China: Now and the Future

On March 14, 2011, China passed its twelfth “Five-Year Plan” which aims to address the rising social inequality, create a more sustainable growth, stimulate internal consumption, and improve the distribution of wealth.

The plan, in other words, seeks to rebalance China’s economy by changing the focus from investment to domestic spending and shifting emphasis from urban development to rural growth.

But looking at the nitty-gritty of the plan reveals that there’s really hardly any change from what China is currently doing. China will still be relying heavily on investment (e.g., building of houses, highways, high-speed railway, new airports) to support growth instead of encouraging consumer consumption.

In China, consumer spending only accounts for 36% of its GDP, which is dwarfed by the United States‘ 70%. On the other hand, fixed investment comprises a whopping 50% of GDP.

Fifty percent is a huge number. No country can be industrious enough to take in that kind of investment without encountering overcapacity, and China is not an exception. Visit China and you’ll understand what I mean. You’ll see highways that lead to nowhere, malls with no retailers, government buildings with no one working in them, and airports with no planes.

In Dongguan, you will see the largest mall in the world which has been 99% vacant since its opening back in 2005. It reminds me of what Cyclopip used to tell me when he began trading on a small account – “It’s not the size that matters, but how you use it!”

In Kangbashi, a district in the Chinese city of Ordos, you’ll find an urban center for a coal-mining community. It was originally created to support around a million people, but hardly anyone resides there. Just google “China’s ghost cities” to see exactly what I’m talking about!

Looking into China’s Future

Chances are, China’s overinvestment will do more bad than good. You can’t just keep making bad investment decisions and expect to flourish, now can you?

China is on track to hit a major growth speed bump because at some point in time, increasing its fixed investment will become impossible. There’s a very real chance that it’ll fall hard on its butt sometime after 2013 because of this. Need proof? Take a look at what happened to Japan!

Because of Japan’s excessive investment in the late 1980s, financially savvy players were forced to look abroad for new investments. What followed was a huge slowdown in domestic fixed investment, which drastically hurt its manufacturing industry. This was one of the biggest factors that led to Japan’s “Lost Decade” – a period in time wherein the average annual growth was just 1.7%.

To avoid a fate like Japan’s, China will need to do a number of things. It will have to cut back on its fixed investments, beef up household spending, and reduce its reliance on exports.

It seems like quite a tall order, but China can accomplish these by increasing wages and allowing the yuan to appreciate. Increasing wages would do well to boost consumer spending, while the yuan’s appreciation would address China’s over-reliance on exports.

Yeah, I know doing this is easier said than done, what with China being so headstrong in its refusal to let the yuan rise. But considering what’s on the line, I think it’s a pretty sweet deal that China should jump on.