NDRC Study Finds China Wasted $6.8T During Investment Boom

Just days after China’s central bank appeared to move back onto a pro-growth track, a report by the country’s highest-level planning body has found that a previous round of economic stimulus resulted in $6.8 trillion in wasted investment.

The document by Xu Ce of the National Development and Reform Commission (NDRC), and Wang Yuan of the Academy of Macroeconomic Research (which formerly belonged to the planning body), found that in the years 2009 and 2013, nearly half of the total funds invested into China’s economy were wasted, according to a report in the Financial Times.

China Again More Worried About Slowing Growth Than Growing Waste

The report’s findings regarding the unwanted by-products of China’s investment boom come close on the heels of an apparent return to looser monetary policy after the government had spent more than a year attempting to cool down overheated asset markets.

This month, however, faced with the likelihood that China would miss its target of 7.5 percent GDP growth this year, and following more than six straight months of decline in housing prices, the People’s Bank of China surprised analysts by announcing an interest rate cut on November 21st.

The move came after the bank had said repeatedly that the risk of inflating asset bubbles was too great to allow such broad-based stimulus, and it was widely seen as a surrender by the PBOC to growth concerns among members of the State Council, China’s cabinet.

Many analysts predict that despite the bank’s previously stated concerns over excessive investment, that the desire among other policy makers to avert potential social unrest and meet growth targets mean that further rate cuts will be on the way next year.

NDRC Investment Report Exposes Growth Problems

Now the NDRC’s report suggests that the industries that the government has worked hardest to support, have been among those with the highest amount of waste.

As China sought to escape the downward pressures of the global financial crisis in 2008, the government unleashed a $586 billion stimulus program, with support for the steel and auto industries among the primary targets. Not surprising, the research by Xu and Wang found these two areas to be among the centres for over-investment and non-performing loans.

“Investment efficiency has fallen dramatically [in recent years],” the FT cited the report as finding. “It has become far more obvious in the wake of the global financial crisis and has caused a lot of over-investment and waste.”

The researchers blamed the wastage on ultra-loose monetary policy, lack of oversight of investment plans, and distorted incentive structures for officials.

Do China’s Lower Interest Rates Translate into More Waste?

Perhaps most discouraging in light of the recent shift towards an expansionist monetary policy and wasteful investment.

The two years that Xu and Wang cited as the most wasteful periods in the half-decade of mis-investment both followed closely after the most dramatic shifts towards loose monetary policies.

The effective wastage of 50 percent of the total investment during 2009 followed soon after the Chinese government first announced its crisis fighting stimulus package in November 2008.

Then, as the economy in general, and the real estate market in particular slowed down in 2011, the government announced a series of loosening measures for monetary policies, including interest rate cuts and revisions in reserve ratios, that continued into 2012.

The results of this shift may well have 2013’s return to a 50 percent rate of wasted investment, as documented by Xu and Wang’s report.

So while markets have reacted to this month’s surprise rate cut by sending stocks of China real estate developers and other listed companies to unexpected highs, if these rate cuts lead to more ghost cities and unneeded steel mills, then the longer term news for the country’s economy may end up being less encouraging.