Two research reports were delivered to my inbox recently. One discussing a country whose “export-driven economy” that is “no longer sustainable,” and another discussing the “one of the most domestically-oriented economies in the world” which is on a sustainable growth path, at least in the short term.
Both reports were about China.
During the endless debates concerning the RMB over the past decade, it was taken as something of a truism that China’s strength in exports, and China’s high level of investment were connected. Recent statistics don’t really bare that out. Three provinces – Guangdong, Jiangsu, Zhejiang – account for nearly 60% of the country’s exports. Fixed asset investment as a percentage of GDP is significantly lower than the national average in all three of those provinces, significantly so in Guangdong and Zhejiang, with the former only coming it 27.7% against a national average of 55%.* This is despite fixed-asset investment having grown 20.7% in 2010, against a 12.2% increase in GDP – investment in coastal export industries has not occurred for a while
What has been occurring over the past few years is a massive increase in mining investment in order to bring down the cost of inputs for China’s massive real-estate boom. Liaoning – one of the provinces with the highest level of fixed asset investment – saw a 63.8% increase in mining investment, matched by an incredible 90.7% increase in real estate investment in the booming seaport city of Dalian.
A closer look at Chinese economic indicators also accentuates the importance of the real estate and mining sectors prior to the financial crisis. Construction, 1teel and electricity consumption all began falling off in late 2007, and were in something of a free fall by mid-2008, well before the collapse of the global economy. Consumption dropped 10% from its peak by 2010, and real-estate sales almost 30%. In other words the Chinese economy stalled well before exports stalled, and picked up again while exports were slowing down.
None of this detracts from the argument that Chinese investment is too high, whether China is focused on a domestic market or an international market, it still has an incredibly high rate of investment relative to GDP. But it somewhat complicates the question “too high for what.” If the threat is non-performing loans, China’s strong fiscal position seems quite capable of handling the problem. High levels of income inequality, and poor renters rights are distorting the market somewhat, this of course is the issue that China’s social housing drive is specifically addressing.
The social housing project has problems, that, if spread to the housing industry overall, could potentially prove the bears right. But one only has to go to a second tier city in China though to see how bad existing facilities are, and how strong the demand is for improvements in this sector. If housing stays affordable China’s development is on the right track.
*The official numbers are thought to underestimate housing services, which if corrected for, would bring fixed asset investment as a percentage of GDP below 50%.