Economics

How inefficient is Chinasinvestment?

DBS Group Research 12 November 2 12

$ Chinas /rowth rate must s!ow as wa/es an# incomes rise an# investment efficienc" fa!!s $ But this happens over the course of man" "ears0 not 12, "ears $ 3nvestment efficienc" in China appears better than an"where e!se in 4sia0 save for Sin/apore $ Recent #ec!ines in measure# efficienc" sa" nothin/ about efficienc"5 on!" that /!oba! /rowth has been roc6" since 2 ) $ Chinas /rowth can remain hi/h for man" more "ears so !on/ as the baton is passe# to in!an# provinces from the Eastern seaboar# $ 7fficia!!"0 /rowth was *.,8 in 1912. But virtua!!" ever" province reporte# faster /rowth than that. 3s /rowth rea!!" *.,8 or is it 1 .18? :he #ifference matters

Its unanimous: China cant grow at a 10% rate anymore. Those days are gone, its said, because the Eastern Coast, where most of the deve o!ment has occurred over the !ast "0 years, is too crowded and !o uted and because economic theory says so: theres been too much investment and its not #efficient$ anymore. Economic theory does indeed say something c ose to that. %eo&c assica theory is a about 'margina ism ( the bang one gets for that ast buc) s!ent. *n the demand side, the +th ice cream cone is not as en,oyab e as the first. *n the su!! y side, the +th investment do ar doesnt !roduce the same )ic) to -./.

Nomenc!ature
0eferences to 7sia in this re!ort adhere to the fo ow conventions: 7sia 10: C8, 82, T9, 20, :-, ;<, I., T8, /8, I% 7sia =: 7sia 10 ess I% 7sia >: 7sia 10 ess I% and C8 Euro?one: E716 -+: 7sia10, @:, A/, EB -": @:, A/, EB

G!oba! efficienc" of investment

IC*0s 12 3 -./4, avg 500"&06 1 ower is better4 1+ 15 10 >
C." 6.5 1".+

C + 5 0 :C8 I% ;< 82 /8 I. T9
5.= ".+ ".D ".6 ".= ".= +.0 +."

D.0

T8

@:7

20

A/

Davi# Carbon $ %&'( &)*) +',) $ #avi#carbon-#bs.com

How inefficient is Chinas investment?

12 November 2 12

Thats a !rob em when investment ma)es u! D0% of -./, as it does in China. Everyone ')nows its too high. 8e says it. :he says it. 9e a say it. Investment cant be efficient ( or as efficient as it used to be. Eoo) at the stee industry. Too much ca!acity. Concrete too. -rowth has to s ow. 7nd oo), it hasF The circ es com! ete, the !udding good. Ten !ercent growth might have been !ossib e yesterday but 6.D% is to!s today. Investment cant !unch i)e it used to.

Not so fast
7s often ha!!ens in economics, we get the theory right, or most y right, and we get the measures wrong. :ometimes way wrong. /roductivity and efficiency are good eGam! es. The theory assumes that a resources are fu y em! oyed. This may be wi d y untrue in the short&run. <ou can sti measure !roductivity and efficiency in the short&run ( and many do ( but the resu ts are usua y nonsense. The reason is immediate y a!!arent. Ta)e abor !roductivity, the usua gauge of which is H3E, out!ut !er wor)er, or some c ose derivative. :a y may be ,ust as good an ana yst this year as ast year ( or even better ( but if the mar)et dro!s and no one buys her services ( then her measured !roductivity tan)s big time. The same is true for ca!ita stoc)s 3 investment. The most common measure of efficiency here is ( get ready ( the incrementa ca!ita &out!ut ratio. Its a mouthfu but its a sim! e idea and a sim! e ratio, ,ust i)e H3E above. The #IC*0$ measures how much investment it ta)es to generate one more unit of -./. That is, IC*0 I I 3 1Chg in -./4 I It 3 1-./t & -./t&14. J1K

7 high3rising IC*0 im! ies ow3fa ing efficiency of investment, because more and more investment is reLuired to generate one more do ar 1or yuan or euro4 of -./. 7s one might guess, the IC*0 can ,um! around ,ust as much as abor !roductivity in the short run, and for reasons that have nothing to do with how efficient investment may or may not be. If a countrys -./ growth fa s c ose to ?ero, the IC*0 shoots off to infinityF If s ow growth turns to s ight contraction, the IC*0 shoots to negative infinityF Even 50&year moving averages cant smooth that )ind of distortion.

