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China’s new infrastructure

May 23, 2013

China is at a crossroads. Its leaders are committed to dramatically transforming the world's second-largest economy. They want so-called knowledge businesses to supplement manufacturing. They want to increase domestic consumption to bolster growth. They want the world to covet Chinese brands. Business and political leaders from around the world will discuss and debate this ambitious vision at Fortune's upcoming Global Forum in the western city of Chengdu on June 6-8. But signs of a New China already are emerging, as you'll discover by reading this special report. Beijing-based Lenovo is producing innovative tech products. Wanda Group of Dalian is building domestic theme parks and resorts. And the Chinese government is investing heavily in roads and railways to help middle-class and affluent consumers get there. These massive infrastructure projects help keep citizens employed -- and, more important, could help China reach its next destination.

The race to build roads

A $207 billion investment to head off future traffic jams

In the past decade alone, China has built 31,000 miles of expressways. That's about two-thirds the length of the entire U.S. Interstate Highway System, constructed at great cost since it was founded some 60 years ago. Today China boasts 49,000 miles of expressways -- and some 2.6 million miles of roads, more than double the amount in 2002.

And it's still growing. Last year China invested $207 billion in road construction and upgrades, according to analysis by KPMG. The government's current five-year plan in the country calls for at least 186,000 miles (and many billions of dollars) more by 2015, with plans to complete nine separate north-south lines and 18 expressways running east to west. Seven additional routes radiate from Beijing to China's borders.

"Most of this infrastructure is catch-up," says Sam Staley, a Florida State University professor who studies transportation in the country for the Reason Foundation. China is home to 20% of the world's population but still has just 5.6% of its roads. In 2009, China surpassed the U.S. to become the world's largest car market, with 19.3 million vehicles sold last year.

Highway construction has been an important part of China's efforts to create jobs. Last year the country had 46 businesses in the industry, with 710,500 employees and a $12.3 billion payroll, according to research firm IBISWorld.

But leadership expects that the roadways will play a critical role in transporting suppliers and finished goods from factories to ports, and in helping make logistics more efficient. (Among the most watched endeavors are massive bridge projects. The most highly anticipated undertaking is a 50-kilometer six-lane bridge linking China's southern Guangdong province with Hong Kong and Macau. It is slated for completion in 2016 and proponents claim it will reduce travel time from mainland China to Hong Kong from more than four hours to 40 minutes.) Says Staley: "They're not done by any stretch of the imagination." Or any stretch of highway.

Planes, trains, and automobiles

How do you transport 1.3 billion people and all their supplies?

China's path to prosperity may be paved with more than just roads. It's also building airports. And high-speed railways.

So many of China's economic goals hinge on efficient transport: The shift from rural to urban living has necessitated vast investments in transit, both in cities and the country. Some new projects consist of highways and subway lines built within metropolitan areas. Others will link rural towns and villages, bringing them into the country's rapidly growing urban network. Gradually, as the coasts continue to modernize, basic manufacturing will move further inland. As eastern cities like Beijing and Shanghai rise up the value chain toward more sophisticated industries, China plans to shift more development (and freight) toward its relatively isolated western provinces. Case in point: It's spending $27 billion on an inland port in Wuhan.

By developing greater connectivity throughout the country, China hopes it will be better able to tap into the vast spending potential of its rising middle class. Domestic consumption, analysts say, is the key to the future of the Chinese economy. By focusing inward, China will be able to create more sustainable growth than it would by peddling low-cost exports to the U.S. and Europe.

Much of the construction is what you might expect -- the development patterns echo the U.S. during the Industrial Revolution. What's different is the scale. In 2007, China had no high-speed rail; today it has the world's largest high-speed network, with 5,800 miles of track. The country plans to construct at least 5,400 more miles of superfast track, plus at least 50 additional airports and 440 deep-water berths for ships by the end of 2015.

Given the recent slowdown and fears over repercussions from infrastructure-induced government debt, managing that kind of economic redirection may seem tricky. But then again, so does doubling the country's length of high-speed rail between 2011 and 2015 -- and that goal is on track so far. Says Stephen Ip, KPMG China's lead partner for government and infrastructure: "A lot of things happen in China that you don't think could."

China's water wars

To solve its water shortages, China is rerouting its rivers

China has a water problem. According to the World Bank, China's per capita water availability is about one-third of what's available to the rest of the world. Put another way: China has to accommodate one-fifth of the world's population on 1/20th of its water. With rapid growth and industrialization, the country needs to come up with a way to increase its supply.

And so China has taken another page out of its ambitious civil-engineering playbook. It is attempting to physically divert trillions of gallons of water from the relatively water-rich south to the parched north. The plan is broken up into three pieces, all bringing water from the Yangtze River northward: The first route, farthest east, is nearly finished and will pump water under the Yellow River to Tianjin. The central route should come online in 2015, and the western route is not likely to be completed before 2030. If the plan works, by the time it is completed, up to 10% of the flow of the country's largest river will have been diverted.

"This is a project that perfectly exemplifies the incredible bravado of the Chinese government," says John Minnich, an East Asia analyst for the research group Stratfor. "The enormity of what China is trying to pull off is mind-boggling."

The total price tag for the project is estimated at $62 billion, but the actual cost is likely to be much higher, says Scott Moore, a fellow at the Harvard Kennedy School of Government. Hundreds of thousands of residents have been displaced by the rerouting of the river. And environmental concerns over water quality and overall scarcity persist despite the construction.

Still, given China's massive growth, gargantuan projects can look downright pragmatic. "On one level, there's bound to be environmental impact," says KPMG's Stephen Ip. "On the other hand, we don't have enough water in the north. Where are we going to get it from?"

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