China’s massive infrastructure rollout has been hailed by many as brilliant. Helping its case is the inevitable comparison to America’s dismal emergency spending, the majority of which is being spent propping up black hole zombie-banks.

China, meanwhile, is pouring resources into projects some think could catapult them into superpower status. It will take decades if it works. And there are plenty of skeptics of China’s infrastructure-based recovery plan. There is also a growing chorus of China bears warning of a bubble in equities and real estate.

The Good

It’s hard to ignore some of the projects going on in China. One of the more impressive is a $200b high-speed rail network.

Efficient public transportation is a no-brainer for China. Combine rising energy costs with 1.3 billion citizens in need of transportation, and you have a socialist’s dream-project. If well-executed, it will provide superior transportation options and a lower cost of living for hundreds of millions.

The alternative, a highway-based system, is not feasible. Currently only 3% of Chinese own a car. Boosting that number to anywhere close to America’s 44% would be disastrous. Energy prices and pollution would skyrocket.

Here’s a map of the rail project, scheduled to be complete within 10 years:

chinese-high-speed-rail-map

U.S. legislators have made noises about a high-speed rail plan of their own, but only $8b of a $787b package was earmarked for it. I suppose projects like tunnels-for-turtles need funding too.

AIG vs. Rail

I can’t resist noting that America has spent nearly the same amount bailing out AIG ($170b), as China will on this huge rail project.

America’s $170b “investment” in AIG allowed us to dodge some of the pain that would have resulted if (god forbid) banks were treated like real businesses, and forced to eat losses on deals with insolvent counterparties.

It also allowed bonuses to keep flowing on Wall Street, and bought some breathing room for near-death firms. The moral-hazard implications are immeasurable. It’s safe to say that our economy will never see its true potential with shenanigans like this going on.

When you reward failure and punish responsible parties, the consequences will be predictably bad.

Said and done

At the end of the day, America will still have our horribly inefficient and only quasi-solvent banking system. Chances for meaningful reform are still bleak, crony-capitalism alive and well.

China, meanwhile, will end up with 16,000 miles of energy-efficient railway connecting their major cities. Plus, they get to brag about badass 236-mph trains. If the U.S. insists on throwing piles of money at something, shouldn’t it be for something cool like really fast trains?

Some would counter that the U.S. strategy has worked. After all, the Dow is above 10,000 again. So everything must be preachy. I would reply that while America’s response has provided a temporary boost, it also sowed the seeds for another disaster. It will feature many of the same players, and involve even more debt.

This is the key difference between Chinese and American stimuli. Neither is perfect, but America’s fails to address fundamental problems – too much debt and banks who only exist thanks to taxpayers and accounting gimmicks. It’s a patch to buy time until the next bubble pops. Nothing more.

The Bad

China’s plan is not perfect by any means. It will be fraught with waste and inefficiency. That’s the nature of government projects, and China is a proudly socialist country. Bureaucrats generally make awful businessmen. With little stake in the outcome of their actions, workers inevitably get careless and make bad decisions. Corruption also tends to creep in.

Exhibit A – China’s Ghost City (skip to 1:15)

This project should serve as a cautionary tale for China. Big missteps like this will be costly. If leaders aren’t more judicious in the future, they could end up with a thousand bridges to nowhere.

American Bear in China

At Buttonwood last month, head of Morgan Stanley Asia Stephen Roach took many of us by surprise with his bearish comments on China. He noted that he moved to Asia because he was bearish on America, but now he’s starting to get bearish on China. He was critical of their infrastructure spending, hinting that much of it may be going to waste.

Roach is still long-term bullish on Asia, but we should listen to his warning. He’s certainly not alone. China-bashing is becoming quite the rage among contrarians these days. China bears are probably onto something, but I think fears of massive bubble are overdone.

I liked Chinese stocks earlier this year, when their valuations weren’t quite so lofty. In January I started buying PGJ (my favorite China ETF) around $13-$14. Since then it’s risen to $24, and like most Asian indexes, looks toppy. The 12-month trailing P/E for Shanghai stocks is currently around 30x. That’s not cheap.

So I recently sold some Chinese stocks from my portfolio. That said, I’m not giving up on emerging markets (including China).  Three reasons for this. Number one – it’s where the growth is. Number two – A falling dollar should benefit American owners of foreign stocks. Number three – it’s still working.

Disclosure: Long PGJ

Chart via The Transport Politic