Chart of the Day: Chinese Fixed Capital Investment is Nearly 90% of GDP
In a recent post, we highlighted a chart from Crescat Capital’s second quarter letter to investors showing China’s unsustainable corporate debt growth. Today, we bring you another jaw dropping chart from the same letter that shows the enormous and unsustainable growth in Chinese fixed capital investment since 2000.
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Fixed capital investment is spending on physical assets such as infrastructure, buildings, property, machinery, or technology. While a certain amount of fixed capital investment is unquestionably good for any economy, fixed capital investment in China has reached completely unsustainable levels. It is largely responsible for the surging corporate indebtedness problem in China that we discussed in the previous post. It is also this excessive fixed capital spending, which is creating the illusion of rapid economic growth and high employment in China.
As Crescat Capital notes:
“The China growth story is not likely a miracle of communist government central planning; it’s a massive credit bubble, almost certainly
the largest ever. China’s impressive growth has come overwhelmingly and almost exclusively from unsustainable credit expansion combined with extensive, largely unprofitable domestic infrastructure expansion. In the last two decades, China has seen the largest construction boom in any country ever. The construction boom can be seen in the chart below by looking at the portion of China’s GDP that has gone into fixed asset investment. This has grown almost every year starting with 23% of GDP in 2000 up to 87% of GDP in 2016.”
Source: Crescat Capital
“We believe this has been a centrally planned misallocation of capital into white elephant, unproductive fixed-asset infrastructure projects that on balance will likely not ever generate sufficient return on investment to justify their cost. The penalty will come from China’s future economic growth. A recent study by University of Oxford, Saïd Business School published in the Oxford Review of Economic Policy finds that China’s low-quality infrastructure investments pose significant risks to the Chinese and the global economy. The study headed by Atif Ansar analyzed 95 large Chinese road and rail transport projects in China. The evidence suggested that for over half of the infrastructure investments in China made in the last three decades, the costs were larger than the benefits they generated, which means the projects destroyed economic value. Dr. Ansar and his colleagues concluded that investing in unproductive projects results in a boom only while construction is ongoing. The boom turns to bust when forecasted benefits fail to materialize and the projects become a drag on the economy. Because of the large build-up of debt associated with past projects, they warn that there is a strong probability that China is headed for an infrastructure-led national financial and economic crisis that will likely also be a crisis for the international economy.”
An economy cannot be perpetually construction and infrastructure led. Eventually the things that are built most produce greater value than the cost to continue building more things. Anything short of that is unsustainable. When fixed capital spending rises relative to the size of an economy every year for decades, now approaching nearly 90% of all Chinese GDP, something is clearly wrong. With overcapacity already plaguing many Chinese industries, the problem is all the more acute.
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“for over half of the infrastructure investments in China made in the last three decades, the costs were larger than the benefits they generated, which means the projects destroyed economic value.” you don’t get it. it’s not an economy, it’s a fief. it’s not meant to be “sustainable”, it’s a possession. when you build the house you’re going to live in, do you think of it in terms of “economy”? in terms of “sustainability”? in terms of “how are all these construction people going to live here?” what the chinese communist party ruling class families are doing is building their… Read more »
wbvhoose
7 years ago
If they have a debt Jubilee What have they lost? The sucked resources, metal, concrete,into their country and have homes(many are empty), manufacturing equipment ect. They also have alot of precious metal. They could do a debt reset launch a new currency and be fine. Banks create money when they issue loans. If you have a house and farm you bought with loans and there is a reset that is great for you if the government says everyone can keep the house they live in. The eye at the top of the pyramid gets poked out.
They lose all the jobs and economic value that those industries create, and the social stability that goes along with that. Judging by the chart, that is a huge portion of the total economy and employment. If replacing it were easy they wouldn’t be in this situation to begin with
“for over half of the infrastructure investments in China made in the last three decades, the costs were larger than the benefits they generated, which means the projects destroyed economic value.” you don’t get it. it’s not an economy, it’s a fief. it’s not meant to be “sustainable”, it’s a possession. when you build the house you’re going to live in, do you think of it in terms of “economy”? in terms of “sustainability”? in terms of “how are all these construction people going to live here?” what the chinese communist party ruling class families are doing is building their… Read more »
If they have a debt Jubilee What have they lost? The sucked resources, metal, concrete,into their country and have homes(many are empty), manufacturing equipment ect. They also have alot of precious metal. They could do a debt reset launch a new currency and be fine. Banks create money when they issue loans. If you have a house and farm you bought with loans and there is a reset that is great for you if the government says everyone can keep the house they live in. The eye at the top of the pyramid gets poked out.
They lose all the jobs and economic value that those industries create, and the social stability that goes along with that. Judging by the chart, that is a huge portion of the total economy and employment. If replacing it were easy they wouldn’t be in this situation to begin with