CH How Inefficient is Investment 121112

8/13/2019 CH How Inefficient is Investment 121112

1/15

Economics

How inefficient

DBS Group Research

is Chinasinvestment?

12 November 212

Its unanimous: China cant grow at a 10% rate anymore. Those days are gone,

its said, because the Eastern Coast, where most of the deveo!ment has occurred

over the !ast "0 years, is too crowded and !outed and because economic theorysays so: theres been too much investment and its not #efficient$ anymore.

Economic theory does indeed say something cose to that. eo&cassica theory is

a about 'marginaism( the bang one gets for that ast buc) s!ent. *n thedemand side, the +th ice cream cone is not as enoyabe as the first. *n thesu!!y side, the +th investment doar doesnt !roduce the same )ic) to -/.

G!oba! efficienc" of investment

IC*s 2 3 -/4, avg 500"&06 ower isNomenc!ature

eferences to 7sia in

this re!ort adhere tothe foow conventions:

7sia 10: C8, 82, T9,

2, -, ;: 7sia 10 ess I

and C8

Euro?one: E716

-+: 7sia10, @, A/,

EB -": @, A/, EB

1".+1+

15

10

>

".D+ ".+5.=

5

0

- C8I

;< 82 /8I

T9 T8 @7 2 A/

Davi# Carbon $ %&'( &)*) +',) $ #avi#carbon-#bs.com

6.5

."

D.0

".6 ".=".= +.0

+."

$ Chinas /rowth rate must s!ow as wa/es an# incomes rise an#

investment efficienc" fa!!s

$ But this happens over the course of man" "ears0 not , "ears

$ 3nvestment efficienc" in China appears better than an"where e!se in

4sia0 save for Sin/apore

$Recent #ec!ines in measure# efficienc" sa" nothin/ about efficienc"5on!" that /!oba! /rowth has been roc6" since 2)

$ Chinas /rowth can remain hi/h for man" more "ears so !on/ as the

baton is passe# to in!an# provinces from the Eastern seaboar#

$ 7fficia!!"0 /rowth was *.,8 in 912. But virtua!!" ever" province

reporte# faster /rowth than that. 3s /rowth rea!!" *.,8 or is it 1.8?

:he #ifference matters
mailto:[email protected]:[email protected]


2/15

Thats a !robem when investment ma)es u! D0% of -/, as it does in China.

Everyone ')nows its too high. 8e says it. he says it. 9e a say it. Investment

cant be efficient ( or as efficient as it used to be. oo) at the stee industry. Too

much ca!acity. Concrete too. -rowth has to sow. 7nd oo), it hasF The circescom!ete, the !udding good. Ten !ercent growth might have been !ossibe

yesterday but 6.D% is to!s today. Investment cant !unch i)e it used to.

Not so fast

7s often ha!!ens in economics, we get the theory right, or mosty right, and we

get the measures wrong. ometimes way wrong. /roductivity and efficiency are

good eGam!es. The theory assumes that a resources are fuy em!oyed. This

may be widy untrue in the short&run.


3/15

China = incrementa! capita!ouput ratio

2 3 -/

D.D

D.0+.D

+.0

".D

".0

5.D

5.0

1.D

1.0

+.6

Chinas 3C7R has

hea#e# north since

the G!oba! >inancia!

Crisis. :hats not

because efficienc"

has fa!!en

== 01 0" 0D 06 0= 11

7ctuay, it means nothing of the sort. IC*s the word over soared when thegoba financia crisis hit in 500>. Taiwans IC*um!ed to "0. 2oreas um!ed

to =>. :inga!ores rose to 1" in 500> and then !unged to &"0 in 500= as growthturned negative. The @ IC* dro!!ed to &+= in 500>N Aa!ans dro!!ed to &55./ut those numbers into a D&year moving year moving average and you wont ust

get a distortion, you get utter nonsense.