;e often /et the theor" ri/ht0 or a!most ri/ht. 4n# we /et the app!ication ver" wron/

<easurin/ Chinas investment efficienc"

9ith this in mind, how inefficient does Chinas investment a!!earM In two words, not very. Ta)e a oo) at the chart on !age 1. It shows the IC*0s of each of the countries in 7sia, ! us the @: and Aa!an, averaged over the D years from 500" to 5006, ,ust before the g oba financia crisis made infinite mincemeat out of a of them. Com!ared to the rest of the wor d, Chinas investment efficiency was about as good as it gets. 7t ".+, Chinas IC*0 was ower than a other countries, save for :inga!ore. Indonesia and Taiwan had IC*0s over +. Thai ands was D. *n this D year time frame ( when g oba resources were fu y em! oyed ( Chinas investment was >D% more efficient than the @:s, twice as efficient as 2oreas and near y +G more efficient than Aa!ans.

4n# !ate!"?
:ad y, Chinas IC*0 has risen mar)ed y since 5006 1chart at to! of neGt !age4. It now stands at +.6. *ver the !ast four years, investment efficiency has fa en by near y +0%. :ure y this eG! ains why Chinas -./ growth has s owedM 7nd sure y this means Chinas ong&run -./ growth rate must now be 6.D% when it used to be 10%M

How inefficient is Chinas investment?

12 November 2 12

China = incrementa! capita!2ouput ratio

2 3 -./ D.D D.0 +.D +.0 +.6

Chinas 3C7R has hea#e# north since the G!oba! >inancia! Crisis. :hats not because efficienc" has fa!!en

".D ".0 5.D 5.0 1.D 1.0 == 01 0" 0D 06

"."

0=

11

7ctua y, it means nothing of the sort. IC*0s the wor d over soared when the g oba financia crisis hit in 500>. Taiwans IC*0 ,um!ed to "0. 2oreas ,um!ed to =>. :inga!ores rose to 1" in 500> and then ! unged to &"0 in 500= as growth turned negative. The @: IC*0 dro!!ed to &+= in 500>N Aa!ans dro!!ed to &55. /ut those numbers into a D&year moving year moving average and you wont ,ust get a distortion, you get utter nonsense. The bottom ine is, whi e investment efficiency is a )ey determinant of ong&run -./ growth, in the short&run, the causa ity is f i!!ed around ( growth determines 1measured4 efficiency, not vice&versa. 7mong other things, this means one cannot use the IC*0s of the !ast +&D years to ma)es any inferences about what !otentia growth might be in the years ahead. In !articu ar, Chinas higher IC*0 of ate says abso ute y nothing about whether growth in the neGt D years wi be faster or s ower than in the !ast D years. :aying it has to s ow because the IC*0 is rising is a bootstra! argument at best ( growth wi be s ow because its been s ow. That wont f y in most sho!s.

?on/er2term 3C7Rs
9here does this eave us thenM 9hat do Chinas IC*0s oo) i)e from a onger&term !ers!ectiveM They oo) !retty good, and not much different from other 7sian countries that came before China in the deve o!ment !rocesses. The chart at right is the same as the one at to! but eGtended 'bac)wards to 1=6=. 7s one wou d eG!ect, investment has become ess efficient over time ( but over decades, not over sma !eriods of D&10 years. In
China = incrementa! capita!2ouput ratio
2 3 -./ 15.0 10.0 >.0 C.0 +.0 5.0 0.0 6= >1 >" >D >6 >= =1 =" =D =6 == 01 0" 0D 06 0= 11

>rom a !on/er2term perspective0 Chinas 3C7Rs !oo6 norma! @ beni/n

How inefficient is Chinas investment?

12 November 2 12

:aiwan = efficienc" of investment

IC*0s 12 3 -./4, rea invst data, 5yr mov avg 50 1D 10 D 0 &D &10 C0 C+ C> 65 6C >0 >+ >> =5 =C 00 0+ 0> 15

Sin/apore = efficienc" of investment

IC*0s 12 3 -./4, rea invst data, 5yr mov avg 50 1D 10 D 0 &D &10 &1D &50
1=>+ recession 7sia financia crisis .ot com bust - oba financia crisis

