tdaxp

"Investment Bubble Builds New China," by Joseph Kahn, New York Times, 23 March 2005, http://www.nytimes.com/2005/03/23/business/worldbusiness/23invest.html (from Dawn's Early Light).

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.

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.

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.

Too Much, or Too Little, Capital?

1. If new public-sector investment achieves anywhere near a 20% return, it shows a dramatic undercapitalization of the Middle Kingdom.
   
2. Investment now reduces marginal costs later. Heavy investment should reduce future prices considerably (as goods can get to market cheaper, etc.).
   
3. 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.
   

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."

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.