Wednesday, October 5, 2011

China's Investment Conundrum

The chart below was created using data from a table within a recent Michael Pettis newsletter (his great blog China Financial Markets will produce a condensed version of the newsletter within a week or so) that outlined the composition of China's GDP by year (broken out by C, I, G, and NX) and multiplying the component percents by the size of the Chinese economy for each year.

What the chart shows is the remarkable growth across all the components, but the unreal growth in investment which now makes up almost 50% of China's economy (the fact that consumption grew by 75+% likely allowed for the other components to grow even faster as the citizens saw their lifestyles dramatically improve, allowing for the flexibility needed with central control by the government).

But, much like the exponential growth in China's currency holdings this investment growth is not sustainable, especially in a world that appears to have more than enough supply for the current (and waning) level of aggregate demand globally. So this begs the question... if there will be a rebalancing away from investment, will it happen due to the pace of Chinese consumption simply increasing (i.e. will China "save" the global economy) or will investment growth (and the Chinese economy) slow substantially?

Source: Chinability


  1. Looks like a giant misallocation of capital to me.
    Thanks for the insightful graph Jake.



  2. Must mirror our over consumption and small investment. Imagine that balance makes sense (via MMT or other hocus pocus) but it cannot be good long term.

  3. I'll likely have a post tomorrow or Friday on just that. Our consumption is up only 18% the past decade, but investment is down 6%. Seems like they are "stealing" our production capacity due to a cheap currency and some horrible policy aimed at maximizing corporate profits at the expense of the average worker...

  4. I think you need to check your axis... at a bit over 1b people in China this would indicate that they are consuming a little under $2 each per year...

  5. It's trillions. Will fix when I am near a computer.

  6. The amount of fixed asset investment is not really the question is it? Its the RoI on that investment that matters. At what point does the incremental investment not help drive the other components - trade looks pretty played out (customers certainly not so willing or able) so the salvation of the economy lies in boosting that red line...

  7. China is a mess Country. There is no such thing as a soft landing after pumping their GDP by as much liquidity as they did. They have not collapsed, but their markets are on a downward slope.

  8. I must agree with penny stocks on this subject.
    Enormous capital misallocations have ugly consequences when they eventually come home to roost. China has yet to face these consequences, yet collapse remains a possibility in my view.