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No easy answer to how much fixed capital China requires

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Why you can trust SCMP
Tom Holland

If there's one question bothering China analysts at the moment, it has to be: 'How much investment is too much?'

Naturally, there are two opposing views, and as ever, the gap between them is a mile wide.

The sceptics are troubled because they believe China is overinvesting. They point out that last year the country's gross fixed-capital formation - which includes investments in factories, infrastructure and the like, but not real-estate transactions - topped 49 per cent of gross domestic product.

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They point out that other major East Asian economies never approached such a high proportion of investment, even in their most rapid phases of development. Japan's investment to GDP ratio, for example, peaked at 36 per cent in 1973, while South Korea's topped out at 39 per cent in 1992 (please see the first chart).

That China's investment ratio has far exceeded those levels, say the sceptics, is a clear signal of overinvestment. They argue that capital is being misallocated to wasteful projects that will never generate an economic return, foreshadowing a future debt crisis.

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Nonsense, retort the China enthusiasts. For one thing, they say that China's real investment ratio is nowhere near as high as the official figures imply, because government statistics fail to capture a significant proportion of private consumer demand.

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