The Overheated Chinese Economy

«It's a common misconception that China needs to boost consumption to rebalance the economy. While it's true that Chinese consumption, currently less than 40 percent [36%] of GDP, is much lower than the 55 to 60 percent shown by Japan and other Asian countries when they were at a similar stage of development, it's not so much low consumption but overinvestment that is the problem. Since 1980, consumption in China has grown at a fairly healthy clip of 15 percent annually, and it's hard for consumption to grow at a faster pace. Instead, from 2002 to 2008, Chinese investment growth accelerated to an annual rate of more than 25 percent, up from its trend of 21 percent over the preceding two decades. That took investment as a share of GDP to more than 40 percent-a level that has been hard for other countries to sustain.

Now, following the government's huge stimulus package early this year, China's investment-to-GDP ratio has reached uncharted territory, at nearly 50 percent. The Asian giant needs to calm down this overinvestment drive, or risk a boom-bust cycle brought on by overleveraging.»

Ruchir Sharma, Newsweek, 5-Sep-2009