CHINA'S EXCESSIVE INVESTMENT

China's Excessive Investment

China's Excessive Investment

Introduction

This paper presents a critical analysis of an article titiled, “China's Excessive Investment”, published in September/October issue of China & World Economy in the year 2008. China, which has consistently notched double-digit growth rates for more than a decade and, more recently India, which grew by 8% in 2006, look particularly attractive—especially as together they are home to over 2.4 billion people. That is not to forget the Association of South-East Asian Nations (ASEAN)—which has an additional population of 560 million—and Japan, which has a population of 120 million and is still the second-largest economy in the world. But what will it take for Western companies to benefit from Asia's potential, as it becomes an ever more powerful force in the world economy?

Discussion

According to the author, China's fixed asset investment rate was at a record high level of over 50 percent in 2006 and 2007. The main forces driving this extremely high investment are excessive investment in infrastructure and real estate. In 2006, infrastructure and real estate investment accounted for 26 and 22 percent of total investment, and 14 and 12 percent of GDP, respectively (Lai, 2008).

Real estate investment is increasing at an exceptionally high pace. Between 2003 and 2007, the average annual growth rate of real estate investment was over 25 percent, 2.5 times the growth rate of GDP over the same period, exceeding the duration of the last real estate bubble during 1992-1995. Behind high investment is the unlimited pursuit for GDP growth by the various levels of governments. Although high growth is often accompanied by high investment, an investment rate of over 47 percent in the consecutive 5 years is unprecedented in the economic growth history of both China and the world.

From 2002 to 2007, China's GDP growth rate was approximately 10 percent, but the investment rate was as high as 48-56 percent, 18-24 percentage points higher than that of Japan and Korea in their postwar high growth period. However, is it possible that a strong growth rate can be maintained while the investment rate is substantially reduced? This means that faster consumption growth could be realized without sacrificing GDP growth (Lai, 2008).

This means that we can support the same growth rate with a much lower investment rate, and at the same time increase consumption.

As mentioned in the article, the average annual growth rate of the investment rate exceeded 25 percent, with the actual investment rate increasing from 47.6 percent in 2003 to 55.6 percent in 2007. The main driving forces pushing this new round of high growth in fixed asset investment came from investment in manufacturing industries, infrastructure and real estate. In 2006, the proportions of investment in these three areas in total investment and GDP reached 72 and 38 percent, respectively. Manufacturing investment made up 31 and 16 percent of total investment and GDP, respectively; infrastructure investment made up 19 and 10 percent of total investment and GDP, respectively; and real estate investment made up 22 and 12 percent ...