The bottom ine is, whie investment efficiency is a )ey determinant of ong&run

-/ growth, in the short&run, the causaity is fi!!ed around ( growth determines

measured4 efficiency, not vice&versa.

7mong other things, this means one cannot use the IC*s of the !ast +&D years toma)es any inferences about what !otentia growth might be in the years ahead.In !articuar, Chinas higher IC* of ate says absoutey nothing about whether

growth in the neGt D years wi be faster or sower than in the !ast D years.

aying it has to sow because the IC* is rising is a bootstra! argument at best (growth wi be sow because its been sow. That wont fy in most sho!s.

on/erterm 3C7Rs

9here does this eave us

thenM 9hat do Chinas

IC*s oo) i)e from aonger&term !ers!ectiveM

They oo) !retty good,

and not much differentfrom other 7sian

countries that came

before China in thedeveo!ment !rocesses.

The chart at right is thesame as the one at to!

but eGtended'bac)wards to1=6=. 7s one woud

eG!ect, investment has

become ess efficient over

time ( but over decades,not over sma !eriods o

China = incrementa! capita!ouput ratio

2 3 -/

15.0>rom a !on/erterm

perspective0Chinas 3C7Rs !oo6

norma! @ beni/n

10.0

>.0

.0

+.0

5.0

0.0

6= >1 >" >D >6 >= =1 =" =D =6 == 01 0" 0D 06 0= 11

3

"."

How inefficient is Chinas investment? 12 November 212


4/15

:aiwan = efficienc" of investment

IC*s 2 3 -/4, rea invstdata, 5yr mov

Sin/apore= efficienc" of investment


50 50

1D1D

10

10D

D 0

&D0

&10

&D&1D

1=>+ -oba

&10 &50 bust

>+ >> =5 = 00 0+crisis

0> 150 + > 65 6 >0 >+ >> =5 = 00 0+ 0> 15 0 + > 65 6 >0

trend but, for reasons noted above, nothing can be inferred from that aboutChinas ong&run growth rate. -iven the historica voatiity and the goba financia

crisis, the 5011 reading is nothing but a bi!.

Orom a onger&term !ers!ective, does China oo) different from other 7sian countries

that went through their ra!id deveo!ment !hases in the 0s and 60s and >0sMot reay. The charts above and beow show IC*s of inga!ore, Taiwan,;aaysia

and Indonesia, four countries with widey ranging incomes, over the !ast D0

years. 7 countries show significant IC* voatiity that has nothing to do with

investment efficiency and everything to do with short&run swings in -/ growththat occurred for other reasons.

7s one woud eG!ect and theory !redicts, a countries show investment efficiency

faing IC*s rising4 over the years, as ca!ita stoc)s accumuate. Put, ust i)e

China, a four show this ha!!ening over the course of decades, not over a !eriod

of "&+ years.

3n#onesia= efficienc" of investment


65 6 >0 >+ >> =5 = 00 0+ 0> 15 0 + > 65 6 >0 >+ >> =5 = 00 0+ 0> 15

4

7sia

financia

crisis

ot

recession com financia



5/15

China = 3C7R%who!e countr"(

2 3 -/, regiona wtd avg

China = 3C7R%Eastern coasta! provinces(

2 3 -/

15 15

10 10

> >

+ +

5 5

0 06= >1 >" >D >6 >= =1 =" =D =6 == 01 0" 0D 06 0= 11 6= >1 >" >D >6 >= =1 =" =D =6 == 01 0" 0D 06 0= 11

Chinas 3C7Rs b" re/ion

Im!ortanty, neither do Chinas IC*s oo) much different between regions. The

natura nu hy!othesis woud be that in Eastern coasta !rovinces, where

deveo!ment has been ra!id and where most beieve it must sow, investment

efficiency was faing ra!idy, or at east more than the nationa average. This

doesnt a!!ear to be the case charts above and beow4. The !ace of IC*deterioration oo)s to be about the same across !rovinces3regions. EGce!t forPeiing and hanghai 7!!endiG I and II4 East coast IC*s are about the same as

