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China Has A Debt Problem Three Times Larger Than Evergrande | Economics Explained - YouTube
Channel: Economics Explained
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We often criticize our governments for
their inability to get things done,
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especially when it comes to
large infrastructure projects.
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The US has been in the news for the federal
infrastructure plan which is promising to put
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more than a trillion dollars towards upgrading and
repairing infrastructure all across the country.
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Already the project is attracting
criticisms from people arguing that this
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won’t meet the requirements to fix
the nation's failing infrastructure.
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The same is true for smaller projects which
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seem to inevitably be plagued with
delays and massive cost overruns.
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This is a real shame because
infrastructure spending can be
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one of the best investments a government can make.
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In the short term, it acts as a form of stimulus.
Bridges and roads don’t build themselves,
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they need laborers, engineers, city planners, and
sure, maybe even a few environmental consultants.
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Just like a stimulus check
this puts money directly
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into people's pockets and alleviates unemployment.
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However, unlike a stimulus check
the money is actually going to
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build something which will continue
to provide value to that economy
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long after regular stimulus
checks would have been forgotten.
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Projects like the hoover dam were built in part as
a way to get people back to work during the great
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recession. Now, almost 100 years later the damn
is still providing a reservoir and electricity.
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Infrastructure spending in a word, is fantastic,
it’s also politically palatable as well. Nobody
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says the paychecks that workers receive on these
projects are handouts, and most infrastructure
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these days also helps to generate clean energy,
or reduce time spent in cars, or whatever.
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Infrastructure spending is great, which is
probably part of the reason why people get
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so frustrated when projects never seem to go
anywhere, or just get caught up in an endless
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web of red tape and consultants.
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to look at places like China where
infrastructure projects just seem to work.
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American bridges and roads are falling into
disrepair at the same time China is building
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feets of engineering once unimaginable.
China built an entire hospital in 10 days,
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while it took the city of San Francisco
ten years to approve a new bus route.
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California has spent 20 years
planning a rail network in the
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time China spent 20 years building
out the largest one in the world.
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And if you think I am just throwing shade
at America, then my own home here in Sydney
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spent over three billion dollars and
more than 4 years to build out trams
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which have all of the traffic issues of busses
combined with all of the flexibility of trains.
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It’s easy to see why people think
whatever it is that China is doing
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is working, but unfortunately, it is not.
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China’s high speed rail network was the
centerpiece of the nation's infrastructure
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development, the jewel in the crown of china’s
building spree and a public demonstration to
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the world that effectively amounted
to “nah nah we are better than you”.
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The system is undeniably impressive, but
it’s also threatening to be a problem for
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the Chinese economy that could make
Evergrande look like a sideshow.
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So.
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How did China build such a massive
high-speed railway network so fast?
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Why did it build such a massive network?
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And finally.
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How much did it really cost
to put all of this together?
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China is a very large country with a lot of
people in it. It’s also a country where car
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ownership is seen as somewhat of a luxury.
For this reason, a robust rail network was
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essential for providing a cheap and effective
way for people to get around the country.
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Now for a long time this need was mostly
ignored because most Chinese workers would
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live and die in the city they would
born in, travel across the country
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was very limited and so the demand for
such a rail network wasn’t really there.
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This all changed in the early 2000s. By this time
the country's plan to open up to the world was
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well and truly in full swing. More and more young
workers were moving from their small hometowns to
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large cities to provide the labor needed to fuel
the nation's ever growing industrial sector.
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These workers still wanted to be
able to get back to their families,
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but air travel and personal cars were too
expensive for most. Before the rollout of
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high speed rail most workers just settled
on taking bus journeys that would often take
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days or even weeks to cover
relatively modest distances.
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By the time 2008 rolled around the Chinese
government had already started working on
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some high speed rail developments, but the global
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financial crisis pushed these efforts into
high gear, if you would pardon the pun.
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China was not immune from the fallout of the
GFC, it was even more heavily dependent on
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trade back then than it is today, and trade
intensity during this period fell rapidly.
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We covered what trade intensity was in
our video two weeks ago on Brexit, so
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if you want a detailed breakdown of what
this term means go and watch that video,
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but put simply, a fall in trade intensity
meant both imports and exports were falling,
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which for a country as dependent on
global trade as China, was bad news.
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The counter to this financial blow was fiscal
stimulus, but China was apprehensive about just
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giving money out because they weren’t sure at
this point how long this crisis would last.
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Instead, they wanted to take people who
might have lost their jobs making stuff
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for export markets and put them
to work building high speed rail.
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Keynes actually half joked about this
exact process in the ’30s. He argued
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that an effective form of stimulus would be for
the government to bury bank notes in the ground,
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because at least then the stimulus efforts
would put people to work digging up the money,
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which would look good in unemployment metrics.
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Of course, if you can get something
out of this stimulus spending that
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isn’t just a well toiled field
then that’s probably preferable.
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The high speed rail development achieved
this goal, it put millions of people to work,
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the Beijing to shanghai track alone, had
over one hundred thousand direct on site
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workers, and that’s to say nothing of other
workers in factories making steel and cement,
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delivering materials to the site, or
simply providing goods and services to
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the workers as they slowly built out these tracks.
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It was in large part because of
this high speed rail development
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that China avoided going into a recession.
