China's big spenders on infrastructure must generate better returns
Academics and bankers are split over whether Beijing is spending more than it should on investment, with levels far higher than rivals
SCMP, May 29
The arguments here are easily stated, and we start with the chart because a picture is always worth a thousand words.
The line at the top of the chart shows you that fixed capital formation stands at a record high of 46 per cent of gross domestic product in China. A free bottle of Scotch goes to the first person who can show me any country with a higher ratio.
The bottom line shows you the same ratio for the United Kingdom, a mere 14 per cent of GDP. I don't know if it is possible to get any lower, except, perhaps, by drinking my bottle of Scotch in one sitting. Surely this comparison suggests that China is spending too much on infrastructure and Britain too little.
But perhaps not. China is a poor and developing country. It needs to spend a great deal on infrastructure to provide the framework for greater wealth. Britain has already built its infrastructure and needs only to maintain what it has built.
Perhaps we should measure not just how much capital investment a country makes every year, but its capital stock - the value of all past investment adjusted for depreciation. Do that, we are told, and we may see that China's capital stock per person is as low as 8 per cent of America's. Thus China is still under-invested and should indeed have high ratios of capital investment.
I think this is the wrong way of looking at things. It entirely ignores whether capital investment is efficient, whether it really gives people what they most need at the best prices they can get. Put another way, the real value of any capital investment is a function not of what it cost but of what it gives back to the people who made it.
Let's say you spend US$5 million to build a toll bridge that returns you US$1 million a year. If the prevailing yield on financial assets in your economy is 5 per cent - ie 20 times earnings - this bridge could have a market value US$20 million, four times what it cost you.
If, on the other hand, you are a corrupt official in China, who built this bridge only for his own convenience, won't pay to use it and cannot find anyone else who wants to use it, then the market value of this bridge is zero, no matter how much it cost.
The question then becomes how to measure whether capital investment in China has been carried out efficiently, and there is one obvious benchmark to apply: how much additional activity in other parts of the economy did this capital investment produce?
The answer in China's case is that it has produced ever less activity for every yuan invested. Household consumption has fallen steadily as a percentage of GDP and is now only 35 per cent - less bang for the buck every year.
In other words, high ratios of investment to GDP themselves indicate inefficient allocation of that investment. They can be high for a few years at a time during a big infrastructure drive, but China's have been consistently high and rising.
This suggests poor investment decisions. If they had been good ones, they should by now have produced better results elsewhere in the economy.
But I concede the weakness of my case. The corollary by this measure would be that Britain has the best designed, best built, best located infrastructure in the world. I can only be wrong. I take it back.