Guangdong Business Leaders Association

Is China over invested?


QiaoHong  SongYu


    Judging on the proportion that investment contributed to the growth of GDP, data suggested that China is indeed over invested. According to the data released by The National Bureau of Statistic on 2nd Feb 2010, investment accounts to 92.3% of the GDP growth. According to our forecasts, the percentage that investment contributed to GDP in 2008 has risen from 41.1% to a record high 43%.


    We think otherwise. We think that: 1) The Chinese investment may have been overvalued; 2) Increased investment market activities are due to the impact of government policy, also know as the tool to adjust the financial cycle; 3) Most of the investment will benefit the current and future economy, and it is unlikely that it will become destructive that many people worried about.


Data error leads to investment data being overvalued


    The contribution that investment brings to GDP growth is higher than ever, but not so to the growth of domestic demand. In 2009, domestic investment accounts for 8 per cent of the GDP growth, domestic consumption and net exports accounts for 4.6 and - 3.9 per cent respectively. Although the percentage that investment brings to GDP has reached its record high since 1987 , it is partly due to the sharp decline of net export. Investment in 2009 brought positive energy to domestic demand growth, but it has not reached its record high.


    In addition, we think the reason that the percentage is so high is that the investment is being overestimated during the calculation process; it is also because of the fact that the fixed assets are over estimated.


    (1) The interference of fixed asset investment in 2009 is very large, published data on investment amount may be too high. Shortly after the stimulus package at the end of 2008, China's urban fixed asset investment horizontal comparison rate grew from 27.8% in the first quarter to 35.9% in the second quarter. Data shows that some local fixed-asset investment data published may be too high, because the data released is the total amount of investment projects (including the unfinished projects) rather than the amount actually completed. Local Government tried to show the State Government that their efforts to implement the stimulate package is paying back and might encourage more robust public investment data, and thus the action has fueled the public to invest even more. On the other hand, in the fourth quarter of 2009, the National Bureau of Statistics tried to rectify the false data to the source and amended some. Thus, we see fourth quarter of 2009 urban fixed asset investment to a seasonally adjusted annual rate of relief on a monthly discount to 10.8%, with the same period of strong growth in industrial added value and generating capacity in stark contrast. In short, it is difficult for fixed asset investment data to predict the magnitude of the deviation, especially in real estate investment in fixed assets statistics reported in October 2009 also changed, which further increased the difficulty of forecasting. Nevertheless, as published in the first quarter of 2009, investment and imports and the differences between the data of industrial added value above the fourth quarter of 2009, we continue to believe that the annual fixed asset investment is higher than the actual investment amount has been achieved


    (2) Because of land costs and less than the price changes, GDP in the investment component of the estimates may be too high. Because the monthly data released by investment in fixed assets are not value-added data, so need to fixed asset investment data reduced land acquisition costs. Although the total cost of land transactions announced in the real estate capital expenditure accounted for the proportion of expenditure seems less than 30%, but significantly lower than the data seems to us in the real estate developers in the industry learned when the research 45% to 50%. Even if we assume a 5% real estate investment is much lower land costs to invest in affordable housing, the overall real estate investment land costs may still be underestimated. In addition, the official fixed asset investment deflator also greatly underestimated the price increase factor in investment spending. For example, despite the higher commodity prices and the price of investment goods rose sharply, but the official 2007 growth rate of fixed asset investment still reached 3.9%. Therefore, GDP, after the report by the investment Zhongping data may be overestimated.


Domestic investment is part of the periodic adjustment method


    Macroeconomic policy adjustments to promote domestic investment in China ahead of a strong recovery. It is undeniable: even after taking into account statistical error, the incentives to promote investment in 2009 still be very strong to achieve recovery. These statistics show that a well-known fact that when the external demand dropped sharply from the end of 2008, China adopted an active policy to promote relaxation and stimulate growth and recovery since the end of 2008 investment growth. By the large government investment in infrastructure projects and monetary easing policy-driven fiscal stimulus makes

