China's Allocation of Capital
By Arnold Kling
Tyler Cowen thinks that China is making the wrong bet.
Automobiles, steel, semiconductors, cement, aluminum and real estate all show signs of too much capacity. In Shanghai, the central business district appears to have high vacancy rates, yet building continues.
The scale of the excess capacity is breathtaking. At the end of 2008, China’s steel capacity was 660m tons against demand of 470m tons. This difference is much the same as the European Union’s total output. Yet, notes the report, “there are currently 58m tonnes of new capacity under construction in China”. To the extent that gross domestic product is driven by such absurd spending is a measure of waste, not of economic welfare.
One of the trends that I repeat is the increased share of output that is going to be toward education and health care. If China wants to jump on that trend, their investment ought to be focused on human capital rather than physical capital.