Shift in fundamentals will avert crisis

'The fundamentals for the mainland's stable, relatively fast economic growth in the medium to long term haven't changed.'

Ma Jiantang, commissioner
National Bureau of Statistics

My colleague Tom Holland made mention of it in the Monitor column yesterday but I think it needs emphasis. For every bang of economic growth it generates, the mainland needs ever more buck of investment effort and the latest figures suggest things are getting worse.

This is a phenomenon that two American economics professors, Alwyn Young and Paul Krugman, pointed out in Singapore some years back (to much Singapore government protest). Total factor productivity they called it. Less bang for the buck works better for me and, yes, Singapore still suffers from it too.

The first chart tells the story. The top line in the red says that total fixed-asset investment in the mainland ran last year at 73.6 per cent of gross domestic product. This is a ridiculous figure and mostly because this has been made a ridiculous statistic. Local authorities have become ever more inventive in what they call investment. At this rate the capital investment component of GDP will exceed GDP itself in six years. Fundamentals, Mr Ma?

The blue line shows you that the more conservatively stated fixed-capital formation is only a sliver away from 50 per cent of GDP. There is still an element of what we might call 'subjective appraisal' here although it is at least closer to how other countries define capital investment.

But it remains very high by the standard of other countries. For the rest of developing Asia, the ratio is 30 per cent at most, for developed countries perhaps 20 per cent. In Britain it is 15 per cent.

The argument is that developing countries need more capital investment to build the infrastructure that developed countries already have. This may be true but the figures for the mainland are still very high by any standard and still indicate that the benefits of all this investment are very slow in arriving.

As an indication of it, the share of household consumption in the economy, the green line in the chart, has declined over 10 years from 45 to 32 per cent of GDP.

I shall put it another way. In 2000 there was 76 yuan of capital investment for every 100 yuan of household consumption. Last year, it took about 153 yuan of capital investment to achieve the same consumption result. That's pretty good evidence of a steep decline in bang for the buck.

The second chart gives you another comparison. The green line is once again the mainland's household consumption as a percentage of GDP. The blue line is the equivalent for Singapore.

And this introduces a question. If sacrifice of immediate personal reward in favour of higher capital investment is the price of going from a poor to a rich economy, why does a rich place like Singapore still have to do it?

The answer is that these high capital investment ratios have actually more to do with an odd notion on the part of foggy-minded, under-challenged politicians that big investment always gives you big growth and that a big growth number is the purpose of life.

For a more balanced view of life, look at the red line on top of the chart. This is the ratio of personal consumption expenditure to GDP in Hong Kong. We put our investment dollars to uses that give us better returns.

Mr Ma is absolutely right. The fundamentals in the mainland have not changed. But if they do not start doing so soon the mainland will have a financial crisis on its hands, not continued rapid growth.