Wednesday, April 20, 2011

Dr. Doom: China is the next bubble

NYU Stern's Nouriel Roubini became famous in 2008 when he was the only prominent academic economist who predicted the financial crisis.   This earned him the nickname "Dr. Doom."  Roubeni has just returned from two trips to China (must have had to come back to teach a Monday night class) and he is not impressed with what he sees. 

The problem?  Chronic over-investment.  China is now committing almost half of its GDP to fixed investment, which is not sustainable. 
The problem, of course, is that no country can be productive enough to reinvest 50% of GDP in new capital stock without eventually facing immense overcapacity and a staggering non-performing loan problem. China is rife with overinvestment in physical capital, infrastructure, and property. To a visitor, this is evident in sleek but empty airports and bullet trains (which will reduce the need for the 45 planned airports), highways to nowhere, thousands of colossal new central and provincial government buildings, ghost towns, and brand-new aluminum smelters kept closed to prevent global prices from plunging.
The flip side of overinvestment is underconsumption.  Roubini thinks that the Chinese will need to let the yuan appreciate, which will increase imports, and privatize government-owned corporations so that profits will flow directly to households. 

1 comment:

  1. Having taken a trip to China last month with Dr. McCreery and other students in the NC State MBA program, we were given a front row view of this overinvestment. We saw small "cities" of empty, newly constructed, 50-story apartment buildings. The scale of the construction was mind-boggling.