China's investments are money to burn
In 1994, Bill Drummond and Jimmy Cauty, the former members of best-selling pop duo KLF and inveterate pranksters, set fire to GBP1 million in cash - today worth more than HK$15 million - on a remote Scottish island. For more than an hour, according to reports, they fed the flames with 20,000 GBP50 notes, until the entire fortune was reduced to ashes.
Judging by the official figures, something similar is going on today in China, only on a vastly greater scale.
Yesterday, the National Bureau of Statistics announced that between them, the government and businesses had invested 2.26 trillion yuan in property, plants and equipment in urban China over the first four months of this year.
To put that amount into perspective, it is 50 per cent greater than Hong Kong's entire expected economic output for the whole of this year.
More to the point, the amount China invested in such urban fixed assets between January and April is up more than 25 per cent over the same four months last year. Considering that fixed asset investment made up half of China's gross domestic product last year, according to official figures, and that investment appears to be growing considerably faster than the overall economy, yesterday's figures should be setting off the alarm bells.
Many analysts believe this scorching pace of investment is unsustainable. They point out that when the investment to GDP ratio has exceeded 40 per cent in other countries, the runaway boom has tended to end in a horrible crash. Thailand, whose investment level topped 40 per cent immediately ahead of the 1997 Asian economic crisis, is frequently cited as a cautionary example.
The danger is that China is investing so much money that a lot of it will never earn a decent return. Instead, it will result in massive over-capacity; factories producing goods no one wants, roads leading nowhere and shopping centres empty of customers.
The efficiency of China's investments is clearly low compared with other Asian economies at similar stages of development. Between 1960 and 1969, for example, Japan managed higher GDP growth rates at far lower investment ratios than China between 1996 and 2005 (see chart). China, it seems, is burning cash on an unprecedented scale.
For now that may not be much of a problem. The mainland's high savings rate is more than able to fund such lavish investment. And there is little sign that excess capacity is squeezing businesses' profit margins. Listed company earnings rose 46 per cent in 2006, and first-quarter earnings for many businesses were double last year's level.
Scarily, however, it is unclear how much of those profit gains were generated by the mainland's surging stock markets, or what proportion of money earmarked for investment in fixed assets was in fact diverted into share speculation.
In the longer run, China's unproductive investments must lead to big losses for the companies, banks and individuals who funded them. In time, they may find out that far from having money to burn, all their investments have gone up in smoke.