Tuesday, August 16, 2011


Who would have ever predicted such a set of outcomes?

Aug 16 (Reuters) - China's long-term plan to cut reliance on investment as a growth engine is clashing with its short-term need for protection against a worsening global outlook.

Beijing has made it clear that consumption, not investment, must eventually do more of the work to drive the world's No. 2 economy.

But with debt troubles in the United States and Europe casting doubt on worldwide demand, it's likely China will keep investing by the billions for now, even if that takes Beijing further from its ultimate goal.
Chinese consumers are a long way from becoming big spenders, so massive investment is still the fastest and easiest way for China to prop up its economy if push comes to shove.

"China's investment carriage continues to race along," the China Securities Journal, an official Chinese paper, said in a front-page story on Monday. "Our investment-led growth model will not falter in the short term."

Data published on Tuesday underscored expectations that China's investment will keep growing at a healthy clip in months ahead. It showed that China pulled in $69.2 billion of foreign investment direct in the first seven months of this year, which is 19 percent above a year ago, and putting the country on track for another year of record foreign direct investment.

Without doubt, having heavy investment carries a price. Analysts say it generates waste and excess capacity, fuels inflation and produces diminishing economic returns. State investment is like an unsustainable life-support system that China needs to wean itself off.

In 2009 -- the last year for which figures are available -- investment made up 65 percent of China's gross domestic product, a far higher share than in other major or Asian economies. Household consumption, however, accounted for just 35 percent, compared with 70 percent in the United States.

In the words of China Premier Wen Jiabao, the Chinese growth model is on all counts unstable, unbalanced, uncoordinated and ultimately unsustainable.

Some of the more bearish economists argue that wasteful investment is inflating a property price bubble and saddling banks with bad loans, sowing the seeds of a future crisis.

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