The white elephant in the room

A more accurate scenario of the losses is seen in the regional breakdown. The study showed though infrastructure investment is generally appropriate, in some eastern regions even slightly insufficient, investment in western regions was generally excessive compared with private capital.

For example, Beijing and Fujian province's ratio of GDP losses in 2011 are among the lowest, showing they have a relatively good balance between infrastructure and private productive capital. Jiangsu's infrastructure investment is inadequate, causing losses of about 4 percent of its GDP in 2011. Central Henan province's infrastructure investment is also inadequate, causing a 3.42 percent toll on its GDP. Zhejiang province's infrastructure investment is slightly inadequate, with a 0.25 percent toll on GDP.

However, in the vast central and western regions, excessive infrastructure investment is a common scene. Excess is particularly severe in Yunnan, Guizhou and Qinghai provinces. The Inner Mongolia autonomous region, the Guangxi Zhuang autonomous region and Gansu province have long seen excessive infrastructure investment, but the loss narrowed in 2011.

"Infrastructure investment creates both demand and supply in economics. But the problem is, in most hinterland regions, its function is overwhelmingly regarded by local officials as creating short-term ‘demand'," said Huang.

The expense of this shortsightedness is that the massive infrastructure investment's role in improving the long-term supply ability is ignored.

"Local officials simply assume that government's input in infrastructure would spur the private sector's investment, thereby generating fiscal revenue for local governments to recover their costs," said Huang. "But that linear development is not necessarily going to happen."

According to Huang, it is reasonable for China to adopt an "infrastructure going ahead" strategy in its go-west campaign. The problem, however, is the breakneck infrastructure investment pace has not been followed with industrial investment growth, primarily led by the private sector.

"Western regions have been desperate to scale up infrastructure investment, but improvement in infrastructure is not accompanied with improvement in governance and investor environment. This has made them less attractive to private investors and failed to generate revenue from their infrastructure investment," Huang said.

If the government's input failed to attract follow-up private productive capital, it risked accumulating "white elephants" and lead to debt crisis. Huang's study found that although in most provinces governments could repay their debts with additional revenue from additional industrial capacity in the next 30 years, five regions might fail to repay their debt by 2039. They include Qinghai, Xinjiang, Yunnan, Guizhou and Inner Mongolia.