List of non-performing assets lengthens as edifice complex builds up
Earlier this month, the foreign ministers and central bankers of the world's 20 largest economies were obliged to descend on the nondescript town of Xianghe, located just outside Beijing, for the annual G20 meeting.
The venue was the Grand Epoch City, a tacky replica of the original Summer Palace, which was burned to the ground by French and British troops in 1860.
The project cost three billion yuan to build and is an ironic testament to one of the main discussion topics at the conference - China's inefficient allocation of capital.
According to staff at the complex, the only time they have any guests is when the government compels foreign dignitaries or state-owned enterprises to hold a conference there. The venture is a giant non-performing loan in the making and a salutary reminder of the extremely high proportion of fixed-asset investment in China's GDP.
According to the latest official statistics, investment in fixed assets such as factories, roads - and replicas of the old Summer Palace - made up 54.8 per cent of gross domestic product in the first three quarters. Using comparable calculations, most Organisation for Economic Co-operation and Development countries and emerging markets have fixed-asset investment of less than 30 per cent of GDP. The question in China is where demand is going to come from to provide returns on all that investment.
The Xianghe project was funded by cheap loans from state-owned banks awash with money, in part thanks to China's famously high savings rate which is about 44 per cent, according to Asian Development Bank economist Zhuang Jian. By comparison the US savings rate is 18.2 per cent, Japan's is 23.9 per cent and the world average is 19.9 per cent.
For years now, the Chinese government has been saying the masses must save less and spend more if the economy is to continue its rapid growth in a sustainable and healthy way.
During his tour last week, US Treasury Secretary John Snow added his voice to the chorus calling for greater consumer spending and less fixed-asset investment, arguing that more Chinese consumption would mean more demand for American goods.
'It is very hard to encourage consumer demand by decree,' BNP Paribas economist Chen Xiandong said. 'The government will probably have to tolerate continuously high levels of investment growth even though we all know investment efficiency is very low. This will cause a lot of capital waste but it is a necessary evil if overall growth is to continue.'
As for government initiatives, fiscal reforms and establishing a functioning consumer credit industry will be priorities over the next year or so, according to ING economist Tim Condon. 'Raising the personal income tax bracket is clearly designed to put more money in consumers' pockets and encourage them to spend,' he said.
But a major reason for the inordinately high savings rate is the dilapidated state of the public health and education sectors.
'When people are constantly worried about paying doctor's bills and school fees they are not about to increase their discretionary spending,' Mr Condon said.
The Asian Development Bank and the International Monetary Fund both advocate government commitments to improving health and education as a way of lifting consumer spending.
Consumer-related credit makes up slightly more than 10 per cent of total bank loans in China, according to China International Capital Corp, compared with 50 per cent in Hong Kong.
The government is in the process of building a nationwide credit database but progress is slow and it will be a long time before consumer credit becomes the norm in China.
In the meantime, infrastructure projects like Grand Epoch City will continue to spring up and the government will continue to do what it can to keep such projects off the list of non-performing assets.
