Bill Rice, whose blog I added to tdaxp’s blogroll today, had earlier pointed on this article from the New York Times
But to an extent that is alarming some Chinese and Western economists, such investment itself is a main driver of China’s economy, which grew at a 9.5 percent pace last year. The investment binge, like any bubble, could produce unneeded factories and underused highways and power plants, weakening the country’s already shaky financial system.
So far, so good. China may be making foolish decisions, such as superhighways to nowhere or worthless airbases which don’t do anyone any good. Kahn’s piece also reports the obvious, that increasing the amount of available capital decreases the marginal utility of capital
Mr. Xu said the economic payoff from these huge investments had fallen sharply. He estimates that 15 years ago, China generated 50 cents of growth for each dollar it invested in fixed assets – roads, subways, and steel mills and the like. That return has fallen to about 20 cents for each dollar invested, he says.
I don’t know if he’s speaking in real or nominal money, but a 20% return is fantastic for investors. But it points to an economy starved of capital. Imagine if financing a dam on a credit card was a wise decision. That’s an economy that needs more money, now. But then..
Senior Chinese officials and most private economists agree that investment rates cannot remain at such levels without setting off high inflation, unneeded capacity and fresh piles of bad bank loans. The question is how much investment must come down and whether the reduction will cause a slump in the broad economy.
Nyt collapses into pop-Keynesianism. Among other criticisms…
- If new public-sector investment achieves anywhere near a 20% return, it shows a dramatic undercapitalization of the Middle Kingdom.
- Investment now reduces marginal costs later. Heavy investment should reduce future prices considerably (as goods can get to market cheaper, etc.).
- Bad bank loans have much more to do with a crooked banking system than capitalization. Crooked banks will get into trouble because they make stupid decisions, not because of the size of investmnets. Bank failures can happen in investment climates good and bad.
Eventually, the article almost finds its way back
They said China would have to limit investment to the high 30’s as a percentage of the gross domestic product to avoid widespread waste. Yet doing so would probably cause the overall growth rate to dive to perhaps half its current level. “At the heart of the imbalances in the Chinese economy,” they wrote, “is an unsustainable investment boom that has been in the making for at least four years and that will probably take at least several years to undo.”
Ah ha! So now the real problem is misdirected investment. That probably has a lot to do with one-party dictatorship and Nigeria-scale corruption. The solution is transparency and the rule of law, not starving China of investment.
And again, when arguing that investment has been misdirected from people into roads
Jiang Jihong, an official of the Communications Bureau of the Guangxi government, said local officials took the environment into consideration and adjusted the route to minimize the geological impact. But she said the highway was vital for the area’s overall development.
Yet some experts say that China’s poor inland provinces may need good schools and affordable health care more than elevated expressways.
Regardless, if there was too much capital in China the solution is obvious… allow the Chinese to invest internationally. Let capital flow from where there is more to less. This would also weaken the Renminbi, which would make Chinese products cheaper relative to other goods, which would make China more profitable for investment, which would cause capital to flow back into China…. In other words, adopt rational economic policies. Don’t complain about overinvestment.
An aggrevating article. Obviously written by someone interested in economist who understands big words, but without the knowledge or training to comprehend the situation. Disappointing.