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.
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.