The View | Things could be worse for China: just ask Brazil
Underinvestment in infrastructure worse than an asset bubble
China has so far avoided the thunderous crash many have long expected, given its multi-year investment spending boom of historic proportions.
A crisis might still be in the cards but, meanwhile, let’s shift our gaze to Brazil. That country’s recent woes offer a reminder that as economic planning mistakes go, there may be worse things than an asset bubble, even one as grand as China’s, with its overlapping infrastructure from cement to steel-making, bullet trains competing with mushrooming airports, and thousands of kilometres of quiet, scarcely used highways.
And that worse thing may be the opposite: underinvestment in infrastructure.
At a quick glance, it would seem that Brazil is simply a victim of China’s declining appetite for commodities. In fact, if it were not for the woeful state of its infrastructure, the resource-blessed country would be dealing much better with the collapse in global commodity prices.
Credit Suisse has estimated that Brazil’s inadequate capital stock subtracts 10 per cent to 15 per cent from the country’s potential gross domestic product. The real killer, however, is the effect that bottlenecks and supply constraints have on inflation.
Brazil is dealing with double-digit inflation, which has forced the central bank to tighten monetary policy even as unemployment is on the rise
Overcapacity in China is deflationary: the risk is that with falling prices, heavily indebted companies will not be able to repay debt, kicking off a debt deflation cycle that ends in crisis. This is a classic dilemma but at least it has a classic solution: the Chinese central bank has been able to respond to deflation and slowing growth by easing policy rates. Indeed, some China optimists are already starting to throw around the term “deflationary boom”.