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Stock Strategist

China's Unsustainable Investment Boom

The country has to boost household consumption to maintain heady GDP growth.

The Chinese fixed-asset investment boom of the past decade has been unprecedented. While all low-income countries have required outsize capital stock additions to make the leap to middle-income status, China's current boom is unmatched by anything on the record books. In fact, by some measures of physical capital, China already looks more like one of the world's leading developed economies, rather than the middle-income economy it is. We don't believe China can continue to rely on building more skyscrapers, highways, and manufacturing plants to sustain the kind of GDP numbers its citizens and global investors have grown accustomed to. In the next 10 years, the onus for growth will rest on Chinese households: their willingness and ability to consume. If consumption fails to grow at a rate well above historical norms, the economy may be able to muster only 5% growth at best, a far cry from the 10% average from 2001 to 2010.

In 2000, before the boom really kicked off, gross capital formation (or GCF, the GDP accounting term for investments in physical capital) accounted for 35% of Chinese economic output. While large by developed economy standards (the U.S. 10-year average is 19%, Japan 23%), it wasn't atypical for a high-growth emerging economy. Nor was it unusual for China: A decade prior, GCF also had a 35% share. The consistent share reflected the balanced growth China enjoyed in the 1990s. By 2000, the Chinese economy was 170% larger than it was in 1990, driven by a 173% increase in investment and a 156% increase in consumption.

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