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So brilliant right? Mission accomplished,
China avoided recession and they got a
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high speed rail network out of it,
which meant workers could freely
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move around the country further improving
living standards and industrial capacity.
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Well, this is where the problems start.
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From its inception the rail program
has been marred by corruption,
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now that’s kinda par for the course with a lot
of government works projects, especially those
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taking place in China, but this was one of
the largest and most public projects ever
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so the corruption scandals were also
bound to be bigger and bolder too.
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This was a bit of a problem for
the government because it meant
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that they weren’t able to brag about
how amazing their new project was
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without those claims being overshadowed by
news of some official taking a bribe or two.
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These issues were compounded in 2011 by
a crash between two high speed trains
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which collided on a section of track that
was elevated twenty meters about the ground.
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It was later revealed that the accident was caused
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by a series of management failures
which had overloaded the route.
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This had serious impacts on the public's
confidence in the high speed rail infrastructure
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that China had just invested hundreds
of billions of dollars into building.
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It also resurfaced concerns about corruption
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and nepotism in the ranks of the
now bloated ministry of railways.
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The government's solution to this was to
semi-privatize the railways by selling
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them to the state owned corporation China
Railway. A year later the two companies
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that were responsible for producing the rail
cars CSR and CNR, merged to form the CRRC.
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These were two massive state owned
corporations which set out on
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the biggest building boom yet.
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Because these corporations were
technically distinct from the government
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they had more control over how
much money they could raise.
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They borrowed almost a trillion dollars to
get Chinese railways to where they are today
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and they found this money through a combination
state owned banks, publicly issued bonds,
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and investments from local governments.
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Now almost as soon as the final
piece of rail was laid on this
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latest construction push the problems started.
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You see, by the time China rail had
started its latest building spree,
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most of the highly profitable lines between major
population hubs had already been established.
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This meant that the new lines were been laid
to city centers which were not going to demand
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the same volume of trains and therefore not
provide the same revenue from ticket sales.
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These projects were still pushed by the government
because they still wanted people to have access to
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and from these smaller tier cities,
even if it wasn’t massively profitable.
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There are a few reasons why they did this, most of
them were political, Sam from Wendover Productions
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did a great video on this so if you are really
interested in that go and watch his video.
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Misguided political motivations
aside there were other problems too.
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China's high speed rail network
became such a point of national pride
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that the developers never really
stopped to ask if there was a
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better solution to the problem of
moving people around the country.
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If you run the ministry of hammers, every
problem starts looking like a nail. Likewise,
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if you run China railway, every problem looks
like it can be solved with a high speed train.
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The problem was that wasn’t
always necessarily the case.
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High speed rail is very technically
impressive and gets a lot of attention
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from the international community, attention
that the Chinese government really likes,
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but sometimes there are better alternatives.
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Regular rail just for a start.
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Regular rail is much cheaper to build and operate
which means that tickets are also much cheaper,
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this can be very important for cost
conscious workers who are still
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far from wealthy by western standards.
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Regular rail also has the benefit
of being able to haul cargo,
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which for a country as dependent on heavy
industry as china, is a really big deal.
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For a while and in isolation China’s high speed
rail network was overdone but breaking even,
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losses from unprofitable routes were made
up for by the highly profitable routes,
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and the state owned corporation even got
to make a little bit of profit for itself
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after paying off it’s massive debt.
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This delicate balance stopped in 2015
however, since then the interest payments
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on the accrued debts have been outpacing
the operating profits of the rail lines.
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A number of factors have been making this
worse, the lines are starting to age and are
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requiring more and more maintenance, the rail
lines can’t increase their prices because then
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people would just choose to fly or go back
to busses, and then covid hit which tanked
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the demand for rail tickets to the point
where almost every line was unprofitable.
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So now China is looking at a state-owned
enterprise with 850 billion dollars in
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debt that it can’t repay. Ironically this has
come at a time where fiscal stimulus like the
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original high-speed rail development program
from 2008 would be needed all over again.
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Obviously, that’s not going to
happen and the government has
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already halted construction
of any more high-speed rail,
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but that doesn’t mean that they are free from
the problems the existing network will create.
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If they try to sell off the network to pay down
these loans, then any profit-motivated company
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would only be interested in purchasing the
highly profitable routes between major cities.
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This means that the government would
need to maintain the unprofitable
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routes with taxpayer money which
would be a huge ongoing expense.
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Alternatively, they could
just close down the railways,
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but that would leave hundreds of
thousands of workers without a job
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and destroy one of the great symbols of China's
economic success over the past two decades.
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The final option is a bailout and
a renationalization of the railway,
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and yeah I know china railway is a state
owner company but it does have some
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autonomy that isn’t afforded to
an actual government ministry.
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None of these options are particularly appealing,
especially during a time when China is facing down
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the barrel of a housing market crash, an energy
crisis, and the impacts of an ongoing pandemic.
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I am always apprehensive
about predicting the future,
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but it’s difficult to see a reality
where china just shrugs these issues off.
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If nothing else, let this latest issue be a
demonstration of why massive projects like
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rail lines, highways and bridges take time
to plan and execute in your home country.
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You may get angry at the red tape, and I do
too, but perhaps pointing to China as the place
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the just gets stuff done isn’t the best way to
highlight how useless our own governments are.
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