C0 C+ C> 65 6C >0 >+ >> =5 =C 00 0+ 0> 15

trend but, for reasons noted above, nothing can be inferred from that about Chinas ong&run growth rate. -iven the historica vo ati ity and the g oba financia crisis, the 5011 reading is nothing but a b i!. Orom a onger&term !ers!ective, does China oo) different from other 7sian countries that went through their ra!id deve o!ment !hases in the C0s and 60s and >0sM %ot rea y. The charts above and be ow show IC*0s of :inga!ore, Taiwan, ;a aysia and Indonesia, four countries with wide y ranging incomes, over the !ast D0 years. 7 countries show significant IC*0 vo ati ity that has nothing to do with investment efficiency and everything to do with short&run swings in -./ growth that occurred for other reasons. 7s one wou d eG!ect and theory !redicts, a countries show investment efficiency fa ing 1IC*0s rising4 over the years, as ca!ita stoc)s accumu ate. Put, ,ust i)e China, a four show this ha!!ening over the course of decades, not over a !eriod of "&+ years.

3n#onesia = efficienc" of investment

IC*0s 12 3 -./4, rea invst data, 5yr mov avg 50 1D 10 D 0 &D &10 C0 C+ C> 65 6C >0 >+ >> =5 =C 00 0+ 0> 15

<a!a"sia = efficienc" of investment

IC*0s 12 3 -./4, rea invst data, 5yr mov avg 50 1D 10 D 0 &D &10 C0 C+ C> 65 6C >0 >+ >> =5 =C 00 0+ 0> 15

How inefficient is Chinas investment?

12 November 2 12

China = 3C7R %who!e countr"(

2 3 -./, regiona wtd avg 15 10 > C + 5 0 6= >1 >" >D >6 >= =1 =" =D =6 == 01 0" 0D 06 0= 11

China = 3C7R %Eastern coasta! provinces(

2 3 -./ 15 10 > C + 5 0 6= >1 >" >D >6 >= =1 =" =D =6 == 01 0" 0D 06 0= 11

Chinas 3C7Rs b" re/ion

Im!ortant y, neither do Chinas IC*0s oo) much different between regions. The natura nu hy!othesis wou d be that in Eastern coasta !rovinces, where deve o!ment has been ra!id and where most be ieve it must s ow, investment efficiency was fa ing ra!id y, or at east more than the nationa average. This doesnt a!!ear to be the case 1charts above and be ow4. The !ace of IC*0 deterioration oo)s to be about the same across !rovinces3regions. EGce!t for Pei,ing and :hanghai 17!!endiG I and II4 East coast IC*0s are about the same as Centra !rovince IC*0s and have risen by about the same amount since 1=>0. Ironica y, 9estern !rovince IC*0s are notab y higher than in Eastern and Centra areas, when one wou d have eG!ected the o!!osite 1i.e., a bigger bang for the investment buc)4. This cou d ref ect the fact that 9estern !rovinces are among the east deve o!ed and investment returns may remain ow unti some minimum 3 critica thresho d eve is reached.

China = 3C7R %Centra! provinces(

2 3 -./ = > 6 C D + " 5 1 0 &1 6= >1 >" >D >6 >= =1 =" =D =6 == 01 0" 0D 06 0= 11

China = 3C7R %;estern provinces(

2 3 -./ 1C 1+ 15 10 > C + 5 0 6= >1 >" >D >6 >= =1 =" =D =6 == 01 0" 0D 06 0= 11

How inefficient is Chinas investment?

12 November 2 12

:he ha!f2!ives of 4sian /rowth

:o what is one to ma)e of 7sias 3 Chinas IC*0sM .oes their s ow rise mean investment efficiency doesnt matter and, more to the !oint, that fast -./ growth can continue foreverM *f course not. The theory is correct ( growth must s ow and investment must begin to offer ess bang for the buc). The esson to be earned is that this is a ong&run !rocess, not something one can see from this year to the neGt. In the case of IC*0s, one has to oo) at a 50 or "0 or even +0 year time s!an before the theoretica forest can be distinguished from the vo ati e trees. In the case of -./ and income 1!er&ca!ita -./4 growth, the data are ess vo ati e and the s owdowns more discernib e. Put they are ,ust as gradua nonethe ess. 7s discussed in our 7sia 5050 re!ort of 5011 J5K it too) :inga!ore some 5D years for !er ca!ita -./ growth to dro! by ha f 1chart be ow4. In Taiwan, it too) about the same amount of time and in 2orea, it too) the "0 years between 1=C6 and 1==6 for !er ca!ita -./ growth to fa from 6.D% !er year to the ".6% rate it has averaged since 1charts at note J"K4.

