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Rebalancing can wait

10 September 2012 By John Foley

So much for China’s rebalancing. President Hu Jintao has extolled the merits of infrastructure investment at an Asia-Pacific summit, even as the government approved some 1 trillion yuan of local projects, from subways to sewers. The goal of consumption rather than investment driving economic expansion has been put on hold. For now, that’s as it should be.

Investment already makes up 46 percent of China’s economic expenditure. That’s normal in transition economies, but usually falls as industrialisation peaks. Singapore, Korea, Thailand and Japan all reached similar levels before falling back. But China’s investment share has kept growing.

In one sense, China is accepting the inevitable. Rebalancing always looked unlikely in the short term, since consumption in China has stubbornly grown more slowly than investment. In August, retail sales grew 13.2 percent year on year, while fixed asset investment grew 20.2 percent in the period January-August. With the economy slowing and demand from the rest of the world set to remain weak, government-sanctioned infrastructure projects offer the best hope of a quick fiscal boost.

Blindly pursuing rebalancing by shrinking investment might please economic purists, but would make little sense. China already invests less than it saves, producing giant trade surpluses that vex its partners. Cut investment, and all other things being equal, China would export more capital and its trade imbalance would widen.  What’s needed is to promote consumption through higher incomes, which is happening, and a stronger currency, which currently isn’t.

Besides, China still needs investment of the right kind. Transport and basic utilities are lacking. Railway lines per square kilometre, as of 2010, were the same as Vietnam, and about a third the level of India, according to Goldman Sachs. Some twenty-five of the projects announced last week were subways and city transport, according to Nomura – what China needs as it continues to urbanise.

Without doubt, China has made investment errors. A reliance on local bank branches and officials has fuelled overinvestment in sectors like steel, aluminium and real estate. Another round of stimulus would need to be more centrally managed and funded. But if China can manage to generate investment without waste, the economy can be healthily unbalanced for a while to come.


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