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The Chinese Economy Is Facing A $6.8 Trillion Nightmare That Could Get Worse

Discussion in 'China & Asia Pacific' started by Anees, Nov 30, 2014.

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  1. Anees

    Anees Lt. Colonel ELITE MEMBER

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    The Chinese economy has wasted $6.8 trillion (£4.3 trillion) in investment during the last four years.

    Six-point-eight trillion dollars.

    [​IMG]


    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.

    But 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.



    Read more: China Economy Waste Malinvestment Slowdown - Business Insider
     
  2. venureddy

    venureddy Major SENIOR MEMBER

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    yes chinese economy has defenitely slowed down. their ghost cities are just a waste of resources.
     
  3. Picdelamirand-oil

    Picdelamirand-oil Lt. Colonel MILITARY STRATEGIST

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    6.8 F-35 programs!:woot::help::rofl:
     
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  4. INDIAN NATIONALIST

    INDIAN NATIONALIST Major SENIOR MEMBER

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    Even so, but they've little in the way of foreign debt. People in China are still consuming, factories are still producing, businesses are still selling. Even if nobody moves into their cities, the economy is still fundamentally sound.
     
  5. Picdelamirand-oil

    Picdelamirand-oil Lt. Colonel MILITARY STRATEGIST

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    China Debt Clock :: National Debt of China
     
  6. Picdelamirand-oil

    Picdelamirand-oil Lt. Colonel MILITARY STRATEGIST

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    The problem is that China is dealing with overbuilding in the property sector. So if the authorities let the market forces play, they have to stop building properties for a year or two and allow the demand to catch up with supply. I would say that China's growth rate should go further down for it to be sustainable, probably close to 6-6.5 percent.
    If the government then introduces appropriate reforms, it can probably push growth back up to 7 percent, may be even 7.5 percent, for the rest of the decade and beyond. But that implies the implementation of basic structural reforms as outlined in the third plenary session of the Communist Party's Central Committee.
    China′s debt problems ′aren′t the same as in the West′ | Asia | DW.DE | 26.09.2014
     
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