Growth must s!ow as incomes rise. But this is a !on/2term process0 not somethin/ "ou see from "ear to "ear

Sin/apore = per capita income path

in constant 5010 @: do ars D0,000 +D,000 +0,000 "D,000 "0,000 5D,000 50,000 1D,000 10,000 D,000 0 C6 61 6D 6= >" >6 =1 =D

6.C% C6&>+

D.+% >+&=+

".>% =+&15

==

0"

"066% 11h

1D

Chinas ha!f2!ife su//ests /rowth wi!! s!ow to *.'8 in 2 2 0 not 2 12

@n ess Chinas #ha f& ife$ of income growth is a ot shorter than the 5D years that has !revai ed e sewhere in 7sia, growth cou d remain ra!id for a ong time to come. In fact, one shou d eG!ect Chinas ha f& ife to be onger, not shorter than e sewhere in 7sia, because there is so much more territory and human resources yet to deve o! there. <es, Eastern coasta deve o!ment must s ow, ,ust i)e :inga!ore and Taiwan and 2orea have s owed. Put China has the o!!ortunity ( and the intention ( to deve o! in and !rovinces, where such !otentia did not eGist in :inga!ore or Taiwan or e sewhere. If things are done right, China shou d be ab e to maintain fast growth for far onger than other 7sian countries were ab e to J+K. 7s things stand, we rec)on it wi ta)e China at east "D years for income eve s to rise to where :inga!ores are today 1chart at note JDK4. This of course doesnt !rove that Chinas growth wi remain fast in the years ahead. Put it does show how much room there is for fast growth to continue if it is inte igent y and successfu y !ursued ( nothing about Chinas growth is !redeterminedN nothing says it must s ow today. *n the contrary, even if Chinas 'ha f& ife is no better than the 5D odd years that obtained in :inga!ore, Taiwan or 2orea, that wou d !ut -./ growth at 6.D% in 5050, not today.

How inefficient is Chinas investment?

12 November 2 12

How fast is /rowth to#a"?

If Chinas growth can remain fast for onger than most thin), it may a ready be running faster than most thin) too. Oor the !ast two Luarters, when -./ growth officia y averaged 6.D% <o<, virtua y every !rovince in the country re!orted growth faster than that. *ur statistics !rofessors may have taught us that its im!ossib e for everything to be above average, but in China things seem to wor) different y. *n average in 5H and "H, Pei,ing and :hanghai re!orted growth of 6.D% 1see 7!!endiG I and II4 but the rest of the Eastern coasta !rovinces re!orted growth of =.5%, a most two !ercentage !oints higher than the nationa average 1chart be ow4. -rowth was even faster in the Centra !rovinces ( 10.D%, " !oints higher than the nationa average. 7nd growth in the 9estern !rovinces averaged 15.+%, a most D !oints higher than average. :o which growth rate is correctM The officia figure of 6.D%M *r the regiona weighted average rate of 10.1%M Orom a ogistica !oint of view, the atter wou d seem to be the on y !ossibi ity JCK. The nationa figure can on y be derived from the !rovinces, or at east one wou d ho!e so. @n ess the centra authorities are handing out !redetermined numbers to the !rovinces ( and they are a 5D% too high ( its hard to see how the nationa number cou d be more credib e than the sum of the regiona numbers. The aw of arge 13 arger4 numbers says the regiona average has to be the better bet.

How can /rowth ever"where be above avera/e? 3t cant

China = GDA /rowth %nationa! vs re/iona! avera/e(

%<o<, 5H15&"H15 avg 1" 15 11 10 = > 6 C D + Eastern /rov 7vg Centra /rov 7vg 9estern /rov 7vg =.5 *fficia nationwide -./ growth rate 6.D% 10.D 15.+

Arovincia! /rowth avera/e# 1 .18 in 29 an# 190 much hi/her than the officia! rate of *.'8

China is sti!! s!owin/

This Luic) y begs the Luestion: is faster regiona growth something new or has this anoma y a ways been thereM The answer is that the regiona rate has genera y been higher than the officia rate and that both have s owed over the !ast 5&" years 1chart at to! of neGt !age4. 7haF, one is tem!ted to say. -rowth is sti s owing ( a sim! e ga! between officia and regiona average rates doesnt change anything. In fact it changes everything. In the very short&term, regiona growth sto!!ed s owing two Luarters ago, when everyone was sti fretting about further wea)ness. Put ets not Luibb e over a cou! e of Luarters. Oor the !ast two years, the worry ( es!ecia y in the 9est ( has been that China was running too s ow y and that it

How inefficient is Chinas investment?

