Published: November 6, 2012
SHIFANG, China — Local leaders were all smiles this summer at a groundbreaking ceremony for a vast copper smelting project that seemed like the answer to the chronic unemployment that has plagued this city in northern Sichuan ever since a devastating earthquake in 2008.
A protest against plans to expand a petrochemical plant in Ningbo, China, last month. More investment projects are running into opposition from a growing Chinese middle class concerned about environmental damage.
But within days, the tree-lined plaza at the heart of the city was packed with thousands of youths, protesting that the $1.6 billion factory would pose a pollution hazard. After two nights of street battles pitting youths against the riot police, city leaders canceled the smelter.
“The environment is more important” than new investments or jobs, said a young woman sitting on a recent afternoon at the cafe across the street from the plaza, now empty except for a clutch of retirees gathered under the clock tower.
China’s economic boom over the last three decades has depended overwhelmingly on a build-at-all-costs investment strategy in which pollution concerns, the preservation of neighborhoods and other such questions have been swept aside. But that approach is starting to backfire, posing one of the biggest challenges for the new generation of Chinese policy makers who will take over at the Communist Party Congress, which starts on Thursday.
New investment projects used to be seen as the best way to keep the Chinese public happy with jobs and rising incomes, assuring social stability — a paramount goal of the Communist Party — while frequently enriching local politicians as well.
But from Shifang in the west to the port of Ningbo in the east, where a week of sometimes violent protests forced the suspension on Oct. 28 of plans to expand a chemical plant, more projects are running into public hostility.
In many cases, they are running into opposition not just from farmers who do not want their houses and fields confiscated, but also from a growing middle class fearful that new factories will lead to more environmental damage.
In response to this and other worries about the economy, a number of influential officials and business leaders in China have stepped up their calls for changes aimed at increasing the efficiency of investment and simultaneously shifting the country toward a greater reliance on consumption.
But China’s leaders, including the outgoing prime minister, Wen Jiabao, have been talking about such a transformation for years with little sign of success, as state-controlled banks continue to lend huge sums to politically powerful state-owned enterprises and local governments.
Frenzied construction of roads, bridges, tunnels and rail lines over the last decade has left China with world-class infrastructure. But it has also produced deeply indebted local governments that are struggling to finance more projects.
At the same time, vast unused capacity in practically every industrial sector has crippled profitability and left manufacturing companies straining to repay their borrowings, a problem that has been partly masked by banks in the habit of simply rolling over loans rather than recognizing losses.
“All Chinese industries are like that — can you dig out which area of Chinese industry is not in overcapacity?” said Li Junfeng, a longtime director general for energy at China’s top economic planning agency.
Investment reached 46 percent of China’s economic output last year. By comparison, Japan’s investment rate peaked at 36 percent, which it reached in the early 1970s; South Korea topped out at 39 percent in the late 1980s.
Growth in Japan and South Korea started to slow and eventually tumbled after investment peaked. The big question now is when China will run into the same limits, and how rapidly change will take place, said Diana Choyleva, an economist at Lombard Street Research in Hong Kong. “The potential for a big crisis is always there,” she said.
