Has China really over-invested that much? – Deutsche Bank

Tim Baker, Strategist at Deutsche Bank, explains that the Chinese over-investment thesis is well known – it’s hard to find any other country that has experienced such a high capex/GDP ratio for a consistent period.

Key Quotes

“Not even East Asian peers like Japan and Korea reached capex/GDP above 40%. But national accounts statistics aren’t always readily comparable. Another way to glean some insight on investment levels is steel consumption, which has the advantage of being more transparent and easily measured.”

“Interestingly, the data on steel consumption per person tells a far less concerning story for China. China’s steel consumption per person isn’t particularly high. It’s around 20% lower than where Japan was during its development phase. And it’s also 20% below where the US sat in the 1960s/70s. Of course, a large exporter (like Korea and Taiwan now) would use a lot of steel per person, and a large domestic population weighs on China’s export/GDP ratio. But even so, it sits above levels reached by Japan and the US. Another piece of evidence comes from rail usage statistics. China is an outlier in how heavily they use their rail for freight and passengers. Again, there seems little sign of over-investment in aggregate.” 

“It’s possible that steel is used more efficiently these days than in the past, in part because aluminium can be a substitute in some cases. But going the other way, given China builds ‘up’ (high-rises), rather than ‘out’, steel intensity could be higher (ie, more steel per square metre of space).” 

“What does it mean for FX? If Chinese over-investment isn’t such a big problem, the transition towards the consumer is less likely to be sharp and dislocating. That should be supportive for commodity prices, and commodity currencies (such as AUD) by extension.”