1/7
Chinese regulators are putting ever more pressure on property developers to constrain the debt needed to fund their activity. Why? it must be because they don't think this activity contributes to real growth in the...
bloomberg.com/news/articles/…
Chinese regulators are putting ever more pressure on property developers to constrain the debt needed to fund their activity. Why? it must be because they don't think this activity contributes to real growth in the...
bloomberg.com/news/articles/…
2/7
economy, even though it is a major contributor to reported GDP. As the article points out, "real estate contributes to about 29% of China’s economic output if its wider influences are factored in, according to a joint research by Harvard University and Tsinghua University".
economy, even though it is a major contributor to reported GDP. As the article points out, "real estate contributes to about 29% of China’s economic output if its wider influences are factored in, according to a joint research by Harvard University and Tsinghua University".
3/7
This is the part that I think most analysts still fail to grasp. After all these years they treat this activity as if it continued to be as economically valuable in China as it had been two decades ago, and as it would be in other countries, and yet Beijing clearly isn't...
This is the part that I think most analysts still fail to grasp. After all these years they treat this activity as if it continued to be as economically valuable in China as it had been two decades ago, and as it would be in other countries, and yet Beijing clearly isn't...
4/7
acting as if it still believed that it is.
And Beijing is right: the fact that the debt associated with this kind of investment has been rising so much faster than its GDP contribution over the past 10-15 years is prima facie evidence of malinvestment.
acting as if it still believed that it is.
And Beijing is right: the fact that the debt associated with this kind of investment has been rising so much faster than its GDP contribution over the past 10-15 years is prima facie evidence of malinvestment.
5/7
What's more, when analysts argue that China will be able to maintain its high-investment growth strategy because it has promised to shift all of the existing malinvestment into productive areas, like the high-tech sector, they obviously haven't done the math, or understood...
What's more, when analysts argue that China will be able to maintain its high-investment growth strategy because it has promised to shift all of the existing malinvestment into productive areas, like the high-tech sector, they obviously haven't done the math, or understood...
6/7
what drives China's investment process, nor have they looked at the historical precedents and wondered why the same promise, made in every previous case in recent history, always proved impossible to fulfill. The amount of bad investment in Chinese infrastructure and...
what drives China's investment process, nor have they looked at the historical precedents and wondered why the same promise, made in every previous case in recent history, always proved impossible to fulfill. The amount of bad investment in Chinese infrastructure and...
7/7
property easily overwhelms the amount of investment that can be productively absorbed by the high tech sector or other parts of the economy, even if we assume that there are no frictional costs (above all politcal costs) to engineering such a shift.
property easily overwhelms the amount of investment that can be productively absorbed by the high tech sector or other parts of the economy, even if we assume that there are no frictional costs (above all politcal costs) to engineering such a shift.
1/9
Several people have asked me to explain the following: "the fact that the debt associated with this kind of investment has been rising so much faster than its GDP contribution over the past 10-15 years is prima facie evidence of malinvestment."
Several people have asked me to explain the following: "the fact that the debt associated with this kind of investment has been rising so much faster than its GDP contribution over the past 10-15 years is prima facie evidence of malinvestment."
2/9
My point is pretty straightforward. When debt is used to fund investment that is economically viable, the associated debt-servicing capacity – including externalities, in the case of a country – must rise at least as quickly as the debt itself over some reasonable...
My point is pretty straightforward. When debt is used to fund investment that is economically viable, the associated debt-servicing capacity – including externalities, in the case of a country – must rise at least as quickly as the debt itself over some reasonable...
3/9
timeframe (that is one way of defining economically viable investment). Because a country's GDP is supposed to be a proxy for its debt-servicing capacity, In that case the debt used to fund investment shouldn't force up that country's debt-to-GDP ratio.
timeframe (that is one way of defining economically viable investment). Because a country's GDP is supposed to be a proxy for its debt-servicing capacity, In that case the debt used to fund investment shouldn't force up that country's debt-to-GDP ratio.
4/9
But if over a 10-15 year period the debt is associated with a sharp rise in the country's debt-to-GDP, as has certainly been the case with China, then the debt funding these investment projects must be rising faster than the associated increase in debt-servicing capacity.
But if over a 10-15 year period the debt is associated with a sharp rise in the country's debt-to-GDP, as has certainly been the case with China, then the debt funding these investment projects must be rising faster than the associated increase in debt-servicing capacity.
5/9
In that case the investment can't have been economically viable. That's why I argue that in a country like China, a sharp and persistent rise in the country's debt-to-GDP ratio is prima facie evidence of malinvestment, but isn't in a country like the US. In the former it...
In that case the investment can't have been economically viable. That's why I argue that in a country like China, a sharp and persistent rise in the country's debt-to-GDP ratio is prima facie evidence of malinvestment, but isn't in a country like the US. In the former it...
6/9
is associated with the capitalizing of what should be an expense, and in the latter it isn't.
Consider that during the 1990s and early 2000s, contrary to what most analysts think, Chinese debt rose very quickly, but no one noticed it because China's debt burden didn't rise.
is associated with the capitalizing of what should be an expense, and in the latter it isn't.
Consider that during the 1990s and early 2000s, contrary to what most analysts think, Chinese debt rose very quickly, but no one noticed it because China's debt burden didn't rise.
7/9
Why didn't anyone notice it? Because China had huge unfunded investment needs at the time, and so on average the debt funded economically viable projects. As a result debt-servicing capacity – and China's GDP – rose as quickly or more quickly than the debt itself.
Why didn't anyone notice it? Because China had huge unfunded investment needs at the time, and so on average the debt funded economically viable projects. As a result debt-servicing capacity – and China's GDP – rose as quickly or more quickly than the debt itself.
8/9
But by the early 2000s the growth in debt accelerated just as GDP growth began to decelerate, and the former began growing much faster than the latter. That is when it should have become clear to everyone (it didn't) that China was falling into the same trap as every other...
But by the early 2000s the growth in debt accelerated just as GDP growth began to decelerate, and the former began growing much faster than the latter. That is when it should have become clear to everyone (it didn't) that China was falling into the same trap as every other...
9/9
country that followed this investment-led growth model: it became reliant on a rising debt burden to maintain acceptable GDP growth rates, and it began systematically overstating the growth in GDP relative to the growth in the real debt-servicing capacity of the economy.
country that followed this investment-led growth model: it became reliant on a rising debt burden to maintain acceptable GDP growth rates, and it began systematically overstating the growth in GDP relative to the growth in the real debt-servicing capacity of the economy.
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