When the 2008 global financial crisis erupted, China's exports collapsed, threatening massive job losses. In response, China unleashed the world's biggest-ever construction boom, pouring more concrete between 2011-13 than the United States did in the entire twentieth century.
Total investment rose from 43% to 48% of GDP during this period, and total debt from 140% in 2008 to over 200% by 2013, reaching 250% by 2017 as banks lent freely to local governments, state-owned heavy industry, and real estate developers. Construction jobs increased from 39 million to 53 million, and total urban employment continued growing at the annual pace of 12 million needed to absorb migration from rural areas. Annual GDP growth dipped only slightly, from 9.6% in 2008 to 9.2% in 2009.
Today, China faces a similar challenge. Like other Asian economies, it has contained the Covid-19 threat more effectively than Western Europe or the US; almost all its factories are open again, and April's export figures show buoyant trade with Asian neighbors. But with Western developed economies still in partial lockdown and likely to recover only slowly, China faces huge headwinds to growth. The temptation will be to repeat a construction-led stimulus.
But the post-2008 construction boom had three adverse effects.
The first is wasted investment. In 2017, President Xi Jinping declared that, "Houses are built to be inhabited, not for speculation." So far, however, his words have had little impact: about 15% of all apartments currently are owned as investments, often not even connected to electricity supply.
In many inland cities facing future population decline, some of these buildings will never be occupied and eventually will be torn down. Other completed infrastructure – highways and sewage systems, subways, and convention centers – similarly exceeds future requirements.
Overbuilding financed by debt has in turn threatened the stability of the banking and shadow banking system – a problem that the People's Bank of China (the central bank) and the banking regulator have spent the last five years trying to resolve.
Finally, the construction boom, based on carbon-intensive steel and cement production, drove China's CO2 emissions from 7.4 gigatons in 2008 to 9.8 gigatons in 2017, making it the world's biggest emitter. This obviously subverts the government's vision of China as a clean economy and an "ecological civilization."
In short, the 2009 stimulus, while necessary at the time, was financially and environmentally unsustainable. China needs a better recovery from today's economic crisis.
Ideally, a better recovery should entail strong consumption growth and reducing China's excessively high investment rate. But the aftermath of Covid-19 makes that difficult in the short term. It is far easier to maintain social distancing on a construction site than in a restaurant, and even when health-related restrictions are relaxed, consumers may be wary of dense convivial environments.
The latest figures show real-estate sales and construction activity rebounding far more rapidly than consumer services and retail. Infrastructure investment by local governments, financed by special-purpose bonds, is already increasing sharply.
But two major developments since 2009 should make the Chinese government wary of traditional investment stimulus. Urbanization is far more advanced, with 61% of people now living in officially designated urban areas, up from 48% in 2009, and many "rural" residents also living in towns of significant size.
Within ten years, China will reach advanced-economy urbanization levels. Unless it moderates investment in urban housing and infrastructure soon, it will be left with huge wasted assets and severe overcapacity in heavy industry. Estimates by the Energy Transitions Commission show that domestic demand for steel and cement could fall by 30% and more than 60%, respectively, over the next 30 years.
In addition, China's population will peak in the mid-2020s, and the working-age population will likely fall by 20% between now and 2050. The number of 20-30-year-olds will decline by 22 million (12%) within just the next decade. In the short term, China still needs to ensure adequate job creation in the face of today's cyclical downturn. But China's medium-term challenge is to increase prosperity despite a declining workforce, which will require it to accelerate automation and productivity growth.
Chinese national and provincial leaders therefore rightly stress the need for "new" forms of infrastructure investment, with a focus on automation technology, artificial intelligence, and the rollout of 5G. But they should be realistic about how much immediate stimulus and job creation this can deliver.
Innovation means that the cost of information and communications technology (both hardware and software) continually falls relative to other goods and services. As a result, China's plan to build nearly700,000 5G base stations in 2020 will require only about CN¥200 billion ($28.2 billion) of investment, compared with annual traditional infrastructure investment of around CN¥20 trillion. So, a 1% increase in traditional infrastructure investment would deliver as much short-term stimulus as doubling investment in 5G, but add far less value to China's economy over the long term.
China must strike the right balance between maintaining short-term growth and laying the foundations for future growth. Accelerating progress toward a low-carbon economy would be a good way to do that. Even here, the investment needs are small compared with potentially wasted spending on real estate and traditional infrastructure. Doubling the pace of wind and solar investment would cost less than 1% of GDP.
Combined with additional investment in ultra-high-voltage (UHV) electricity transmission, power distribution networks and multiple forms of energy storage, and charging infrastructure to support electrification of road transport, the increase in spending on achieving a low-carbon economy could significantly offset the decline in export demand. As for "traditional" investment, stronger building regulations could ensure that China builds more energy-efficient cities rather than just pouring ever more concrete.
China could recover as strongly from Covid-19 as it did from the 2008 crisis, but in a far more sustainable fashion. To do so, it must resist the temptation to use its traditional stimulus tools and realize its own vision of its future economy.
Adair Turner, Chair of the Energy Transitions Commission, was Chair of the UK Financial Services Authority from 2008 to 2012. His latest book is Between Debt and the Devil.
Disclaimer: This article first appeared on project-syndicate.org, and is published by special syndication arrangement.