Tuesday, August 18, 2015

Overbuilding

"Hope tastes good - like a cigarette should."
--Dr Yen Lo (The Manchurian Candidate)

The 21st century has been hailed as belonging to China. Social and economic reforms coupled with a huge population have vaulted China into the number two spot in GDP (~$10 trillion). As the human mind is prone to do, it is easy to extrapolate recent performance into the future and predict a dominant position for China in upcoming decades.

However, people tend to forget that, despite some positive market reforms, China remains a centrally planned economy. And central planners tend to make big mistakes when allocating capital--mistakes that impair standards of living for prolonged periods.

A classic example of this is becoming evident in Chinese infrastructure and real estate. Chinese consumption of building materials has been eye popping. For example, in three years China is estimated to have used more cement than the US used in the entire 20th century.


China's 'ghost cities' as profiled on 60 Minutes and elsewhere suggest that central planners have employed these building materials in the construction of massive infrastructure and real estate projects that are vastly underutilized. An eye-popper for me are these two pics showing Shanghai's financial district in 1987 (top) and 2013 (bottom).



One consequence of this overbuilding is that China's economic statistics look better than they actually are. For instance, massive construction spending has surely goosed China's GDP numbers--even if the fact of the matter is that many of those building projects have little economic utility.

Huge misallocation of capital by its central planners positions China (and the world) for the inevitable bust that follows the bureaucrat's misguided boom.

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