China tries its favorite economic cure: More construction

At a cavernous factory in the Chinese city of Xuzhou, 100 new workers have just been hired to produce giant construction cranes. Nearby, at another sprawling factory, employees toil until midnight to assemble drilling and tunneling machines. A few blocks away, their colleagues at a factory that makes dump trucks have received enough orders to keep them busy well into next year.

These factories, and half a dozen more in the city, are all owned by Xuzhou Construction Machinery Group, a state-owned industrial behemoth that manufactures the outsize machines behind China’s latest construction boom.

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The company, China’s largest producer of construction equipment, is at the center of Beijing’s strategy to revive the country’s economy in the wake of the coronavirus pandemic by doubling down on a tested strategy: investing in infrastructure projects at home.

China appears to have mostly eradicated the coronavirus within its borders. But outbreaks overseas have caused economic downturns elsewhere that have hurt foreign demand for Chinese exports, including the trucks and machines made in Xuzhou.

Foreign markets helped fuel the country’s rapid growth for four decades. But now China is back to doing business with a local customer: itself. Once again, Beijing is investing heavily in the country’s own infrastructure, employing millions of people not just to build new roads, railway lines and sewage systems but also to make the equipment necessary for those projects.

“This year is a very bad year for overseas contracts, and I cannot travel,” said Vincent Cao, the drilling and tunneling equipment manager at the company, better known by its initials, XCMG. Despite those limitations, business is booming, he said, adding, “It is a good year for China.”

On its face, China’s strategy appears to be working. Big investments helped make China the first major economy to see its economy rebound after an outbreak, with output rising 3.2% from April through June compared to the same period last year. China’s economy is reviving even as Europe’s downturn now appears significantly deeper than originally expected and the U.S. economy struggles.

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Previous investment campaigns have given China some of the best infrastructure in the world, including the fastest train and longest sea bridge. But the latest push comes with its own set of risks and puts China at odds with how much of the rest of the world is handling the downturn.

Practically all of China’s infrastructure projects are being funded with more debt. Economists warn that paying interest on all that debt may be a drag on future growth.

Additionally, some Chinese economists said, the country does not need more record-breaking megaprojects but would instead benefit from modest programs, like building better sewer lines close to people’s homes. While these less-glamorous infrastructure projects improve the quality of people’s lives, they offer little glory or political reward for the local officials who oversee them.

China’s captains of industry have prospered by building the country’s premier projects, not by improving neighborhood sewer lines. Wang Min, XCMG’s longtime chair, said that he wanted to make big machines for large projects, a space in which few other Chinese businesses can compete.

When told of a sewage line being replaced in Xuzhou using construction equipment of modest size, Wang was unenthusiastic. “All enterprises can manufacture this kind of excavator, so we don’t have any kind of competitive strength,” he said. “But in terms of the large-scale excavators, XCMG has an advantage.”

Long before building some of the world’s largest cranes and bulldozers, XCMG got its start manufacturing land mines for the People’s Liberation Army during World War II. In the 1950s, it briefly produced plows until it switched to making construction machinery.

The company, which is owned by the Xuzhou municipal government, is still inextricably entwined with the state and military, though it no longer produces weapons. XCMG has been an integral part of China’s development strategy, and as the country has prospered, so too has the company.

During China’s last infrastructure binge, intended to bail the country out of the global financial crisis, XCMG’s sales soared eightfold from 2008 to 2010. When Xi Jinping, the country’s top leader, rolled out his Belt and Road Initiative in 2013 that offered enormous loans to developing countries to buy Chinese-made goods, XCMG was there, cashing in on exports to countries like Venezuela and Nigeria.

Now the company is shifting gears again. Many developing countries are struggling to repay their debts to state-owned Chinese banks and are unable to buy bulldozers and other gear. China has almost completely closed its borders, adding another wrinkle of difficulty for XCMG managers trying to close deals in distant markets.

But China is also looking inward. Xi has set poverty alleviation as the country’s top economic goal this year. Many of China’s poorest areas are remote villages, and extending road and rail lines to them requires extensive bridge and tunnel construction. That means putting lots of people and lots of XCMG equipment to work.

Premier Li Keqiang, China’s second most powerful leader, called in May for much of the country’s new construction spending to take place close to where people live. That would make it easier for millions of rural workers who have lost their jobs at factories producing goods for export to find new work without migrating to distant cities.

The scope of China’s latest building boom is enormous, and XCMG is playing a pivotal role. Thirty-seven Chinese cities are in the process of building a total of 150 new subway lines, and the company is manufacturing the needed equipment for half of them.

The country’s high-speed rail system, which already connects more than 700 towns and cities, is expanding so fast that it annually buys three times as many pile drivers as the European and U.S. markets combined. XCMG, the world’s biggest producer of pile drivers, has supplied most of them.

But China’s plan to build its way out of its pandemic downturn contrasts with the policies of most Western governments. Western economists generally recommend transferring money directly to consumers rather than constructing ever more railroads and highways.

“It would be more efficient to give them the money than spending two-thirds of it on steel and petroleum and whatever,” said Michael Pettis, a professor of finance at Peking University in Beijing.