You are on page 1of 3

China's bad growth bet (Answers the question of "Is Investment always good / desirable?

" - considers the case of China and the policy it adopted in 2008 - 2009 during the economic crisis. It invested in infrastructure and this article considers the medium and long term implications. Specifically, it considers how such I can lead to deflation due to high growth in AS. The article also suggested policies that China could adopt for long term growth. Take note of how it suggested redistribution of income to increase C. As you read, consider the extent that these policies can be applied to Sg context.) It's in for a hard landing come 2013 - unless it can save less, consume more and stop over-investing Today Apr 18, 2011 by Nouriel Roubini
The focus of this essay

I recently took two trips to China just as the government launched its 12th Five-Year Plan to rebalance the country's long-term growth model. My visits deepened my view that there is a potentially destabilising contradiction between China's short- and medium-term economic performance. China's economy is overheating now but, over time, its current over-investment will prove deflationary both domestically and globally. Once increasing fixed investment becomes impossible - most likely after 2013 - China is poised for a sharp slowdown. Instead of focusing on securing a soft landing today, Chinese policy-makers should be worrying about the brick wall that economic growth may hit in the second half of the quinquennium. Despite the rhetoric of the new Five-Year Plan - which, like the previous one, aims to increase the share of consumption in gross domestic product - the path of least resistance is the status quo. The new plan's details reveal continued reliance on investment, including public housing, to support growth, rather than faster currency appreciation, substantial fiscal transfers to households, taxation and/or privatisation of state-owned enterprises (SOEs), liberalisation of the household registration (hukou) system, or an easing of financial repression. China has grown for the last few decades on the back of export-led industrialisation and a weak currency, which have resulted in high corporate and household savings rates and reliance on net exports and fixed investment (infrastructure, real estate and industrial capacity for import-competing and export sectors). When net exports collapsed in 2008-2009 from 11 per cent of GDP to 5 per cent, China's leader reacted by further increasing the fixed-investment share of GDP from 42 per cent to 47 per cent. Thus, China did not suffer a severe recession - as occurred in Japan, Germany and elsewhere in emerging Asia in 2009 - only because fixed investment exploded. And the fixed-investment share of GDP has increased further in 2010-2011, to almost 50 per cent.
Conse quenc es of over invest ment in

China is rife with over-investment in physical capital. labour repression has caused wages to grow much more slowly than productivity. they all save about 30 per cent of disposable income. Several Chinese policies have led to a massive transfer of income from politically weak households to politically powerful companies. The trouble is that the reasons the Chinese save so much and consume so little are structural. Low interest rates on deposits and low lending rates for firms and developers mean that the household sector's massive savings receive negative rates of return. automobile capacity has outstripped even the recent surge in sales. But overcapacity will lead inevitably to serious deflationary pressures. cut net exports as a share of GDP and boost the share of consumption. thousands of colossal new central and provincial government buildings. China needs to save less. the investment boom will fuel inflation. Commercial and high-end residential investment has been excessive. Eventually. This creates a powerful incentive to over-invest and implies enormous redistribution from households to SOEs . Moreover. of course. highways to nowhere.have ended with a financial crisis and/or a long period of slow growth. In the short run.The problem. NEED FOR PRIVATISATION Traditional explanations for the high savings rate (lack of a social safety net.most of which would be losing money if they had to borrow at marketequilibrium interest rates. etc) are only part of the puzzle. Singapore and Taiwan. this is evident in sleek but empty airports and bullet trains (which will reduce the need for the 45 planned airports). leaving little for consumption. To avoid this fate. China will suffer a hard landing. and overcapacity in steel. To a visitor. A weak currency reduces household purchasing power by making imports expensive. while the real cost of borrowing for SOEs is also negative. The big difference is that the share of China's GDP going to the household sector is below 50 per cent. underdevelopment of consumer finance. cement and other manufacturing sectors is increasing further. owing to the highly resource-intensive character of growth. limited public services. ageing of the population. infrastructure and property. thereby protecting import-competing SOEs and boosting exporters' profits. and brand-new aluminium smelters kept closed to prevent global prices from plunging. most likely after 2013. is that no country can be productive enough to re-invest 50 per cent of GDP in new capital stock without eventually facing immense overcapacity and a staggering non-performing loan problem. reduce fixed investment. Reaso ns for high S .including East Asia in the 1990s . It will take two decades of reforms to change the incentive to over-invest. ghost towns. Chinese consumers do not have a greater propensity to save than Chinese in Hong Kong. All historical episodes of excessive investment . starting with the manufacturing and real-estate sectors.

tie up another 25 per cent of GDP. professor of Economics at the Stern School of Business at NYU and co-author of Crisis Economics. real estate and infrastructure. Nouriel Roubini is chairman of Roubini Global Economics (www. As a result. mostly SOEs.To ease the constraints on household income. More importantly. But boosting the share of income that goes to the household sector could be hugely disruptive. as it could bankrupt a large number of SOEs. China needs either to privatise its SOEs. Instead. or to tax their profits at a far higher rate and transfer the fiscal gains to households. liberalisation of interest rates and a much sharper increase in wage growth. so that their profits become income for households. Copyright 2011 MediaCorp Pte Ltd | All Rights Reserved Sugge stions for policy chang . and thus will intensify the coming economic slowdown once further fixed-investment growth becomes impossible. all of which are politically powerful. on top of household savings. but at a very high foreseeable cost. whose paperback edition is forthcoming this month. Until the change of political leadership in 2012-2013.or retained earnings . Continuing down the investment-led growth path will exacerbate the visible glut of capacity in manufacturing. the savings . China will invest even more under the current Five-Year China's policymakers may be able to maintain high growth rates.roubini.of the corporate sector. export-oriented firms and provincial governments. China needs more rapid exchangerate appreciation.