5/15 But China's GDP growth didn't slow at all. Why? Because Beijing did not allow the decline in property investment to translate into a decline in overall investment. It "solved" the declining property investment by engineering a surge—almost RMB for RMB—in manufacturing investment.
6/15 More manufacturing, in other words, was not driven by any perceived increase in Chinese or global demand. It was wholly a reaction to the decline in property investment combined with a political determination to continue meeting excessively high GDP growth targets.
7/15 The consequence was perhaps predictable: the creation of excess capacity in the property sector now shifted to the creation of excess capacity in the manufacturing sector, and especially in politically preferred sectors, like solar panels, EVs and batteries.
8/15 But this means that unless Beijing is willing to give up the GDP growth target (which for now, it isn't), it cannot "resolve" involution—i.e. cut capacity sharply in the worst affected areas—unless it can engineer a corresponding upsurge in demand elsewhere.
9/15 As it is extremely unlikely that we will see property investment recover any time soon, for China to cut capacity in the most involuted sectors of manufacturing will require shifting debt and resources to create another source of growth.
10/15 The most likely outcome, in my opinion, is it shifts investment into other manufacturing sectors, those not yet suffering involution. This, of course, won't resolve the problem of excess capacity, but it will make it much less concentrated in a few key sectors.
11/15 Another possibility (on which they already seem to have started), is to increase spending on infrastructure. The problem is that China already has "excess capacity" in infrastructure, after the huge amounts that poured into infrastructure investment between 2010 and 2017.
Michael, are there publicly accessible data that show these huge shifts in investment that you describe over the last 20 years?
Yes, widely available, for example here: www.ecb.europa.eu/press/econom...
Many thanks.
Sounds like military Keynesianism is the answer.
12/15 The third possibility, and the best by far, is that it shifts resources to boost consumer spending. This is what most analysts cited in this article have proposed. But of course more consumption has also been the best "choice" for the past 10-15 years, and hasn't happened.
13/15 That's because it is extremely difficult to pull off. Low consumption in China is not the result of an oversight that can be fixed administratively. It is fundamental to an economic system in which household transfers subsidize rapid growth in investment and manufacturing.
14/15 What this means is that the only sustainable solution to China's problem of excess capacity is to engineer a transformation of the country's economic system and growth model. Other "solutions" just shift excess capacity from one sector to another.
15/15 We will eventually see this transformation, but I think Beijing can still postpone it for a few more years. Until then, I mostly expect excess capacity in the involuted sectors to shift mainly into other manufacturing sectors and partly into infrastructure.