The story of China’s investment addiction is well known. China invests more in factories, smelters, roads, airports, shopping malls and vast housing complexes than any modern nation has done in history. At its peak, after the stimulus that followed the 2008 global financial crisis, gross capital investment hit a vertigo-inducing 49 per cent of output. Worse, every time growth sags, as it did at the start of this year, central planners reach for the cement-mixers, pushing investment up again.
Yu Yongding, a well-known academic at the Chinese Academy of Social Sciences, worries about this a lot. China is storing up trouble, he believes, as it adds to its stock of white elephants and unprofitable industries. Take the steel industry, he writes in a recent article. China has more than 1,000 steel mills and produces roughly half the world’s output. There is so much overcapacity that profitability last year was an atom-thin 0.04 per cent.
China’s high investment rate is the flip side of its high savings rate, which in 2007 topped 50 per cent of gross domestic product. This story is also well known. Chinese people save too much. One reason is that they stash away money to cover catastrophic events such as sickness or redundancy. In addition, the system penalises consumers by suppressing deposit rates so that cheap money can be funnelled to favoured sectors – all those steel mills. This propensity to save makes the necessary rebalancing of the Chinese economy harder. If consumers cannot be relied upon to spend and exports can no longer be the engine of growth, all that is left is investment.