Should China Rethink High Speed Rail?

While I was in China, I blogged about why the US is not going to get Chinese-style high speed rail.  Now the Chinese Academy of Sciences is saying that maybe China shouldn't get it either:

The Chinese Academy of Sciences (CAS) reported to the State Council recently, urging the large-scale high-speed railway construction projects in China to be re-evaluated. The CAS worries that China may not be able to afford such a large-scale construction of high-speed rail, and such a large scale high-speed rail network may not be practical.  

Wuhan - Guangzhou High-speed Train

High-speed rail train runs at over 250 km per hour, about twice the normal speed of a regular train. Under the current plan, the central government has approved to build, by 2020, 16,000 km of high speed rail providing access to about 90% of the Chinese population. Some local media have reported recently that the recently enabled Wuhan - Guangzhou high-speed rail is currently running an average daily attendance of less than half capacity, while the newly opened Shanghai-Hangzhou high-speed rail attendance is even lower. The main reason for the high-speed rail low attendance is that fares are too high; the high-speed railway ticket prices are usually double or higher than normal train fares. 

The report submitted by the Chinese Academy of Sciences said China's high-speed rail construction has caused debt that has already reached unsustainable levels

When you're in China, it's easy to get caught up in the constant extolling of the benefits of (modified) central planning,  After all, the Shanghai-Hangzhou train, which I rode, is awesome, and it's certainly true that the market probably wouldn't have provided it.  The Chinese argue that the new high speed rail network is critical not merely to move the population around, but to free up the existing railbed for more freight traffic.

On the other hand, there are great dangers to being able to point at an infrastructure problem like this and say: "Make it so."  We interviewed someone at the rail ministry, and initially I was going to ask him the normal financial questions you ask someone planning a major capital expansion in the United States: capital costs, cost-effectiveness, and so forth.  The answers are more often than not the fever dreams of the most optimistic consultant they could find, but at least there is some tether to reality: the head of the agency doesn't actually want to be fired because his budget overruns just ate the money allocated for children's health care.

In China, I was stumped as to how you'd even ask that question. These projects don't have to go to the market for loans; the government directs the state-owned banks to lend to them, at interest rates decided by the state.  There's no opportunity cost to the money, since it's not like the rail ministry would otherwise be building a chain of noodle shops.  And the ridership projections are vetted by the same people who want to build 16,000 km of high-speed rail.

Prices are really useful.  But in whole large sectors of the Chinese economy, particularly the  banking sector, the government sets those prices.  This means huge information loss, and the concomitant possibility that there is a vast misallocation of resources.

Don't those things happen in markets?  Hell yes:  witness the housing bubble.  On the other hand, witness East Germany.  To get a really catastrophic misallocation of resources, it seems to take a government; corporations can only screw things up on an artisinal scale.  For that matter, it's worth noting that our government has spent the last seven decades trying to keep the price of housing low, and that much of that intervention, such as the creation of mortgage securitization, ultimately significantly contributed to the crisis.

It's worth remembering that at the time they were built, all those useless houses looked like prosperity.  So too, massive mispricing in China may look pretty sweet--unless a hiccup suddenly leaves the government with a hell of an expensive white elephant.  Or lots of them. As anyone who has contemplated purchasing a luxury car will know, just because something is really awesome, doesn't mean it's a good idea, economically speaking.  Buying without knowing the price is dangerous no matter where you are.