Over-investment in China

John Gapper’s blog in the Financial Times today focuses on the risks that come from excessive capital investment in the Chinese economy. Bloated by an ultra-low cost of capital, many heavy industries have boosted their capacity to enormous levels and then relied on double digit annual growth in exports to absorb this capacity and maintain output and jobs. But this excess investment has made China vulnerable to the world financial crisis (not least the slump in world trade) and it has been a key factor behind global trade imbalances and the rise of protectionism. Capital investment of up to 40% of GDP is a reflection of a deeply skewed development model and one that is unsustainable.

“The result is huge over-capacity in heavy industries that soak up excess capital, which was hidden until last year by strong export demand for steel and the other affected products. But it also makes Chinese industry vulnerable to shocks such as the financial crisis.The Chinese government itself accepts - at least in theory - the need to switch away from a pure reliance on exports to fuel growth, to boost domestic consumption and to make growth more balanced.”

More here - China’s over-investment is its Achilles’ heel

An FT editorial today develops the discussion and highlights the waste of scarce resources that occurs when investment is made in capacity that will probably never be used:

“At the end of 2008, China’s steel capacity was 660m tons against demand of 470m tons. This difference is much the same as the European Union’s total output. Yet, notes the report, “there are currently 58m tonnes of new capacity under construction in China”. To the extent that gross domestic product is driven by such absurd spending is a measure of waste, not of economic welfare.”

The rest of the editorial can be found here

George Magnus also writes on China in his piece in the Times