12 November 2 12

China = officia! nationa! an# re/iona! av/ GDA /rowth

%<o< 1> 1C
u! for 5 Luarters

3s /rowth *.,8 or 1 .18? 3t ma6es a #ifference

1+ 15 10 > C + 5 0 ;ar&00 ;ar&05 ;ar&0+ *fficia nationa growth rate 0egiona wtd avg

10."%

6.+%

;ar&0C

;ar&0>

;ar&10

;ar&15

might s ow even further. 9ou d anybody serious y have been worried about a 's owdown in China if growth had dro!!ed to 10."% from 1+%M %o. They wou d be heaving oud sighs of re ief that growth was down to a sustainab e 10% and that a b owout in this sector or that mar)et had been averted. '9e done China, everyone wou d be saying, 'Pac) to !otentia growth. 7nd not a moment too soon. In short, the who e discussion of the !ast two years wou d have been com! ete y different. :o that " !ercentage !oint ga! does matter. @n ess we )now which growth rate is the more credib e, we dont )now which discussion we shou d have been having for the !ast two years.

>ina! thou/hts
7 few things remain c ear. Chinas growth must s ow as !er ca!ita incomes rise and the Eastern coasta !rovinces become saturated with the tra!!ings of deve o!ment. 7 oo) at Chinas growth by region since 5000 1chart be ow4 corroborates the theory and the intuition. :ince 500", growth has s owed mar)ed y in the East. It Centra !rovinces. 7nd it has acce erated in the 9est. has remained high in the

:he #eve!opment baton must pass to in!an# provinces

China = GDA /rowth b" re/ion

% <o<, +Lma 1C 1D 1+ 1" 15 11 10 = > 6 0+ 0D 0C 06 0> 0= 10 11 15 1" Centra : 11."% East: =.+% 9est: 15.=%

How inefficient is Chinas investment?

12 November 2 12

If China wishes to )ee! growth as ra!id as it has been over the !ast 50 years, it has a much better chance of doing so than most !eo! e thin). Put the baton wi have to !ass to the in and !rovinces which remain re ative y undeve o!ed and where !otentia remains unta!!ed. In this ight, com! aints about inefficient infrastructure investment ( roads to 'nowhere, for eGam! e ( shou d be tem!ered. %ew roads a ways oo) i)e they go nowhere at first. Its what ha!!ens ater that counts. Thats another thing the IC*0s dont !ic) u!.

How inefficient is Chinas investment?

12 November 2 12

En#notes
J1K The IC*0 may a so be eG!ressed as 13 margina !roduct of ca!ita . J5K 7sia 5050, .P: -rou! 0esearch, :e!tember 5011. J"K 2orea and Taiwan !er&ca!ita income !aths. Borea 22 AC3 paths after reachin/ C1,
constant 5010 @: do ars 55,000 50,000 1>,000 1C,000 1+,000 15,000 10,000 >,000 C,000 +,000 5,000 0 tI0 tQ> tQ1C tQ5+ tQ"5 tQ+0 tQ+> 0 tI0 tQ> tQ1C tQ5+ tQ"5 tQ+0 tQ+>
1==6

!eve!

:aiwan 22 AC3 paths after reachin/ C1,

constant 5010 @: do ars 5+,000

!eve!

6.D% !ath 1=C6&1==6

50,000 1C,000 15,000 >,000 +,000

C.>% !ath 1=C+&1==C

".6% !ath 1==6&5010

1==C

".6% !ath 1==C&5010

J+K JDK

Oor more detai on what needs to be done right, see 7sia 5050 1J5K4. /er&ca!ita income of 7sia&10 countries and how far one country is #behind$ another 1origina y !ub ished in 7sia 5050 J5K4.

4sia 22 per capita GDA time!ine

@:. !er !erson in 5011 and number of years Rahead3behindR other countries 1assuming C% !er&ca! growth rate4
:D+,>5C

D0,000

+0,000

82
"+,50=

"0,000
T9
50,560

20
55,=00

50,000
;<

10,000
I%
1,D==

/8
5,50>

I.
",++C

T8 C8
D,1>D D,"1"

=,60+

0 &D5 &D0 &+> &+C &++ &+5 &+0 &"> &"C &"+ &"5 &"0 &5> &5C &5+ &55 &50 &1> &1C &1+ &15 &10 &> &C &+ &5 tI0

10

How inefficient is Chinas investment?

