Sunday, April 24, 2011

President Hu addresses convention marking Tsinghua's centennial celebration



The address celebrating Tsinghua's centennial by President Hu can be viewed here.

http://english.cntv.cn/program/newsupdate/20110424/102980.shtml

In the address President Hu underlines and reaffirms the importance of creating an "innovation" economy to the future success of China.  Stating that only by making greater investments in human capital and encouraging innovation will China be able to grow further into the future and become a "moderately wealthy" country.

The other issue that Hu's speech addresses that is of interest to me is the admittance that China's educational, and university educational system in particular is in need of improvement on many levels to become internationally competitive.

Monday, April 18, 2011

Nouriel Roubini's thoughts on China's future growth. Long term... not that good.

Just another housing development in the city of Shijiazhuang, Hebei province.  Some are concerned that there is an increasing level of overcapacity in the Chinese housing market that is fueling a property bubble.  Others disagree that there is any over capacity at all as the largest rural-urban migration in history continues in China.


Recently Nouriel Roubini, the famously pessimistic economist that very accurately predicted the 2008 economic crisis, wrote an article on China's mid to long term economic prospects.  His conclusion?  Well with a heading like "China's Bad Growth Bet" its not surprising that the country's economic future might not be as rosy many of us would like to believe.  In an article published first on Project Synidcate and then on Al Jazeera four days later he argues that due to rapidly increasing levels of over capacity -which is in turn due to consistently massive investments in capital stock- the country is likely to fine its economic growth suddenly hitting a wall.  Instead of a gradual slowdown in economic growth the decline will be sudden and painful.  As Roubini says:
The problem, of course, is that no country can be productive enough to reinvest 50 per cent of GDP in new capital stock without eventually facing immense overcapacity and a staggering non-performing loan problem. China is rife with over investment in physical capital, infrastructure, and property. To a visitor, this is evident in sleek but empty airports and bullet trains (which will reduce the need for the 45 planned airports), highways to nowhere, thousands of colossal new central and provincial government buildings, ghost towns, and brand-new aluminum smelters kept closed to prevent global prices from plunging.

Its interesting to note that this observation of rampant overcapacity as a constant factor of China's economic growth was also noted by Jack Perkowski (the founder of ASIMCO) in his outstanding book about his experiences in setting up his firm in China in the 1990s.  Perkowski notes the massive overcapacity of Chinese steel producers in China during the 1990s and points out why this is such a persistent factor of China's economic development. This does lead one to question weather this feature of overcapacity is just a normal component of China's economic development that has been around for a while and will just be shrugged off like it has in the past as either demand expands to meet the overcapacity or banks and industry get rich enough, due to the overall increasing prosperity of the country, to afford to write off the bad investments. 

However Roubini's core point that no one can continue to invest so much in capital stock without eventually running into some sort of problem is all too true.  Adam Smith would certainly agree with Roubini on this one.  In the Wealth of Nations Smith makes a number of references to over investment causing "over trading" and thereby triggering painful economic contractions to rectify economy or industry concerned.  On the other hand China has experienced over investment in particular sectors of its economy before and managed to 'power' through them under the momentum of the country's overall economic growth.  Such was the case with steel production in the 90s.  Either way, only time can tell.

You can read Perkowski's blog here:
You can read Roubini's blog here: