Feb. 9 (Bloomberg) -- Such is the extent of overinvestment in China, say HSBC Holdings Plc economists Qu Hongbin and Sophia Ma, that the municipality of Jian in the southern Guangxi province has built an eight-lane highway in the city center when the whole town has 200,000 people and fewer than 10,000 cars.
Amid all the political frenzy in the U.S. about currency ``manipulation'' by Chinese authorities, a fuller search for the root causes of the global current-account imbalances has prompted researchers to look beyond the exchange rate and focus on savings and investment behavior in China.
The most-populous nation is saving too much even as the U.S. overspends. It's an unstable equilibrium because it's underpinned by unsustainable overinvestment in China.
If investment in the Chinese economy cooled because of state efforts to rein in overcapacity, and if savings remained high, China might end up exporting even greater amounts of capital than the $209 billion it added to its foreign-exchange reserves last year. A lot of it may be expected to go into U.S. debt, the No. 1 choice of central bankers around the world.
That might exacerbate the U.S. current-account deficit. A neat solution to the global imbalances must, therefore, synchronize reductions in Chinese savings with the government's efforts to cut wasteful investments, especially in construction.
``Higher consumption in China should be part of an orderly adjustment process,'' International Monetary Fund Managing Director Rodrigo de Rato said at the University of California at Berkeley last week. He also stressed the need for greater currency flexibility in China and a narrowing of the U.S. current-account and budget gaps.
Savings, Investment
After last month's 17 percent increase in China's 2004 gross domestic product estimate, the investment rate that year could have been anywhere from 36 percent to 40 percent of GDP, according to Goldman Sachs Group Inc.
According to statistics that were available before the GDP revision, China saved about half of its annual gross domestic product in 2004 and invested 46 percent locally. The current- account surplus was, accordingly, 4 percent of GDP.
Instead of clinging to a surplus, a fast-growing China should be able to finance a current-account deficit of an equal magnitude with stable external financing.
With the Chinese central bank set to possess a more-than- comfortable $1 trillion in its foreign-exchange kitty, there's little reason for it to worry about a currency crisis.
China, thus, has scope to reduce its savings rate by 8 percentage points or so without having to sacrifice growth.
The question is how to achieve this shift from investments to consumption in the Chinese economy.
Forced Frugality
Chinese households are forced to be unusually thrifty because banks, which seldom get back the money they lend to state-owned companies, pay too little on deposits.
Investing outside the banking system is considered risky. Illiquid shares of government-controlled companies dominate the stock market.
There are also strict controls on taking money out of the country. Consumer credit is weak, so individuals feel compelled to be frugal to finance big-ticket purchases.
Any automatic reduction in savings because of aging is at least two decades away. The transition to consumption, as HSBC's Qu and Ma point out in their Jan. 10 report, may prove to be easier said than done, unless the government sets the tone by cutting its own savings.
Out of the government's revenue, which last year equaled 19 percent of GDP, consumption expenditure was only 14 percent of GDP. The budget showed a modest 2.1 percent deficit only because large sums were transferred to state-owned enterprises and invested in physical infrastructure, such as roads and ports.
Education
``One thing the government can do immediately to rebalance growth is to reduce its savings and investments and boost consumption expenditure,'' Qu and Ma say.
A frontline candidate for higher expenditure is education.
``With China's government spending on education accounting for only 3 percent of GDP, the lowest among Asian countries, there's a real case for the government to boost spending on education,'' the economists say.
A pay rise for the millions of teachers in remote rural areas who, according to the HSBC researchers, make less than $25 a month will be a consumption item in GDP statistics.
For all practical purposes, it will still be an important investment in China's future growth.
Public spending on education may even become a trigger for increased household consumption in China, the HSBC economists say. If the government spends more on education, families will be able to set aside less for future tuition payments, the No. 1 motivation for household savings in China.
`Costly Mistake'
``China made a costly mistake in the 1990s: It created many world-class facilities but underinvested in education,'' Yasheng Huang, a professor of international management at the Massachusetts Institute of Technology's Sloan School of Management, wrote in the Financial Times last month.
One glaring example of resource misallocation may be the magnetic-levitation, or Maglev, train that connects Shanghai's Longyang Road station to Pudong International Airport, which is less than 20 miles away.
With a top speed of 267 miles per hour (430 kilometers per hour), the Shanghai Maglev might be the world's fastest commercial railway. It's still ``inconvenient and expensive,'' say the HSBC analysts, who estimate the payback period for the investment at 160 years.
Thankfully, education pays back a lot sooner. Otherwise, no one would send their children to school.
No comments:
Post a Comment