A number of writers have asked in recent times, including this one, whether China is doing enough to slow its rate of fixed asset investment.
The headline numbers look bad, with growth in fixed asset investment (FAI) hitting 27.7% in the first quarter, well above the government’s 18% target and almost three times the pace of overall GDP growth.
China’s response? A measly 27 basis points increase in lending rates to 5.85% in April, and a few property measures aimed at dampening speculation. With the central bank failing to reach for the panic button, we all hold our breath and wait for the investment bubble to burst.
But perhaps we don’t need to be quite so worried. A June 6 Asian Focus report by Jonathan Anderson, the chief Asia economist for UBS, points out some very good reasons for the People’s Bank of China’s inaction. Simply put, they know something the rest of us don’t or, more accurately, should know but have forgotten.
Headlines lie, and in China’s case they lie more than others. The main reason to ignore the headline FAI numbers, writes Anderson, is that they are not FAI numbers at all. This is because the monthly National Bureau of Statistics investment survey includes all corporate investment spending, including secondary asset purchases such as land, property, corporate acquisitions, and so on, which are excluded under the economic definition of FAI.
The monthly UBS China by the Numbers publication adjusts official figures for the estimated impact of secondary asset transactions, and puts the real figure closer to 15% than 30%.
Investment still represents around 40% of GDP, which is rampant by Western standards. Again, Anderson has an explanation. In the West, gross domestic savings rates are roughly in line with the investment ratio. The same is true for China today. Because they save more, they can maintain an investment ratio that looks suicidal by western standards. A high investment/GDP ratio could mean unsustainable overinvestment, or it could just be a reflection of high savings and growth. Again, looking at the headlines doesn’t help.
The true measure of over-investment is sharply falling profits and rising inventories at home. According to Anderson, profit and inventory data shows China is doing just fine. The composition of FAI has also shifted from the overheated industrial investment of 2003, to material-intensive infrastructure spending today and a slowing in heavy industrial capacity growth.
Anderson’s advice? Forget the headline investment numbers. Watch credit growth, watch profits, watch inventories, construction, import and export trends.
And if you insist on worrying about fixed asset investment, worry about the real numbers, not the headlines.