Far too much of a good thing
I recently read in an item written in a usually reliable blog, that “China consumed more cement in 2011-2012 than the United States used in the whole of the twentieth century”. There was no source given for this remarkable fact/ statistic, and therefore its credibility must remain in serious doubt. The reason I mention it is because it highlights a genuine, major and extraordinary phenomenon, namely the extent of investment in China in recent years.
It is true that the development of the Chinese economy since the late 1970s is an unprecedented and unparalleled phenomenon. Within this ‘economic miracle’, which has directly affected more people than any other of the ‘economic miracles’ of the twentieth century, the most striking aspect is the centrality of investment within the process of economic development. On the one hand, it is obvious that any backward economy, if it is to progress toward modernity, must be the beneficiary of massive investment — beginning with roads and other transport infrastructure, and including provision of water, electricity, etc. It almost goes without saying that industrialization requires building factories and that urbanization involves building (many) houses or apartment blocks. Then there is so-called ‘soft’ investment, in health systems, education etc.
On the other hand, even for a developing country — even for the biggest, most populous developing country — there can be too much of a good and essential thing. There is today no doubt, among Western analysts and even within the Chinese government, that China over-indulged in investment. The exact extent of the excess is a matter of debate, at least in most sectors. How many multi-lane highways is too many? How many high-speed bullet-trains is too many? And, in case the point is not clear, “too many” is primarily an economic concept — that resources have been expended on a project that will not, ever, justify itself in terms of value created.
But roads, bridges, dams, airports, power stations and even factories are all economic projects whose utility can usually be easily measured. Residential construction — building homes for people to live in — is also a component of “investment” in terms of GDP, whereas buying ownership of an existing house is not an economic investment, because no new asset has been created. Most ordinary people are not aware of that distinction, but the economic logic behind it is unassailable. By extension, if building new homes is an investment, it is possible to have too much of that as well.
This is hardly a theoretical idea. In Las Vegas and in the “Inland Empire” in California, in the previous decade, there was grossly excessive investment in residential construction — as there was in Ireland and, even more grossly, in Spain. Yet all these Western excesses do not begin to match the Chinese experience. Entire suburbs of large cities, and entire cities that sprang out of the countryside, were created in the years following the Chinese government’s decision to prevent the global crisis of 2007/8 dragging the economy down from its then-very-rapid growth. The quantities of cement, as well as copper and many other raw materials, that were poured into this national mega-project were, to use current slang, both “epic” and “biblical” — and then some.
But none of that can change the fact that much, in some places most or even all, of this investment was unnecessary, unjustified and hence a massive waste of resources. Apartments, office blocks and entire cities now stand empty, with no demand for them. The buying boom/ mania in Chinese real-estate, fuelled with seemingly endless amounts of government-provided credit to banks and thence to contractors, companies, households and investors of all sorts, eventually burnt itself out — as booms and manias always do. The government’s efforts to cool the fire it had created, by cutting off or at least reducing the flow of credit, was no doubt a factor in this outcome, but the end would have come sooner or later.
The result is encapsulated in that economic phrase “massive waste of resources”. These resources were paid for with credit and the credit itself was supposed to be repaid from the proceeds of the sale of the projects created from those resources. But the projects can no longer be sold and hence the repayments cannot be made. Up to a point, the government can bail out the borrowers, or at least extend and pretend to cover up their inability to repay. But these efforts also have costs and cannot be continued indefinitely.
Meanwhile, the demand for copper, steel, iron, cement and all the rest plunges in China — and the entire world, from Brazil to Germany to Australia, which has enjoyed years of surging demand, expanding production, rising employment and huge profits, suddenly finds that there is another side to the graph, this one pointing downward.
That is the underlying story of the global economy in 2014 — which was much worse than 2013, when the decline of Chinese economic growth became undeniable and the impact began to hit home. The process is far from complete, indeed it is still unfolding, so the implications going forward are clear, if harsh.