Centra !rovince IC*s and have risen by about the same amount since 1=>0.Ironicay, 9estern !rovince IC*s are notaby higher than in Eastern and Centra

areas, when one woud have eG!ected the o!!osite i.e., a bigger bang for the

investment buc)4. This coud refect the fact that 9estern !rovinces are amonthe east deveo!ed and investment returns may remain ow unti some minimum

China = 3C7R%;estern provinces(

2 3 -/

China = 3C7R%Centra! provinces(

2 3 -/

=

>

6

D

+

"

5

1

0

&1

1

1+

15

10

>

+

5

0

6= >1 >" >D >6 >= =1 =" =D =6 == 01 0" 0D 06 0= 11 6= >1 >" >D >6 >= =1 =" =D =6 == 01 0" 0D 06 0= 11

5



6/15

:he ha!f!ives of 4sian /rowth

o what is one to ma)e of 7sias 3 Chinas IC*sM oes their sow rise mean

investment efficiency doesnt matter and, more to the !oint, that fast -/ growth

can continue foreverM *f course not. The theory is correct ( growth must sow

and investment must begin to offer ess bang for the buc). The esson to beearned is that this is a ong&run !rocess, not something one can see from thisyear to the neGt. In the case of IC*s, one has to oo) at a 50 or "0 or even +0year time s!an before the theoretica forest can be distinguished from the voatie

trees. In the case of -/ and income !er&ca!ita -/4 growth, the data are essvoatie and the sowdowns more discernibe. Put they are ust as gradua

nonetheess.

7s discussed in our 7sia 5050 re!ort of 5011 J5K it too) inga!ore some 5D years

for !er ca!ita -/ growth to dro! by haf chart beow4. In Taiwan,i t too) aboutthe same amount of time and in 2orea, it too) the "0 years between 1=6 and

1==6 for !er ca!ita -/ growth to fa from 6.D% !er year to the ".6% rate it has

Growth must s!owas incomes rise. But

this is a !on/term

process0 not

somethin/ "ou see

from "ear to "ear

Sin/apore= per capita income path

in constant 5010 @ doars".>%

=+&156.%

6&>+

D.+%

>+&=+

D0,000

+D,000

+0,000

"D,000

"0,000

5D,000

50,000

1D,000

10,000

D,000

0

6 61 6D 6= >" >6 =1 =D == 0" "066% 1D

@ness Chinas #haf&ife$ of income growth is a ot shorter than the 5D years that

has !revaied esewhere in 7sia, growth coud remain ra!id for a ong time tocome. In fact, one shoud eG!ect Chinas haf&ife to be onger, not shorter than

esewhere in 7sia, because there is so much more territory and human resourcesyet to deveo! there.


7/15

How fast is /rowth to#a"?

If Chinas growth can remain fast for onger than most thin), it may aready be

running faster than most thin) too. Oor the !ast two Luarters, when -/ growth

officiay averaged 6.D%


8/15

China = officia! nationa! an# re/iona! av/ GDA /rowth

%

11+

15

10

>

+

5

0

3s /rowth *.,8 or

1.8? 3t ma6es a

#ifference 10."%

6.+%

;ar&00 ;ar&05 ;ar&0+ ;ar&0 ;ar&0> ;ar&10 ;ar&15

might sow even further. 9oud anybody seriousy have been worried about a'sowdown in China if growth had dro!!ed to 10."% from 1+%M

o. They woud be heaving oud sighs of reief that growth was down to asustainabe 10% and that abowout in this sector or that mar)et had been averted.'9e done China, everyone woud be saying, 'Pac) to !otentia growth. 7nd

not a moment too soon. In short, the whoe discussion of the !ast two years

woud have been com!etey different.

o that " !ercentage !oint ga! does matter. @ness we )now which growth rate

is the more credibe, we dont )now which discussion we shoud have been havingfor the !ast two years.

