Every few months we write the same story, more or less, about China. Every few months the statistics come out, and they are more or less the same — incredible, simply fantastic. The most recent: GDP growth of 11.3%, investment up 30%. This has been the same story for the last decade in investment, the last twenty years in GDP. WSJ:

China’s central bank Friday announced its second interest-rate increase in four months in a bid to choke off excess investment, a move that comes as Beijing also ratchets up political pressure on local governments to slow spending….

China’s economy expanded 11.3% in the second quarter from a year earlier, the fastest pace in 12 years. With the economy expanding so fast, interest rates are still too low to discourage borrowing by local governments and their corporate affiliates.

Local governments are a significant part of China’s larger problem. They account for as much as 20% of its investment, and they also lean on banks to provide credit for enterprises they control. Local officials are promoted largely on their success in generating economic growth, which comes through investment. And returns generated by their investments help to pay for social spending on everything from education to health care — costs that are now their responsibility, not Beijing’s.

The failure of rate increases so far to rein in investment has prompted Beijing to back up this and other economic fine-tuning with strong-arm political methods. In an unprecedented move this past week, the governor of Inner Mongolia and his two lieutenants were told to write self-criticisms to China’s powerful State Council for allowing hundreds of millions of dollars of investments in coal-burning power plants that hadn’t been authorized by Beijing.

China continues to be a little bit out of control. Even though 280 of its top 500 companies are no longer state-owned, government spending and investments have created a Wild West atmosphere, as the power plants tale illustrates. Look, any government that suddenly revises its entire economy GDP up by 18% all of a sudden doesn’t have a complete grip on things. We have said before and we’ll say it again: China is in its Roaring Twenties, with great increses in income and productivity producing a massive overinvestment in plant and equipment that is simply not sustainable. At some point it must reach the end of that road.

This entry was posted on Sunday, August 20th, 2006 at 12:19 pm and is filed under China, General, business. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.