China investment levels excessive, risks are rising: IMF research

Wed Nov 28, 2012 5:22am EST
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BEIJING (Reuters) - China's economy relies on an excessively high level of investment and risks a potentially destabilizing increase if the government aims to keep growth around current levels for years to come, new International Monetary Fund research suggests.

Already running high as measured by a theory used by economists to assess capital-to-output ratios, investment accelerated between 2007 and 2011 to counter the effects of the global financial crisis, IMF staff wrote in a research paper on China's soaring investment levels.

"Depending on precise assumptions, over this period, China may have been over-investing by between 12 and 20 percent of gross domestic product relative to its steady-state desirable value," the report said.

"Even allowing for elevated investment levels associated with most economic take-offs, the econometric evidence suggests that China is over-investing," it said. "China's predicted investment norm over the last 30 years has ranged between 33-43 percent of GDP. In reality, it has fluctuated in a much broader band of 35-49 percent of GDP."

The IMF says its working papers do not necessarily represent the organization's policy, and that the reports describe research in progress that is published to spur debate.

The potential for severe internal economic imbalances in China stemming from an extended period of investment-driven growth, plus the risk that the excess capacity it creates spills into the global economy, are a recurring theme of IMF research.

A rise in fixed asset investment spending has helped underpin a rebound in China's economic growth in recent months, after seven successive quarters of slowing expansion - the worst run since the depths of the global financial crisis.

China officially targets GDP growth of 7.5 percent this year and analysts broadly believe the government has had an informal annual target of 8 percent or more for years - a level regarded until now as necessary to create enough jobs for the country's 1.3-billion strong population.

In a report earlier this year that Beijing sanctioned, the World Bank - the IMF's sister organization - assumed that China could maintain growth of 6-7 percent a year until 2030 with the right mix of structural economic reforms.   Continued...

A worker smashes limestone inside a limestone mine in Quzhou, Zhejiang province October 12, 2012. REUTERS/Stringer