The Chinese Economy Is Facing A $6.8 Trillion Nightmare That Could Get Worse
REUTERS/David Gray Empty apartment buildings litter Ordos, one of the "ghost cities" that have characterised China's wasteful investment. The Chinese economy has wasted $6.8 trillion (￡4.3 trillion) in investment during the last four years.
Six-point-eight trillion dollars.
That's according to a report from China's National Development and Reform Commission and the Academy of Macroeconomic Research, written up here in the Financial Times. The report says that amount has been "ineffective investment."
For sure, $6.8 trillion is a difficult figure to imagine. That's two years of output for the entire German economy . It's more than four times as much as is invested in S&P 500 index funds .
Even in the enormous Chinese economy, that's practically half of the investment between 2009 and 2013, the period covered by the investigation. This is likely to have pretty grim effects on Chinese economic growth in the years ahead.
Investment of whatever variety initially shows us up in GDP figures. For example, the spending on building a bridge. Initially, the bridge construction will boost GDP simply because of the spending needed to finish it.
after that, the economic effect of the bridge depends on a lot: Where is it from? Where does it lead to? If it's a useful investment, it could keep boosting spending by making consumers' journey to a city less arduous, and allowing them to go to the shops more often. If it's a bridge to nowhere, it's not likely to have that effect, and will simply be a waste of resources without any positive growth effect in the future.
China seems to have built the equivalent of $6.8 trillion in bridges to nowhere.
According to the FT, the authors are blaming the investment on low interest rates and other forms of government stimulus, suggesting that there's been a sort of malinvestment . The country's deserted ghost cities are probably the ultimate symbol of this wasted investment.
And if that's the case, it's not likely to be the last of it: The People's Bank of China just slashed interest rates, and it looks like there's probably more coming. The economy has slowed significantly in recent years: The government now targets a growth rate of 7.5%, well down from the double-digit rates seen before the crisis, and many analysts believe they will struggle to even reach that.
That's not all: The problem is exacerbated by graft and corruption among the country's autocratic elite, which skims off the investment whether it's wasteful or not. If the report's authors are correct about the causes, don't expect to see an improvement in the quality of China's investment any time soon.
Eric 4 hours ago 0 4
I watched a 60 minute program on chinas ghost cities...
I was like OMG and i'm not a teenage girl.
For as far as you can see its just block after block of condos and malls etc, whole modern cities and no one lives there, no one works there. It is just miles of empty buildings.
I do not see how they can sustain that sort of thing and survive.
My guess is a large part of the growth we've been seeing out of china over the last few years is not real.
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Intrepid 46 minutes ago 0 0
Of course not. Entirely set up for the fat cats to walk away with full pockets. Thats how it works.
Sankara 19 hours ago 0 17
They speak of countries being large economies based on their GDP. I believe the judgement is incomplete unless the capacity to consume matches the capacity to produce.
It is this mismatch that has been causing this aberration regarding assessing the strength of economy of a country.
China has been able to produce way too much more than what they can consume. This resulted in wasted production that depreciates before its value is realized/consumed.
US started consuming significantly more than it produced. The national debt is a reflection of that. Hope this would be contained sooner than later for the country to get back to a balanced tread. As I see, Americans are getting aware of the need to produce and we are putting in efforts to turn around. But is that enough effort??? That is a million dollar question!