China invests badly; and the situation is getting worse. With nearly 50% of GDP invested each year this is an unprecedented level compared to Japan or Korea at similar points of development who were rarely investing more than 40%. Calamity is the inevitable end-game as the system ultimately collapses under the debt burden associated with this State-Sponsored foolishness.
That versions of the above summary color a lot of China skeptics thinking is not new. What may surprise them though is that the the argument is (mostly) unsupported by an analysis of available data.
In the paper* highlighted this week, from Mr. Carsten A. Holz of the Hong Kong University of Science and Technology published last November, he deconstructs the China over-investment argument and not only debunks most of it but finds considerable cheer (for the long term China investor) in the data.
[*German speakers can find a shorter version of the paper, in German, at China’s Investment Rate – German synopsis. Handlich, nicht wahr?]
The development pattern observed elsewhere suggests China’s high level of investment isn’t about to slow down; in fact, it could persist for the next 20-years. Besides, how ‘high’ is high? A political dimension, not present in peer development countries, suggests the data may be including double counting. It could also be jockeyed by cadres who are assessed, to a certain extent, on how enthusiastically their locale is investing?
Mr. Holz finds no evidence of sector over-investment. Manufacturing? Still not fully capable of supplying domestic demand. Property? With urbanization only recently nosing over the 50% level and a target of 80%, at least another 20-years of work in progress; and elsewhere? Sector catch up can look like herding when analyzed over a short period; but it’s really only sensible allocation based on improved returns when looked at longer term.
The good news keeps coming. Only 25% of investment is now State-Sector related. 80% of new investment is funded either from retained profits or other non-bank channels and foreign investment is now a negligible 1% of the total. This last observation Mr. Holz concludes is ‘..perhaps the defining criterion of an economic superpower.’
As I wrote recently after a visit to a provincial capital [So, so much more to do] China still has a ton of work to do and in the paper Mr. Holz highlights although aggregate numbers for China’s success to date are large when looked at on a per-capita basis they’re still only around 25% of developed market norms.
Bring on the next 20-years.
You can access the paper in full at China’s Investment Rate
Happy Sunday.