The China Market: Is China Over-investing?
China Economic Quarterly
This article originally appeared in the March 17, 2003 issue of South China Morning Post in Hong Kong and is reproduced here with permission from the publisher.
Despite doubts about official statistics, it is clear that China has enjoyed strong economic growth over the past several years. But how sustainable is that growth? A key part of the answer is deciding how long the country can keep up the current frantic pace of investment.
Investment - the construction of factories, roads and buildings - has been a much more important part of China's recent growth than consumption - people buying toothpaste, TVs and cars, for example. Over the past four years, annual growth in retail sales has bounced around between 7 and 10 per cent. Meanwhile, annual growth in fixed-asset investment has more than tripled, from 5 per cent in 1999 to 16 per cent last year. In 1999, fixed-asset investment was less than 37 per cent of gross domestic product (GDP), a very high figure; last year it was 42 per cent.
Moreover, it is possible that official statistics understate the true level of investment. According to the government, total investment by private enterprises was a little over US$15 billion (HK$117 billion) last year - 3 per cent of all investment and less than a third of the amount invested by foreigners. The growth rate of private investment was 13 per cent, 3 percentage points below the overall investment rate.
These figures are not, on the face of it, credible, given the obvious rapid growth in private enterprise. They could mean that the National Bureau of Statistics uses a very narrow definition of "private" and that a lot of true private investment gets counted in other categories. Or they could mean the bureau is ill-equipped to measure economic activity outside the state sector. Students of Chinese statistics tend to believe the latter. If so, then the actual growth in investment may be higher than the government reports.
However high the investment rate, its sustainability depends on two things: whether there is enough money to pay for the investment and whether investments are going into useful things that will produce an economic return.
Sceptics worry, first, that investment is growing so fast that China will soon no longer be able to pay for it. They also fear that too much money is going into roads to nowhere and luxury apartment buildings doomed to vacancy. They predict a repeat of the investment boom of 1992-94, which created mountains of goods no one wanted and littered cities with empty buildings.
The risks are real, but China can probably keep up the breakneck pace for a couple more years before running into trouble.
First, the country has plenty of money. In 2001, the last year for which data is available, the savings rate, as a percentage of GDP, was three points higher than the investment rate. Only when that gap falls towards zero should the brakes be put on investment.
Second, investment is clearly more efficient than it was a decade ago. Factories are producing more goods than the Chinese people can buy, but now much of the surplus is being exported, instead of being left to moulder. Between 1990 and 1997, unsold goods accounted for 6 per cent of GDP; between 1998 and 2001, the figure was just 1 per cent.
Over-investment could produce some headaches in the long run. But it will not make China go broke in the short term.