first investment in China is to achieve recovery in other areas. It is worth noting that our Goldman Sachs Financial Conditions Index in China, in October 2008 ~ July 2009 during the more than 660 basis points to relax, thereby reducing the cost of borrowing to help restore business confidence. Monetary easing, he market-oriented policies to help the industry to meet domestic consumer demand for the first quarter of 2009 began to make a rapid expansion of investment decision. This offset the growth in foreign trade capital spending declines. This region other small open economies, investment fell in sharp contrast. In 2009, the recovery of the global financial crisis period, as weaker external demand, exports of many Asian economies declined. Therefore, export-related investment growth was significantly slower (especially in small open economies), making the investment contribution to the GDP growth rate fell to a low level. For example, the 2008 and 2009, China Taiwan and South Korea led the decline in the level of investment accounts for their investment share of GDP in 2009 decreased by 3.1 and 4.2 percentage points. Investment (especially the part of government-led) should be regarded as a cyclical management tool. In fact, China's domestic investment cycle is often subject to macro-policies (intended Fuping led by external demand fluctuations in the business cycle) effects (see Figure 2). For example, in 2002 and 2008 ~ 2009, external demand slowed, Chinese government launched a fiscal stimulus policies

to stimulate domestic investment, in order to avoid further decline in economic growth, in turn, a stronger external demand and inflationary pressures, the government tend to inhibit the growth of domestic investment, as did 2004 and 2007. Therefore, the cycle of rising and falling phase of the investment properties are very different; in 2009, investment in export-oriented industries was significantly lower than 2007 levels, but strong investment in infrastructure. Strong rebound in external demand could trigger a new round of policy tightening,including the implementation in early 2010 may be re-credit controls and investment restrictions.


There is no short-term structural problem of over-investment


    Some industries and regions of excess capacity may exist, but we think that this is not a structural problem. We have long been said that as the limited reserves of capital goods (unit of output and per capita data is the case), and high return on investment, China does not exist structural overcapacity. Therefore, there may be more than an industry problem of low capacity utilization, especially in the recovery phase of the growth in demand continues. However, much less with other growth economies of China, the Chinese up to about 10% of GDP trend growth will help make it easier to eliminate excess capacity. For example, in 2002 the general problem of excess production capacity in 2003, soon disappeared in most industries, some industries even in the early 2004 suffered a growth bottleneck. We have already noted the field of power generation and rail transport to reduce excess capacity, the People's Bank of China survey diffusion index, capacity utilization in the first quarter of 2009 to 39.5 in the fourth quarter rose to 43.8 (close to the third quarter 2008 pre-crisis levels) are also reflect this.


   China's economy has not developed to the stage of excess supply of infrastructure investment. We believe that the financial crisis, China has created a non-trade areas and speeding up infrastructure investment opportunities in inland areas, in 2004-2008 during the first half of the development of economic overheating, this part of the investment has lagged. Therefore, the current stage of economic development does not necessarily lower than the residents of the importance of consumption, but investment in infrastructure is far less than the stage of excess supply.

    In fact, investment in infrastructure may facilitate further growth in consumption, or even a necessary prerequisite for further growth in consumption. For example, following the substantial growth in passenger car sales in 2009, China may need to speed up road construction to avoid traffic jams lead to stagnation of automobile consumption. Besides Beijing, Tianjin, Chengdu and Chongqing Yangtze River Delta and the metropolitan area's development industry needs investment in public transport and utility of further growth, the development of these cities with the support of these areas to adapt to rapid growth of urban population growth in consumption. From this point of view, we believe that growth is the infrastructure in 2009 to pave the way for further development of the city and create more consumer demand, especially in central and western regions.


    Investment growth in 2010 may continue to be strong, be strong support for the residents of investment demand. We still believe that, with government-led decline in investment priorities and the limited size of (local government investment through the payment of the restrictions in the platform), residential investment will continue to be one of the main growth drivers. In the strong earnings prospects and relatively low real interest rate support, residential investment will continue to remain strong, so that the overall investment structure is more inclined to market-oriented industry.


    But China's economic structure still need to shift toward consumer-driven growth in order to achieve re-balance. Although China does not there is a structural problem of over-investment. The structure of economic growth but still stressed that changes to the consumer to the importance of re-balance.Although economic growth in 2009, driven by rapid recovery in investment, but too frequent policy adjustments could lead to rent-seeking behavior and shake the stability of private sector capital spending outlook. We still believe that to improve people's actual income levels and improving social security system, measures should help boost consumer spending and in this respect we have from the recent policy change to see some positive progress


(The authors are Chinese economists of Goldman Sachs Group)


 Guangdong Business Leaders Association