China’s economic growth has accelerated, running at 11.9% year over year in Q1. Yet the country’s economic growth remains the result of substantial increases in fixed asset and real estate investment.
In the first quarter, investment in fixed assets reached 3.53 trillion yuan ($517 billion), up 25.6 per cent year on year. Investment in the real estate sector soared 35.1 per cent.
As seen below investment contributed to 57.9% of Q1’s GDP growth. If the majority of these investments end up being economically productive in the long-term, then this is great. Problem is, should many of these investments end up being wasteful (investment that creates overcapacity in industries or real estate), then we could one day realise that half of Q1’s GDP growth was simply wasteful spending.
Thing is, in defence of China bulls, Q1’s GDP mix was far better than that of 2009. In 2009, investment contributed to a shocking 94.6% of GDP growth (note that the large negative net exports contribution is due to the sharp trade surplus contraction China experienced in 2009) So the country’s growth became less dependent on investment in Q1, but was still heavily dependent on it.
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