Fixed ideas

China can afford to quit infrastructure binge

Headline numbers in China don't always tell the whole story. Fixed-asset investment grew an unexpectedly slow 9.6 per cent in the first five months of 2016. In a country of spendthrift factory managers and bureaucrats, this suggested Beijing was making progress putting the brakes on - so much so that China's stock market dropped in reaction to the data.

In fact, investment by less efficient state-owned enterprises grew more than 20 per cent in the first five months of 2016 while the private sector expanded just 3.9 per cent. Much of this investment will be wasteful and Beijing should instead be closing bleeding SOEs, and rely on the robust job market to absorb those laid off.

Beijing has made all the right noises about cutting overcapacity. But when economic growth threatens to get too sluggish, mandarins across China revert to form, pushing infrastructure investment and prodding state-owned companies to invest more.

After adding in the growth in loans and government bond issuance, adjusted "total social financing", a widely used barometer of investment in China, grew by 17 per cent in May, UBS reckons. Property development grew by seven per cent and housing starts by 18.3 per cent in May in a country already dotted by empty housing estates.

Another way to look at this is to consider gross fixed capital formation which, unlike fixed-asset investment data in China, does not double-count old machinery and buildings if they are re-sold. This has been at more than 40 per cent of GDP for 12 consecutive years.

South Korea and Thailand only managed comparable levels of breakneck investment for eight years before the Asian financial crisis unfolded, according to Real Economics. The firm says it is almost a decade since Wen Jiabao, then premier of China, warned the country's growth path was "unsustainable".

The good news is that the economy created 5.8 million new jobs in the first five months of 2016, a rate faster than that in 2015. This creates room to close smoke-stack factories as the more labour-intensive service sector in China's cities continues to hire. Beijing's fears of social stability being undermined are overdone anyway, because fewer job-seekers are entering the labour market every year.