Speedometer useless when driving blind

'We will not use ... measures such as cutting or braking. We will properly calibrate our speed'

Ma Kai

State Development and Reform Commission

HOW WONDERFUL IT would be if an economy could be steered, speeded up and slowed down just as easily as a car. The authorities in Beijing certainly give the impression that they think it can be.

Mr Ma's first problem is that he cannot even be sure that he has his speed properly calibrated when the head of the national statistical agency has already several times confessed that there are grave deficiencies in the present measurement of the mainland's economic performance.

And even if he had this measurement properly calibrated, it would tell him only how fast he was going, which is all very well, but do not put me in a car with a driver who thinks that seeing the speedometer is the only skill he needs to stay safely on the road.

For all that he may claim to forswear the use of brakes, however, it was applying brakes to the growth of the economy that Mr Ma had in mind on Monday. His concern is that investment in some sectors of the economy, particularly steel, electricity and cement, has grown much too quickly and could invite boom and bust conditions again.

Well, yes and no. Here is another way of looking at it. The first chart shows you the level of fixed asset investment in raw material industries and, indeed, it indicates explosive growth over the past two years.

But now look at this in the perspective of the entire economy and the picture changes. The second chart tells you that the numbers are actually quite small as a percentage of gross domestic product and seem to be making up ground earlier lost only when the focus of attention turned to manufacturing industries.

There is a story you could easily construct from this. The mainland has become one of the world's biggest raw material importers through the requirements of its manufacturing industries and raw materials prices have shot up recently, putting a squeeze on margins. In that case why not internalise more of the sourcing of raw materials? Is it such a bad idea to invest more in raw material production?

Of course, there may be other ways of looking at it. What if the mainland has created its own margin squeeze problem by overproduction in state-owned industries? You could then quite easily see why its finished goods prices would not rise (they are still falling in export markets) while raw materials prices would go up with the heavy demand for inputs.

In that case, further investment in raw materials production would be exactly the wrong solution. It would only perpetuate the problem and be a classic case of pouring in good money after bad. The proper solution would be to put state-owned industries on a proper market footing at a faster pace than is now purportedly being done.

There are certainly levels of investment at which people begin to question whether a sufficient return is being generated and when 47 per cent of a nation's gross domestic product is absorbed by overall capital expenditure, as the mainland's was last year, you do have to wonder whether the money is being used as judiciously as it should be. On balance, the second of my two scenarios is more likely.

But the point is, I cannot be certain. The economic figures are not comprehensive or reliable enough to make that judgment, which brings me back to Mr Ma's talk of proper calibration of speed and his allusion that Beijing can actually control these things as a driver does a car.

Surely the first requirement of driving a car is that you should be able to look through the windshield at where you are going. I wonder, however, whether these supposed masters of fine tuning in economic direction have even got that far yet.