World Economy

Chinese Economy Facing $6.8t in Wasted Investments

Chinese Economy Facing $6.8t in Wasted InvestmentsChinese Economy Facing $6.8t in Wasted Investments

Ghost cities lined with empty apartment blocks, abandoned highways and mothballed steel mills sprawl across China’s landscape – the outcome of government stimulus measures and hyperactive construction that have generated $6.8 trillion in wasted investment since 2009, according to a report from China’s National Development and Reform Commission and the Academy of Macroeconomic Research.

The report says that amount has been “ineffective investment.” That’s two years of output for the entire German economy. It’s more than four times as much as is invested in S&P 500 index funds, Business Insider reported Friday.

Even in the enormous Chinese economy, that’s practically half of the investment between 2009 and 2013, the period covered by the investigation. This is likely to have pretty grim effects on Chinese economic growth in the years ahead.

  Wasted Investment

Investment of whatever variety initially shows us up in GDP figures. For example, the spending on building a bridge. Initially, the bridge construction will boost GDP simply because of the spending needed to finish it.

But after that, the economic effect of the bridge depends on a lot: Where is it from? Where does it lead to? If it’s a useful investment, it could keep boosting spending by making consumers’ journey to a city less arduous, and allowing them to go to the shops more often. If it’s a bridge to nowhere, it’s not likely to have that effect, and will simply be a waste of resources without any positive growth effect in the future.

The authors are blaming the investment on low interest rates and other forms of government stimulus, suggesting that there’s been a sort of malinvestment. The country’s deserted ghost cities are probably the ultimate symbol of this wasted investment.

The People’s Bank of China just slashed interest rates, and it looks like there’s probably more coming. The economy has slowed significantly in recent years: The government now targets a growth rate of 7.5%, well down from the double-digit rates seen before the crisis, and many analysts believe they will struggle to even reach that.