If I believed in Austro-Chinese business cycle theory

by on November 10, 2009 at 9:17 am in Economics | Permalink

Most of China's growth this year has been unsustainable, driven by stimulus. China's money supply has risen 29% in the past year. At the government's behest, banks have increased their lending by nearly $1.4 trillion, or 32%, during that time.

That flood of borrowed cash has been channeled into new infrastructure and production capacity. These investments will account for up to half of China's gross domestic product this year, according to some estimates.

A key question is whether China needs all of this investment. Analysts at the London hedge fund Pivot Capital Management say that China already has enough idle steel-production capacity, for example, to match the steel output of Japan and South Korea combined.

Meanwhile, the ratio of investment to GDP is rising, suggesting China's investment is less and less efficient, says Edward Chancellor at Boston asset-management firm GMO.

The combination of soaring investment and dwindling returns was seen in Japan in its asset bubbles in the 1980s and in the "Asian Tigers" just before their crises in the late 1990s, he says.

The link is here.  Does anyone know how to say "excess capacity" in Chinese?  Even more importantly, can you get it past the typepad spam blocker?

1 christopher November 10, 2009 at 10:12 am

Well, I tried, but it seems 4 characters in Chinese set off the filter. So, in pinyin (with tones) guo4yu2rong2liang4 would get the idea across fine, though I imagine there’s a different technical term.

2 Doc Merlin November 10, 2009 at 10:46 am

Judging from the successful prediction of your previous “If I believed in austrian theory post” then we should see a bubble burst in 10… 9… (continues countdown)

3 bartman November 10, 2009 at 11:08 am

Most of China’s growth this year has been unsustainable

Good lord, what an empty statement. NOTHING is sustainable – anything extrapolated out in a straight line will eventually hit a constraint. What amazes me is that these Wall Street types are still able to put out “two points (or less) and a ruler” projections and have anybody pay attentiopn to them.

4 David Heigham November 10, 2009 at 11:45 am

Is the WSJ complaining because at least one government in the world has succeeded in expanding lending drastically? Or because the Chinese stimulus has taken the form of a successful expension of money supply? Or simply confirming that they do not understand China ?

The ratio of China’s investment to total GDP does appear to be rising despite their governments wish to expand consumption. However, how much of that rise would be scored as invetment in other countries? At the detailed level, the Chinese system has in the past prioritised invetment over consumption; and the incentive that creates in the bureaucracy has proably lead to reporting more investment and less consumption than would be reported where reported economic indicators in an official’s area of respnsibility is not a prime determinant of career progress. Adjusting statistical practice to the new political priorities will take time.

5 Stephen M November 10, 2009 at 12:55 pm

“Excess capacity,” huh? When China finally decouples from the US and their currency appreciates, their Chinese consumer will become their primary consumer for Chinese products. I think you can definitely make the argument that China will face economic problems in the future as their central planning efforts backfire, but ultimately their ability to produce and their ability to consume may make whatever hardships they experience occur less frequently and be over with quickly.

6 david November 10, 2009 at 1:16 pm

@Foobarista Why would anyone go to Hong Kong to escape a meltdown in mainland China? It’s not owned by the British any more, you know.

7 Bill November 10, 2009 at 2:26 pm

We should tell the Chinese how to stimulate their economy as we did ours: cut taxes on the wealthy and let it all trickle down; run bigger deficits to finance these tax cuts; give tax credits to persons with high incomes to upgrade to newer homes (sponsored by the Republican Senator of Georgia); and spend more on the military, our most productive national asset. Perhaps we can get them to support agricultural subsidies not to grow food. That’ll get them going in the right direction.

8 kevinearick November 10, 2009 at 9:05 pm

It’s accelerating in neutral. Once they get around to placing it in gear, applying a real load, the story will be quite different.

9 R. Richard Schweitzer November 10, 2009 at 11:44 pm

Is it not true, by what we can learn from statistics that the “New Economy” of China, which is what all refer to, touches no more than 20% of the population, and of that 20% a further limited percent actually advance economically.

If so, there is a broad range of “rural” poverty and limited “development” to absorb any excesses of fiscal errors.

10 excessive capacity November 11, 2009 at 2:06 am

The correct term is 产能过剩.

11 Thomas Gal November 12, 2009 at 2:20 am

I agree. It’s all a bit risky and eventually it’s going to catch up with them over there. Still with such a population advantage they will dominate eventually.


12 VangelV November 17, 2009 at 10:42 am

This is not as simple as it looks. Clearly the Chinese government is trying its best to plan the economy. And if one goes to a Chinese book store or university s/he is much more likely to be exposed to Keynes than Mises or Hayek. That suggests a problem in China’s future.

But China is also in need of development in housing, transportation infrastructure, sewers, water pipes, electricity generation, etc. That requires a massive investment just as the one that we saw in the 1950s in the US, when America, with a tiny percentage of the global population, was using up about half the world’s supply of cement. And while many will point to the ghost developments popping up all over the country they fail to visit previous ghost developments. I saw such building activities more than a decade ago and thought them to be massive errors. But today those buildings and roads serve the inhabitants of those developments well and proved to be very needed, even if they were not profitable for the developers that created them at the time. Given the huge number of people in the countryside looking to move to urban areas it is clear that China will need much more, not less housing development and associated infrastructure and services.

Then there is the belief that Chinese businessmen dance to the tune played by the government. The reality says otherwise. While the central government is the driver behind most of the large operations, smaller and medium sized businesses tend to look to profit and local factors rather than federal political goals as their guide.

I do not mean to suggest that central planning and stupid political moves will not harm China’s economy. It is obvious that the CP can do damage just as the Democrats and Republicans have in the US. I am only making the argument that the Chinese economy a dynamic non-linear system that is harder to analyse than Tyler and others suggest. For my part I continue to invest capital in Chinese mining operations that have proven to be quite profitable over the years. While it is possible that some of them will suffer greatly during the inevitable corrections one needs to take some risks when pursuing investment gains.

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