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Monday, March 16, 2015

Does China Even Have a Business Cycle - Construction Wise?

Does China even have a business cycle - construction wise?

This is a picture of China's business cycle from Business Insider.

On the face of it, this looks like a normal, ordinary business cycle with its ups and downs, booms and busts.

Business cyles invariably cause significant fluctuations in investment.  Factories shut down as sales dry up and revamp up production once sales pick up.  This is true for just about anything: Factories, Mines, Housing, and Buildings.  Not so in China.  The pace of China's Investment has been relentlessly trending upward, business cycle or not.

But from an investment perspective, China has been on an investment tear for almost for over fifty years straight.  Gross Capital Formation (GCF) as a percentage of GDP has been on a relentless climb upward since 1962 and is still trending upward.  At 49% of its GDP in 2013, China's GCF is 2.2 times the World Average of 22% as of 2013. It's historical long-term average GCF as % GDP is an astonishing 36.20% - almost 50 percent more than the long-term historical World average of 24.43%.  

This is a pace that no other major national economy has been able to duplicate on a sustained on a long-term basis, not even the largest and fastest growing economies called the BRICs (Brazil, Russia, India, and China).  At 49% of GDP, China's GCF currently stands at almost double that of the historical average of the fast growing BRICs (inclusive of China): 26%

This is not just true of China's Invesmtnent Cycle, it is also true of its Construction and Real Estate Sectors (CRES)  At 12.75% of the economy, the CRES is 37% higher than its historical long term average of 9.25%. It has stayed that way for a long time since the early 1990s, contributing to a substantial over investment.

An extended period of over investment invariably leads to an extended period of mal-investment and misallocation of investment resources to enterprises and ventures of dubious economic value that may eventually go bust.

Sources:; China National Statistical Yearbook

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