China’s economy is undoubtedly growing at an awesome rate.  I read today that over the past 31 years, yearly GDP has grown by 9.9%, on average.  Compared to the US’s 2-3%, that’s incredible.  But Chinese people still aren’t rich.  Even when you look at GDP per capita, according to the CIA Factbook Chinese people make about 16% of what Americans make.  But according to consumer spending studies, they only have 6% the purchasing power of Americans.  Another alarming statistic is productivity versus wages: Chinese are on average 1/3 as productive as an American worker, but receive 1/10 the wages.  Why are they not cashing in on the China boom?  Where are the consumers?

Part of this lies in the distribution of aformentioned awesome GDP growth.  Almost 50% of GDP growth is in capital investment, or, in the stuff that makes stuff.  This includes machines in factories, and also things like infrastructure which aren’t an “end product” so to speak, but increase the profitability of overall operations.  Investment is a very good thing…up to a certain level.  At some point, infrastructure gets oversaturated, meaning there are too many highways and not enough cars.   High speed rail in China may also be a victim of overinvestment, especially when a high speed rail ticket is too expensive for the vast majority of the population.  These are investments in the future to be sure, but the problem is that the loans taken to build these items have interest payments.  When a road or rail line remains in debt for 50 years, the interest payments are going to easily overtake the principal.  Investment that follows demand closely and is priced accordingly will have a great effect on the economy.  But building roads and bridges without demand or a populace who can afford to use it is going to be very costly.

A more pressing concern for capital investment lies in the state-owned sector of the economy.  The Chinese government loves to own enormous enterprises in heavy industry like steel, mining, petroleum extraction, and the like.  Capital investment in machines that make steel more efficiently may generate overcapacity like we see with infrastructure, but also put too many people out of work.  China’s greatest industrial strength continues to be its cheap and huge labor force.  If the big steel companies all buy state of the art smelting machines, they might be able to produce the same amount of steel with 20% of the workforce.  That makes Chinese goods more expensive (since it is of high quality) and reduces the need for so many workers.  Big international companies looking for medium grade steel might find themselves shopping in India instead, where a large labor force produces lower quality steel, but at a cheaper cost.  The economic and social implications of this might be serious.

Chinese are also big savers, but so are Japanese, who are still much greater consumers by comparison.  Other reasons like underreported income might also be important but impossible to verify.

Data from Development Data Group, The World Bank. 2008, courtesy of EarthTrends

Either case, as the chart above demonstrates, having awesome economic growth doesn’t mean you get rich so quickly.  China is growing fast, but its people are still mostly poor.

Footnote: Interesting article today in WSJ about a potential Chinese “hard landing” has RBC claiming increased capital investment and public housing spending are signs the Chinese economy is healthy.  No mention of the already insano 50% capital investment rate, or the fact that over 65 million houses in China are probably vacant.  But hey, keep building, why not.

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