China's New Investment

I found an article from the Wall Street Journal Online entitled China's Growth Slowest in Two Decades. Given that we study growth theory, and China is a major player in the world economy, and tonight is the deadline for submitting new posts, I thought I would give it a read. The article is pretty basic and talks about how the numbers don't accurately portray Chinese growth because they only release numbers on a year-to-year basis, unlike our quarterly releases. The main thing that caught my attention was the noted increase in Chinese domestic investments.

The government's stimulus program has been ramping up investment to counteract the weakness in export demand. Fixed-asset investment in urban areas, China's benchmark measure of capital spending, rose 30.3% in March from the year-ago period, picking up from 26.5% growth in the first two months of this year.

I may have this completely wrong, but this seems to be a step in the right direction as far as their policy goes. Reinvesting back into your countries own capital is vital to growth and if the Chinese begin investing some of their billions back into their own country as it becomes more stable and reliable they could experience substantial gains in well-being, I think. Here is a link to the article, http://online.wsj.com/article/SB123984767545423661.html#mod=testMod.


anthony said...

I agree with the post, China investing into their own country will likely make things improve. China would be wise to invest into the companies who make their revenue from exports as they could buy shares in those companies for very cheap. Also, investing into those troubled companies will keep them afloat, saving people from getting laid off. I'm not so sure China cares about the well-being of their people though, as the evidence seems to point that way.

Dr. Tufte said...

We didn't talk about this much in class, but there is a modestly more advanced idea called "balanced growth".

You can actually see balanced growth in your Excel workbooks: if capital and labor start out of proportion to the steady state, the one will grow faster and the other slower until they are balanced. Then they stay that way.

It's also possible to show that balanced growth is efficient growth. Anything unbalanced is inefficient, to a larger or smaller degree.

A problem with fiscal policy, or any sort of central planning, is that governments are not very good at balanced growth. What we see when we look at historical data for the Soviet Union is a lot of unbalanced growth.

So, when I hear news that China is pursuing an expansionary fiscal policy, I am much more dubious of its beneficial effects than I am of such a policy in the U.S. At least here there's a process where unbalanced actions could be discussed. I think in many countries - China included - those sort of things would never be questioned.

Spencer said...

There is a graphic in the article that notes that the most recent quarter, the first quarter of '09, could mark the bottom of the downturn. Now that numbers have been released for the final two quarters of 2009 it seems that it was the bottom and that Chinese policies were effective. The final quarter growth rate of 10.7 percent compared to 6.1 for first quarter is a significant improvement. While there may have been other factors at work the evidence at least favors that by increasing their domestic investment the Chinese government helped their economy.