Wednesday, March 24, 2010
This morning, via Yves Smith, I read a report from Edward Chancellor, China's Red Flags (free registration required) making the case that China is basically a giant speculative bubble that will blow up soon enough to care about. We've discussed this a couple of times in the past (eg here, here, and here). I've been open-minded, but leaning a little away from the bubble hypothesis. However, I have to say that Chancellor's report has me leaning more the other way.
In particular, the graph above is pretty alarming (assuming it's basically accurate - I haven't done anything to verify it myself yet). It basically shows the fraction of production that is going in fixed asset investment - real property, equipment and software, etc. This makes it appear that the ongoing 8-10% growth in GDP is requiring ever more investment to produce it, and the growth in this ratio is clearly unsustainable - an economy in which 100% of GDP is going to investment cannot happen. So this looks like a clear case of Stein's law - "If something cannot go on forever, it will stop". The graph would suggest the existing trend cannot continue more than another 2-3 years at the outside.
I suggest reading the whole thing.