>ina! thou/hts

7 few things remain cear. Chinas growth must sow as !er ca!ita incomes rise

and the Eastern coasta !rovinces become saturated with the tra!!ings o

deveo!ment. 7 oo) at Chinas growth by region since 5000 chart beow4

corroborates the theory and the intuition. ince 500", growth has sowed

has remained high in the Centra!rovinces. 7nd it has acceerated in the 9est.

China = GDA /rowth b" re/ion

% 0= 10 11 15 1"

8

u! for 5

Luarters

*fficia nationa growth rate

egiona wtd avg



9/15

If China wishes to )ee! growth as ra!id as it has been over the !ast 50 years, it

has a much better chance of doing so than most !eo!e thin). Put the baton wi

have to !ass to the inand !rovinces which remain reativey undeveo!ed and

where !otentia remains unta!!ed. In this ight, com!aints about inefficient

infrastructure investment ( roads to 'nowhere, for eGam!e ( shoudbe tem!ered.ew roads aways oo) i)e they go nowhere at first. Its what ha!!ens ater that

counts. Thats another thing the IC*s dont !ic) u!.

9



10/15

En#notes

J1K The IC*0 may aso be eG!ressed as 13 margina !roduct of ca!ita.

J5K 7sia 5050, P -rou! esearch, e!tember 5011.

J"K 2orea and Taiwan!er&ca!ita income!aths.

orea AC3 paths after reachin/1, !eve!

constant 5010 @ doars

:aiwan AC3 paths after reachin/1, !eve!

constant 5010 @ doars

55,000

50,000

1>,000

1,000

1+,000

15,000

10,000>,000

,000

+,000

5,000

0

5+,000

50,000

1,000

15,000

>,000

+,000

0

t0 tQ> tQ1 tQ5+ tQ"5 tQ+0 tQ+> t0 tQ> tQ1 tQ5+ tQ"5 tQ+0 tQ+>

J+K Oor more detai on what needs to be done right, see 7sia 5050 J5K4.

JDK /er&ca!ita income of 7sia&10 countries and how far one country is #behind$ another originay !ubished in

7sia 5050 J5K4.

4sia per capita GDA time!ine

@ !er !erson in 5011 and number of years Rahead3behindRother countries assuming % !er&ca! growth rate4 :-

D+,>5

D0,000

+0,000

"0,000

50,000

10,000 T8 C8I

",++

0

&D5 &D0 &+> &+ &++ &+5 &+0 &"> &" &"+ &"5 &"0 &5> &5 &5+ &55 &50 &1> &1 &1+ &15 &10 &> & &+ &5 t0

10

82

"+,50=

20

T9 55,=00

50,560

;D D,"1"

1,D== 5,50>

.>%!ath

1=+&1==

1==

".6%!ath1==&5010

6.D%!ath

1=6&1==6

1==6 ".6%!ath

1==6&5010



11/15

JK *ne !ossibe eG!anation is that regiona authorities are sti measuring -/ in gross terms rather than vaue&

added terms. Put this issue was addressed years agoN its uni)ey that it remains a factor. ;oreover, it eaves

unanswered the Luestion of how nationa authorities woud 3 coud transate gross out!ut into vaue&added

terms if the regiona authorities were not abe to.

7nother !ossibe eG!anation is that trade baances were not rectified. If!rovinces re!orted intra&regionatrade sur!uses that were not transated into nationa sur!uses, then nationa -/ eves woudbe arger

thanregiona eves. This too is easy to account for. ;oreover, it woud not ead to a higher -/growthrate regionay uness sur!uses were growing over time. This has not been the case.

Sources

ata for a charts and tabes come from CEIC and Poomberg.

