Data is a wonderful thing, but it is no substitute for facts on the ground. As a business owner in China watching the destruction of millions upon millions of small businesses, I don't think investment stocks and flows are the issue. The main issue is that foreign markets are closing to Chinese goods. (There is also huge misallocation of capital, but let's leave that aside because it kind of worked when exports were pumping.) The export-driven growth model is dead, and there is nothing to replace it. China is not Japan, both are old but China is poor in comparison to Japan. The party is incapable of the kind of reform needed, that is; to scale down government, to sell off SOEs, and get out of the faces of the SME entrepreneurs and small operators where the real dynamism comes from. China is bound for a long and painful decline. The halcyon days are in in rear view mirror. It is caught in the middle-income trap and is going to stay there until the system changes fundamentally, which it will not. Or rather, if it does change, it will be after the Russian model. Chinese elites do not see people as citizens with rights, they see them as livestock to be husbanded and exploited. That is not going to change unless Taiwan takes over!
So in essence China’s high investment rate are overstated. While China's investment share of GDP is much higher than other countries, the focus should be on how investment contributes to capital accumulation, which boosts productivity and long-term growth. China's challenge is not high investment but the wrong type of investment, particularly in real estate. By shifting investment towards more productive sectors, China can sustain growth. Western critiques predicting China's economic collapse may have misinterpreted the situation.
It is always pleasant to see the consensus view challenged, in particular by a persuasive analysis.
The West considers China's yearly investment outlay (flow) excessively high (even after taking out property), but forgets that it is a country’s accumulated capital (stock) rather than the flow that is the enabler of productivity and innovation. It is argued that China’s capital stock is very low in comparison to developed and even middle-income countries. Therefore, it is reasoned that China is actually doing well to continue its high investment strategy.
But it is puzzling that the illustrating table ranks the capital stock of countries ‘per worker’. China’s large population, then, seems to inevitably push the country down the table. Japan’s capital stock is measured three times higher than China’s. Yet in the world’s global innovation index (published by the World Intellectual Property Organisation), Japan is one place behind China’s 12th ranking. If the ‘per worker’ measure is not the explanation, I must be missing something, maybe to some extent the fact that the rest of the world’s capital stock is older and therefore less performant than China’s relatively recently built-up investment engine.
So the piece leaves me persuaded but not convinced.
Very interesting piece. I was unaware that China’s capital ratios are so low, however I still don’t think this undermines the case for an internal rebalancing of China’s economy to boost demand, which I know you talk about a lot yourself (https://stephenroach.substack.com/p/the-cacophony-of-a-hundred-flowers). For me this simply adds further credibility to my other main criticism of China; namely, that Chinese industry appears to be highly inefficient, and instead simply relies on being able to draw in the savings of over a billion people in order to prop itself up. Not only is China attempting to force its development on other countries through overly aggressive export promotion, but it isn’t even doing it well; for all its perpetual underconsumption, it still can’t manage to sustain viable levels of capital or stimulate efficient forms through competition. The net impact is that everyone loses - other economies have their own industries hollowed out, whilst Chinese citizens themselves fail to reap any of the benefits.
Western hawks have been waiting for collapse of China which never happen.
Data is a wonderful thing, but it is no substitute for facts on the ground. As a business owner in China watching the destruction of millions upon millions of small businesses, I don't think investment stocks and flows are the issue. The main issue is that foreign markets are closing to Chinese goods. (There is also huge misallocation of capital, but let's leave that aside because it kind of worked when exports were pumping.) The export-driven growth model is dead, and there is nothing to replace it. China is not Japan, both are old but China is poor in comparison to Japan. The party is incapable of the kind of reform needed, that is; to scale down government, to sell off SOEs, and get out of the faces of the SME entrepreneurs and small operators where the real dynamism comes from. China is bound for a long and painful decline. The halcyon days are in in rear view mirror. It is caught in the middle-income trap and is going to stay there until the system changes fundamentally, which it will not. Or rather, if it does change, it will be after the Russian model. Chinese elites do not see people as citizens with rights, they see them as livestock to be husbanded and exploited. That is not going to change unless Taiwan takes over!
So in essence China’s high investment rate are overstated. While China's investment share of GDP is much higher than other countries, the focus should be on how investment contributes to capital accumulation, which boosts productivity and long-term growth. China's challenge is not high investment but the wrong type of investment, particularly in real estate. By shifting investment towards more productive sectors, China can sustain growth. Western critiques predicting China's economic collapse may have misinterpreted the situation.
It is always pleasant to see the consensus view challenged, in particular by a persuasive analysis.
The West considers China's yearly investment outlay (flow) excessively high (even after taking out property), but forgets that it is a country’s accumulated capital (stock) rather than the flow that is the enabler of productivity and innovation. It is argued that China’s capital stock is very low in comparison to developed and even middle-income countries. Therefore, it is reasoned that China is actually doing well to continue its high investment strategy.
But it is puzzling that the illustrating table ranks the capital stock of countries ‘per worker’. China’s large population, then, seems to inevitably push the country down the table. Japan’s capital stock is measured three times higher than China’s. Yet in the world’s global innovation index (published by the World Intellectual Property Organisation), Japan is one place behind China’s 12th ranking. If the ‘per worker’ measure is not the explanation, I must be missing something, maybe to some extent the fact that the rest of the world’s capital stock is older and therefore less performant than China’s relatively recently built-up investment engine.
So the piece leaves me persuaded but not convinced.
Very interesting piece. I was unaware that China’s capital ratios are so low, however I still don’t think this undermines the case for an internal rebalancing of China’s economy to boost demand, which I know you talk about a lot yourself (https://stephenroach.substack.com/p/the-cacophony-of-a-hundred-flowers). For me this simply adds further credibility to my other main criticism of China; namely, that Chinese industry appears to be highly inefficient, and instead simply relies on being able to draw in the savings of over a billion people in order to prop itself up. Not only is China attempting to force its development on other countries through overly aggressive export promotion, but it isn’t even doing it well; for all its perpetual underconsumption, it still can’t manage to sustain viable levels of capital or stimulate efficient forms through competition. The net impact is that everyone loses - other economies have their own industries hollowed out, whilst Chinese citizens themselves fail to reap any of the benefits.
Exactly. See my comment above. Economic analysis without political analysis is not going to tell you much.