CAOFEIDIAN, A $91 billion industrial project here, mired in debt and unfulfilled promise, suggests part of the reason why China's economy is wobbling and why it will be hard to turn around.
The steel mill at the heart of Caofeidian, which is outside the city of Tangshan, about 225 kilometers (140 miles) southeast of Beijing, is losing money.
Nearby, an office park planned to be finished in 2010 is a mass of steel frames and unfinished buildings. Work on a residential complex was halted last Christmas, after workers completed the concrete frames. There is even a Bridge to Nowhere: a six-lane span abandoned after 10 support pylons were erected.
'You only need to look around to see how things are going,' said Zhao Jianjun, a worker at a plant that hasn't produced its steel-reinforced plastic pipes for months. 'Look north, west, east,' he said, gesturing to empty buildings.
Chen Gong, chairman of Beijing Anbound Information, a Chinese think tank, says Caofeidian shows the flaws of the Chinese economic-growth model, in which the government plans investment and companies are expected to follow suit, regardless of market conditions. Chinese local governments are 'driven by the blind pursuit of GDP,' said Mr. Chen.
Economists widely expect the world's No. 2 economy to decelerate during the rest of 2013 and not to improve much next year. Though the government still is holding to its target of 7.5% growth in gross domestic product for 2013, down from 7.8% expansion last year and 9.3% in 2011.
The latest indication of slowing came on Wednesday, when a preliminary gauge of China's manufacturing activity fell to an 11-month low in July, while its sub-measure for employment dropped to its lowest since the global financial crisis.
China's Premier Li Keqiang has said he would press to keep China's growth in gross domestic product this year from slowing too much. But Mr. Li repeatedly has ruled out a big stimulus plan and has said China needs to remake its economic model so it relies less on investment and more on domestic consumption and the service sector.
Still, some economists, businesspeople and local government officials are calling for a large economic stimulus plan like the one responding to the financial crisis. But that earlier spending and borrowing spree, while bolstering the economy, has contributed to the country's current problems.
China's leaders turned to credit-fueled investment to drive growth after export demand faded in the wake of the 2008 crisis. The share of investment in GDP rose to 48.1% in 2012 from 41.6% in 2007, as local governments built roads and airports, as property developers threw up forests of luxury apartments and as state-owned enterprises expanded factories and foundries.
That activity no doubt buoyed growth. But by rushing what normally would be a decade's worth of investment into a few years, China hastened an end of its era of rapid growth. Too many projects replicated each other, say economists, eventually creating supply gluts everywhere from housing to steel, concrete and solar-power equipment. A tendency to invest in high-profile, though redundant, large-scale projects also consumed bank financing that could have been better used to fund small firms and service companies starved of cash.
Since the early 1990s, China's overall return on investment has fallen by about a third, the International Monetary Fund says. The country over-invests by 10% of GDP, the Fund estimates. And each yuan of lending in China now produces just one-third the payoff in economic growth that it did before 2009, Fitch Ratings Inc. says.
'China's economic miracle doesn't seem that extraordinary when you see how credit has exploded,' said Charlene Chu, Fitch's senior director in Beijing.
Still, relatively low government debt, which the IMF recently estimated at 45% of GDP, means China still has scope to backstop any sharp slide in growth or prop up the financial system, if required. But to avoid the mistakes made after 2008, Beijing would need to figure out how to target its infusions of money into underfunded parts of the economy to produce a long-term payoff.
One can see the byproducts of the previous big stimulus program everywhere, from ghost towns of big unoccupied housing projects on the outskirts of many Chinese cities, to unfinished infrastructure and factories.
GK Dragonomics, a Beijing research firm, says much of China's housing investment since 2008 has been directed at smaller cities where population growth is ebbing and not toward large cities where population is rising. The result: housing shortages in Beijing, Shanghai and other large cities, driving up home prices, while there are housing gluts in hundreds of others.
Between 2000 and 2010, China added 28,000 square kilometers of urban space, the equivalent of 322 Manhattans, much of which was devoted to industrial development and housing. To keep the projects going, developers often took out new loans to cover old borrowings, a practice Chinese banking critics call 'extend and pretend.'
Societe Generale analyst Wei Yao estimates that up to a relatively high 38.6% of GDP goes to repay debt in the country. 'No wonder that credit growth is accelerating without contributing much to real growth,' said Ms. Yao. The result: there is less money to finance new projects and companies to drive economic growth.
The Caofeidian project dates back to at least 2003, when work began to transform the island into a big deep-water port and industrial site outside Tangshan, a city devastated by a 1976 earthquake that killed more than a quarter million people.
The central government wanted to move a big Shougang Group steel plant from Beijing to the new industrial park built on land reclaimed from the Bay of Bohai. Steel suppliers and users would be encouraged to move nearby, with plenty of office and residential space for workers.
In 2006, China's then Communist Party chief, Hu Jintao visited the site and called the land 'as precious as gold.' Governments and state-owned industrial enterprises invested 561 billion yuan ($91 billion) on the area over the past decade, Caofeidian officials say.
But similar projects were coming on line all over China at the same time, building a glut of industrial commodities, such as steel, which helped producer prices fall for the past 16 consecutive months.
And according to the prospectus for bonds sold by Shougang in 2011, for the first nine months of that year-the most recent data available-the company's Caofeidian steel operations posted a net loss of 3.6 billion yuan and were mired in debt.
Of Shougang Group's 74 billion yuan of overall corporate long-term debt, 28.9 billion yuan, or 40%, went to finance its Caofeidian venture. A Shougang representative said he wasn't aware of the debt matter and didn't respond to additional requests for comment.
With the steel industry languishing, other Caofeidian projects have stalled. Japan's Sojitz Corp.'s 2768.TO +0.56% joint venture for pipes, Mr. Zhao's plant, halted production about four months ago, according to employees. A Sojitz spokeswoman said the company has temporarily suspended production because new orders had dried up.
Zhang Danping a spokesman for the Caofeidian government, said that while some projects had been halted during the winter, they had since all resumed, an assessment that workers on the site didn't appear to share.
Boosting lending further to pay for more investment, Beijing's traditional remedy to pump up growth won't work any longer, economists argue.
When credit is growing at twice the pace of GDP as it has been recently, said Ms. Chu, the Fitch analyst, 'mathematically, there is no way to grow out of the poor investment decisions of the past.'