11



12/15

4ppen#i 3D

China = se!ecte# statistics

hare in

nationa -/5011

%

100.0

ea -/

-rowth7vg "H&+H

% egiona 7verage

Eastern coasta! provinces

PeiingTianin8ebeiEiaoning:hanghaiAiangsuBheiangOuian:handong-Sdong8ainan

Centra! provinces

:hanGiAiin

8EA

7nhuiAiangGi8enan8ubei

8unan;esternprovinces

Inner ;ong-uangGiChongLing:ichuan-ui?hou

".1

5.5

+.6

+."

".6

=.+

.5

".+

>.6

10.50.D

+.>

+.+

+.

+.6

+.>

+."

+.D

+.1

+.6

".++.1

+."

".

+.0

+.0

+.1

".6

".=

".6

".=

5.=+.1

6.>

1".D

=.1

>.>

6.

10."

>.0

11.6

=.6

>.">.

+,>">

,5>0

D,06

",=

+,0""

+,+">

D,+1>

+,1"

5.1

5.1

5.+

5.=

5.5

D.1

".=

".>

+.6

D.6

+."

".D

+.0

D.

".

".=

+.0

+.+

".D

".

".>

+.5

".

"."

=.=

15.0

=.>

11.=

10.+

=.+

10.

10.=

>,=D1

",=0"

D,"0D

+,0+15,D+"

5,=61

",0=0

D,165

",05=

+,D+>

D,0>D

+,5=

>,>=

+,6>5

+,>5>

15,D0

,D>5

5.6

5.5

1.=

+.01.1

1.6

0.1

5.+

1.0

0."

0.+

1."

D.5

5+.

1=.5

.>

=".5

D."

.0

".D

".+.0

D."

6.=

D.0

+.6

D.+

6.5

D.+

+."

+.D

+.>

+.>

+.+

".>

+.0

+.5

".+."

+.

.6

D.5

+.+

D.D

.

D."

".6

".>

+."

+.5

".>

11.>

11.1

1".D

15.61".+

1".D

11.+

15.

15.5

15.>

10.D

11.6

=.5

10.D

15.+

6.6

10."

12



13/15

4ppen#i 33D 3ncome !eve!s an# capita! efficienc" %3C7Rs( b" province

China = GDA per capita

@ !er !erson, 5011

China = capita! efficienc" b" province

IC*0s K / GDP) by province (real

0 D,000 10,000 1D,000 0 5 + >

Tianin

:Shai

PSing

ASsu

BSiang

Sning

-Sdong

Ouian

:Sdong

8ebei

8Snan

:Sdong

:Shai

TSin

Sning

Ouian

8ebei

PSing

ASsu

BS?hang

8Snan

-Sdong

15,=0=

Aiin

8ubei

8A

:hanGi

8unan8enan

AiangGi

7nhui

8enan

Aiin

:hanGi

8A

8unanAiangGi

8ubei

7nhui

Centra

;ong

CSLing

:haanGi

ingGia

iniang

Hinghai

:ichuan

-uangGi

Tibet

-ansu

+."

+.D

+.1

".+

Centra /rovinces

D.

D.6

+.6

+."

".=

+.0

".

".D

9estern /rovinces

6.5

D."

D."

.0

D.+

D.0

+.0

+.6

D.+

".

".D

15,+=

15,+D+

=,1>

=,1D1

6,>++ Eastern

6,>"/rovinces

6,+D6

6,5>1

D,5">

+,++>

,5>0

D,+1>

D,06

+,>"> /rovinces

+,1"

+,+">

+,0""

",=

>,=D1

D,"0D

D,165

D,0>D

+,5=

+,D+> 9estern/rovinces

+,0+1

",=0"

",0=0

",05=

5,=61

5,D+"



14/15

4ppen#i 333D GDA /rowth b" province

China = /rowth rate b" province

% .

>.>

=.1

=.6

10."

11.6

1".D

Centra /rovinces

=.+

=.>

=.=

10.+

10.

10.=

11.=

15.0

9estern /rovinces

10.D

11.1

11.+

11.6

11.>

15.5

15.

15.6

15.>

1".+

1".D

1".D



15/15

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