1 Comment

China relies on investment, as opposed to household consumption, much more than any other economy in history. Household consumption is fairly stable through economic cycles. China's government will make sure that government investment is very countercyclical. But private investment is extremely pro-cyclical, and it increasingly appears that public sentiment and expectations of future growth have plummeted in a way not observed since China took off. In particular, the belief that the government can solve any economic problem is slipping away.

So I fear that private investment growth may not just level off, but could turn severely negative. Because if you don't expect higher future demand, then you don't increase capacity and you don't take risks on new technology. Looser credit would make it easier to refinance existing debt in an over leveraged system, but it wouldn't increase investment. For the first time, the PBOC would experience 'pushing on a string'.

I suspect that China makes up about half of the global consumption of industrial commodities and capital goods. So if China's total investment does plummet, then it isn't a global slowdown, but a global recession.

Can China increase government investment fast enough to offset a drop in private investment? China's economy is now so large, diverse, and fairly mature, and they've already built all the easy infrastructure projects, that I'm not sure they can. What is your opinion?

Expand full comment