Sober view required of spending binge that risks inflation hangover

'Beijing's efforts to control growth in fixed-asset investment paid off last year, with the latest official figures showing growth of 25.8 per cent to 7.01 trillion yuan, 1.9 percentage points down on the growth rate in 2003.'

South China Morning Post

January 26

OKAY, BOSS, I KNOW it is not a done thing to pick on our own troops but, honestly, this is like saying that an alcoholic's efforts to control his addiction have paid off because he has brought his average intake down from 2.7 bottles of gin a day to 2.5.

By any benchmark the mainland's investment in fixed assets is huge both in absolute terms and in the pace at which it is expanding. That growth rate of 25.8 per cent is well above the nominal growth rate of the economy and, actually, surprisingly high for a period during which Beijing said it wished to rein growth back.

Let us put it into perspective. The first chart shows you fixed-asset investment as a percentage of gross domestic product in the mainland and, for purposes of comparison, the equivalent ratios for the United States and Britain.

I fully recognise that this is to some extent a case of comparing apples and oranges. Developed economies do not need such heavy capital investment. They have already built most of their required infrastructure and their industries tend to grow more slowly, thus needing less capital expansion.