Fixed asset investment -- investment in such things as factories, power plants, roads, and new buildings -- was 26.1% higher at the end of July 2007 than it was at the end of July 2006. This is good news relative to June's 28.4% rise, but all the caveats we discussed in the rise in investment output (see entry for August 14) apply here too. The July number is barely below the too-high 26.7% achieved in the first half of the year.
By the way, even if the numbers do come down dramatically, it seems to me that, like credit expansion and money expnasion, FAI is both a stock and a flow problem. Previous bouts of exess investment pile up unnecessary production facilities, inventory, and so on, and in order for the economy to adjust fully, it is not enough to slow down to some theoretically reasonable pace commensurate with sustainable growth. I would argue that FAI would have to grow below this "reasonable" pace in order to allow the economy to absorb the previous excess production (or write it off).
Your point that the large existing stock implies a period of below average flows is an important one. Suppose there is a payback for overinvestment. Investment mechanically would not contribute as much to growth during that period. How do Chinese policy makers respond?
I am not sure how they plan to respond, but I am doubtful that they have a lot of tools. The obvious response to a slowdown caused by the overinvestment "payback" is fiscal. For a system obsessed with maintaining employment, any slowdown would have to matched by an expansion somewhere else. I think, however, that total debt is already quite high -- probably well over 60% of GDP if you include contingent liabilities through the banking system, and these liabilities would almost certainly rise in a slowdown. The government doesn't have the room that Japan did in 1990 for fiscal expansion. The other obvious option, to force export expansion by devaluing, would probably be very hard to pull off without enfuriating the trading partners.
Michael Pettis is a professor at Peking University's Guanghua School of Management, where he specializes in Chinese financial markets. He has also taught, from 2002 to 2004, at Tsinghua University’s School of Economics and Management and, from 1992 to 2001, at Columbia University’s Graduate School of Business. He is a member of the board of directors of ABC-CA Fund Management Co., a Sino-French joint venture based in Shanghai.
Pettis has worked on Wall Street in trading, capital markets, and corporate finance since 1987, when he joined the Sovereign Debt trading team at Manufacturers Hanover (now JP Morgan). Most recently, from 1996 to 2001, Pettis worked at Bear Stearns, where he was Managing Director-Principal heading the Latin American Capital Markets and the Liability Management groups. He has also worked as a partner in a merchant banking boutique that specialized in securitizing Latin American assets and at Credit Suisse First Boston, where he headed the emerging markets trading team. Besides trading and capital markets, Pettis has been involved in sovereign advisory work, including for the Mexican government on the privatization of its banking system, the Republic of Macedonia on the restructuring of its international bank debt, and the South Korean Ministry of Finance on the restructuring of the country’s commercial bank debt.
Pettis is a member of the Institute of Latin American Studies Advisory Board at Columbia University as well as the Dean’s Advisory Board at the School of Public and International Affairs. He is the author of several books, including The Volatility Machine: Emerging Economies and the Threat of Financial Collapse (Oxford University Press, 2001). He received an MBA in Finance in 1984 and an MIA in Development Economics in 1981, both from Columbia University.
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Comments (2) for "In July FAI rose 26.1% year ...
- 8/16/2007 12:47 PM
January, 2008