According to an Oxford University report, infrastructure investment has been a major driver of Chinese economic growth over the past 35 years, but currently, more than half of Chinese infrastructure investments have been "destroyed, and are not generating " economic value, as costs have been larger than benefits.
This finding is likely to fuel a debate over the viability of China's infrastructure-heavy growth model.
China has stepped up infrastructure spending this year to buffer a slowdown in manufacturing investment. But such investment leads to significant waste while adding to China's worrying debt load, says the paper by Oxford professors, led by Atif Ansar, a lecturer at Oxford's Saïd Business School.
"Far from being an engine of economic growth, the typical infrastructure investment fails to deliver a positive risk-adjusted return," the paper found.
"Poorly managed infrastructure investments are a main explanation of surfacing economic and financial problems in China. We predict that, unless China shifts to a lower level of higher-quality infrastructure investments, the country is headed for an infrastructure-led national financial and economic crisis," the Financial Times quotes the report, as saying.
The paper takes aim at what it calls the "prevalent view" among economists that high rates of infrastructure investment are crucial to growth for developing economies and that China offers a model for others emulate, the Financial Times adds.
On the contrary, Ansar warns that countries such as Brazil, Nigeria and Pakistan should not follow China's path.
President Xi Jinping's signature foreign policy initiative, the New Silk Road, calls for the country to finance road, rail and port construction to connect China with central Asia, the Middle East and Europe.
"It is a myth that China grew thanks largely to heavy infrastructure investment. It grew due to bold economic liberalisation and institutional reforms, and this growth is now threatened by over-investment in low-grade infrastructure," said Ansar.
The research paper said that three quarters of all projects suffered a cost overrun, which has exacerbated the debt problem which appears in the current issue of Oxford Review of Economic Policy.
The authors estimate that a third of China's USD 28.2tn debt load is attributable to such overruns. The study is based on a sample of 95 road and rail infrastructure projects in China between 1984 and 2008.
Other economists however do not agree with Ansar's criticism citing that even if an infrastructure project does not directly generate enough cash flow to cover its financing costs, positive externalities can spur enough economic activity that makes the project worthwhile.
"For most of the past few decades, the bulk of Chinese infrastructure investment has served the overall economy reasonably well. If you compare China with most other developing countries, they would love to be in China's shoes in terms of having all that infrastructure," said Louis Kuijs, head of Asia economics at Oxford Economics and former senior China economist at the World Bank.
But Kuijs acknowledges that China now faces diminishing returns from additional infrastructure, as the most productive investments are already largely complete. Other analysts also see problems with excessive and wasteful infrastructure investment but doubt it will lead to crisis.
"The authors' data on individual infrastructure projects tell us that China is basically no worse and no better than the rest of the world in terms of managing infrastructure projects - just like everywhere else, they often run behind schedule and over budget," said Andrew Batson, China research director at Gavekal-Dragonomics in Beijing.
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