SPECIAL REPORT CHINA'S ECONOMY
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What has China got in return? Investment, unlike consumption, is cumulative; it leaves behind a stock of machinery, buildings and infrastructure. If China's capital stock were already too big for its needs, further thrift would indeed be pointless. In fact, though, the country's overall capital stock is still small relative to its population and medium-sized relative to its economy. In 2010, its capital stock per person was only 7% of America's (con- Boom, boom verted at market exchange rates), according to Andrew Batson and ]anet Zhang of GK Dragonomics, a consultancy in Beijing. Even measured at purchasing-power parity, China has only about a fifth of America's capital stock per person, depending on how its PPP rate is calculated. China needs to "produce lots more of almost everything", argues Scott Sumner of Bentley University, even if it does not produce "everything in the right order". Its furious homebuilding, for example, has unnerved the government and cast a shadow over its banks, which worry about defaults on property
The ballad of Mr Guo
loans. But it still needs more places for people to live. In 2010 it had 140m-150m urban homes, according to Rosealea Yao of GK Dragonomics, 85m short of the number of urban households. About three-quarters of China's migrant workers are squeezed into rented housing or dormitories provided by their employer. Nor is China's capital stock conspicuously large relative to the size of its economy. It amounted to about 2.5 times China's GDP in 2008, according to the APO. That was the same as America's figure and much lower than Japan's. Thanks to China's stimulus-driven investment spree, the ratio increased to 2.9 in 2010, but that still does not look wildly out of line.
Malinvestors of great wealth SINGING KARAOKE WITH Taiwanese investors, smearing birthday cake on the cheeks of an American factory owner, knocking back baijiu, a Chinese spirit, with property developers: Guo Yongchang would do anything to attract investment to Gushi, a countyof1.6m people in Henan province, where he served as party secretary. His antics are recorded in "The Transition Period", a remarkable fly-on-the-wall documentary about his last months in office, filmed by Zhou Hao. Mr Guo persuades one developer to raise the price of his flats because Gushi people are interested only in the priciest properties. After a boozy dinner he drapes hi mself over the developer's shoulder and extracts a promise from him to add more storeys to his tower to outdo the one in the neighbouring city. The one-upmanship exemplified by Mr Guo has generated great economic dynamism, but also great inefficiency. When the centralgovernmenttries to stop economic overheating, local governments resist. Conversely, when the government urged the banks to support its 2008 stimulus effort, local governments scrambled to claim an outsized share ofthe lending. The result is a local-government debt burden worth over a fifth of China's 2011 GDP. The worst abuses, however, involve land. Local officials can convert collectively owned rural plots into land for private development. Since farmers cannot sell their land directly to developers, they have
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to accept what the government is willing to pay. Often that is not very much. Such perverse incentives have caused China's towns and cities to grow faster in area than they have grown in population. Their outward ripple has engulfed some rural communities without quite erasing them. The perimeter ofWenzhou city in Zhejiang province, to take one example, now encompasses clutches of farmhouses, complete with vegetable plots, quacking ducks and free-range children. This results in some incongruous sights. Parked outside one farmhouse are an Audi, a Mercedes and a Porsche. Alas, they do not belong to the locals but to city slickers who want their hub caps repainted. Oddly, where electoral reforms have given Chinese villagers a bigger say in local government, growth tends to slow, according to Monica Martinez-Bravo of Johns Hopkins University and her colleagues. This is partly because elected local officials shift their efforts from expanding the economy to providing public goods, such as safe water. But it is also because a scattered electorate cannot monitor them as closely as their party superiors can. Fear of their bosses and hunger for revenues keep local officials on their toes. Mr Guo, star of"The Transition Period", was eventually convicted of bribery. He was not entirely honest in the performance of his duties, and not always sober either. But with all the parties, banquets and karaoke, no one could accuse him of being lazy.
In Defoe's tale, Robinson Crusoe spends five months making a canoe for himself, felling a cedar-tree, paring away its branches and chiselling out its innards. Only after this "inexpressible labour" does he find that the canoe is too heavy to be pushed the 100 yards to the shore. That is not an example of overinvestment (Crusoe did need a canoe), but "malinvestment". Crusoe devoted his energy to the wrong enterprise in the wrong place. It is surprisingly hard to show that China has overinvested, but easier to show that it has invested unwisely. Of China's misguided canoe-builders, two are worth singling out: its local governments (see box) and its state-owned enterprises (soEs). China's soEs endured a dramatic downsizing and restructuring in the 1990s. Thousands of them were allowed to go bankrupt, yet those that survived this cull remain a prominent feature of Chinese capitalism. Even in the retail, wholesale and restaurant businesses there are over 2o,ooo of them, according to Zhang Wenkui of China's Development Research Centre. soEs are responsible for about 35% of the fixed-asset investments made by Chinese firms. They can invest so much because they have become immensely profitable. The 120 or so big enterprises owned by the central government last year earned net profits of 917 billion yuan ($142 billion), according to their supervisor, the State-owned Assets Supervision and Administration Commission (sASAC). It cites their profitability as evidence The Economist May 26th 2012
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