across the entire country.

Since public transits companies are not profitable, many of them also double as REITs to extract profit from the rise in land value. Now that the property prices are plunging, it is becoming increasingly difficult maintain the expansion of public transits given the rising upkeep costs and the diminishing profits.

A very prominent example right now is the Shenzhen Metro who had been transfusing blood (more than 29 billion yuan) to the dying Vanke, one of the biggest property developers in China once hailed as a successful model just 2 years ago when Evergrande was imploding under the weight of its own hyper-financialization.

If you ever wonder why your average Chinese worker does not reap the benefit of its rapid industrialization, why they have to work harder for less wages, why there is low consumption problem, when the increase in productivity should bring the opposite, this is why. This is where a lot of the wealth is going into - to plug the massive debt taken out by local governments to fuel property speculation frenzy since the 2010s.

The solution is actually very simple. The central government simply has to run the deficit spending to directly finance these infrastructure projects. However, this was not done over the past 15 years during the booming infrastructure investment phase, because the government wanted to balance the budget per IMF recommendation. As a result, local governments had to borrow massively from shadow banks (before 2015) and through direct municipal bond issuance (after 2015) to build housing and infrastructures, which ends up with an outsized debt bubble that has become very difficult to service. This is where the “zombification” of the economy starts as the government continues to bail out these unproductive investments because the alternative is the collapsing finance in the local governments and with their bad loans, the entire banking sector as well. This is why neoliberal ideas are so dangerous.

And yes, make no mistake, this is the end of the infrastructure building era in China.