Can China wean itself off its addiction to investment?
Yu Yongding says China needs to reduce its reliance on investment to spur growth, not least in the steel and property sectors. To do so, it can't put off dealing with the problem of overcapacity
China's economy slowed unexpectedly in the second quarter of this year. Just as unexpectedly, most data released since July suggests that China's growth has stabilised. Markets, not surprisingly, have breathed a collective sigh of relief. But should investors still be nervous?
Currently, the most severe problem confronting Chinese authorities is over-capacity. For example, China's annual production capacity for crude steel is close to one billion tonnes, but its total output in 2012 was 717 million tonnes - a capacity utilisation rate of about 72 per cent.
The profit on two tonnes of steel was just about enough to buy a lollipop
More strikingly, the steel industry's profitability was just 0.04 per cent in 2012. Indeed, the profit on two tonnes of steel was just about enough to buy a lollipop. The average profitability of China's top 500 companies was 4.34 per cent in 2012, down 33 basis points from a year earlier.
Some say that today's overcapacity is a result of China's past overinvestment. Others attribute it to a lack of effective demand. The government seems to come down in the middle.
On the one hand, the government has ordered thousands of companies to reduce capacity. On the other hand, it has introduced some "mini-stimulus" measures, ranging from exemptions from business and sales taxes to pressure on banks to increase loans to exporters.
The official line is that China's growth model requires less investment and more consumption. But not all Chinese economists agree. They argue that capital stock is the key factor for growth and that China's per capita capital stock is still low relative to developed countries.