China has reported annual growth rates since the panic of 2008 of between 6.7% and 12.2%, with a steady downward trend since early 2010.

If China’s growth engine is running out of steam, as I’ve described, how has China managed to maintain such relatively high growth rates?

The answer is contained in three key words: debt, deflation and waste.

Waste is a blunt word referring to non-productive investment. The investment component of China’s GDP is about 45% of the total. Most major economies show about 25% to 35% for investment.

But at least half the Chinese investment is wasted. It goes to projects that will never produce an adequate return, either on an absolute basis or relative to alternative uses of the funds.

If this wasted investment is subtracted from GDP, similar to a one-time write off under general accounting principles, then 8% growth would be 6.2%, and 6% growth would be 4.7%. There are other distortions in Chinese growth figures, but wasted investment is one of the most glaring.

A simple example will make the point. During a recent visit to China I took the high-speed train from Beijing to Nanjing and passed through the magnificent new Nanjing South train station.

The train had the smoothest, quietest ride I’ve ever experienced even at speeds of 305 kph. The noisy clickity-clack of Amtrak’s Acela service from New York to Washington seems like a Wells Fargo stagecoach ride through the Old West compared to the Chinese railroad.

The train station was over a quarter-mile from one entrance to the other side, and had marble floors, high ceilings, expensive boutiques and over 128 escalators that all functioned perfectly.

There’s only one problem. My ticket cost about $30. Tickets on Amtrak for a ride of similar duration cost about $250, and Amtrak losses money.

There’s no way China can pay the costs of building and operating its railroad system with such inexpensive tickets.

But the Nanjing South train station project did create 20,000 construction jobs for over two years. That really is the point. China needs to find jobs for the millions of workers arriving from the countryside looking for work.

Failure to generate those jobs could result in social instability, riots, and attacks on the legitimacy of the ruling Communist Party of China. As a result, China borrows the equivalent of billions of dollars to finance white elephant and prestige projects that create jobs with little thought given to how the debt will be repaid.

 

The Whole Truth And Nothing But The Truth,

Jonathan Chambers