Fears have once again turned to China, the erstwhile growth engine of the world, whose main stock market continues to grind to fresh lows of the year.
Chinese fears helped slam copper today to the tune of 7%.
If things get really bad, can China just rev up the stimulus engine like it did during the last recession?
Probably not so easily.
In a recent note, Citi’s Shuang Ding summed up the problem:
Investment boom during 2008-10 pushed investment/GDP ratio to a record
high — The ratio reached 48.5% in 2010, unprecedented in recent history of China
and major world economies. It implies nearly half of GDP was invested, raising
questions about how far China can continue to invest to support growth.
Investment is becoming less efficient in boosting growth … — The marginal
product of investment has declined noticeably in the past three years during which
China implemented large-scale stimulus measures to sustain growth in the face of
global recession. The efficiency of investment was low compared with pre-crisis
period and Japan and Korea when they experienced fast economic growth. Low
efficiency is attributable to the sheer size of investment, a bias toward construction,
and state intervention in investment decisions.
… and therefore increasingly unsustainable — The expansion of investment
projects has significantly increased government debt burden. Local government
debt doubled during 2008-10 to reach Rmb10.7tn, raising total government debt to
GDP ratio to about 45%. It becomes increasingly clear that aggregate demand
created by low-yielding investment would increase government debt and banks’
NPLs, and cannot support sustainable growth.
Meanwhile, if you haven’t looked at a recent copper chart, do so.
It’s not just total. All of September has been a total waterfall.
NOW WATCH: Money & Markets videos
Business Insider Emails & Alerts
Site highlights each day to your inbox.