12 November 2 12

JCK

*ne !ossib e eG! anation is that regiona authorities are sti measuring -./ in gross terms rather than va ue& added terms. Put this issue was addressed years agoN its un i)e y that it remains a factor. ;oreover, it eaves unanswered the Luestion of how nationa authorities wou d 3 cou d trans ate gross out!ut into va ue&added terms if the regiona authorities were not ab e to. 7nother !ossib e eG! anation is that trade ba ances were not rectified. If !rovinces re!orted intra&regiona trade sur! uses that were not trans ated into nationa sur! uses, then nationa -./ eve s wou d be arger than regiona eve s. This too is easy to account for. ;oreover, it wou d not ead to a higher -./ growth rate regiona y un ess sur! uses were growing over time. This has not been the case.

SourcesD
.ata for a charts and tab es come from CEIC and P oomberg.

11

How inefficient is Chinas investment?

12 November 2 12

4ppen#iE 3D
China = se!ecte# statistics
-./3ca! 5011 @:. 0egiona 7verage Eastern coasta! provinces Pei,ing Tian,in 8ebei Eiaoning :hanghai Aiangsu Bhe,iang Ou,ian :handong -Sdong 8ainan Centra! provinces :hanGi Ai in 8EA 7nhui AiangGi 8enan 8ubei 8unan ;estern provinces Inner ;ong -uangGi ChongLing :ichuan -ui?hou <unnan Tibet :haanGi -ansu Hinghai %ingGia Tin,iang East 7vg Centra 7vg 9est 7vg PS,ing3:Shai EG&PA3:8 15,+D+ 15,=0= D,5"> 6,>++ 15,C+= =,C1> =,1D1 6,+D6 6,5>1 6,>"C +,++> +,>"> C,5>0 D,06C ",=CC +,0"" +,+"> D,+1> +,C1" >,=D1 ",=0" D,"0D +,0+1 5,D+" 5,=61 ",0=0 D,165 ",05= +,D+> D,0>D +,C5= >,C>= +,6>5 +,>5> 15,DC0 C,D>5 :hare in 0ea -./ IC*0 IC*0 nationa -./ -rowth 5011 avg 5010&11 avg 500"&11 7vg "H&+H ratio ratio % % <o< +.+ ".> 100.0 10.1 ".1 5.5 +.6 +." ".6 =.+ C.5 ".+ >.6 10.5 0.D 5.1 5.1 5.+ 5.= 5.5 D.1 ".= ".> 5.6 5.5 1.= +.0 1.1 1.6 0.1 5.+ 1.0 0." 0.+ 1." DC.5 5+.C 1=.5 C.> =".5 +.> +.+ +.C +.6 +.> +." +.D +.1 +.6 ".+ +.1 +.6 D.6 +." ".D +.0 D.C ".C ".= D." C.0 ".D ".C +.0 D." 6.= D.0 +.6 D.+ 6.5 D.+ +." +.D +.> +.> +.+ +." ".C +.0 +.0 +.1 ".6 ".= ".6 ".= 5.= +.1 +.0 +.+ ".D ".C ".> +.5 ".C "." ".> +.0 +.5 ".C +." +.C C.6 D.5 +.+ D.D C.C D." ".6 ".> +." +.5 ".> 6.> 1".D =.1 >.> 6.C 10." >.0 11.6 =.6 >." >.C =.= 15.0 =.> 11.= 10.+ =.+ 10.C 10.= 11.> 11.1 1".D 15.6 1".+ 1".D 11.+ 15.C 15.5 15.> 10.D 11.6 =.5 10.D 15.+ 6.6 10."

12

How inefficient is Chinas investment?

12 November 2 12

4ppen#iE 33D 3ncome !eve!s an# capita! efficienc" %3C7Rs( b" province
China = GDA per capita
@:. !er !erson, 5011 0 D,000 10,000 1D,000

China = capita! efficienc" b" province IC*0s 1K / GDP) by province (real terms)
0 5 + Eastern /rovinces C >

Tian,in :Shai PS,ing ASsu BS,iang ESning -Sdong Ou,ian :Sdong 8ebei 8Snan
D,5"> +,++> 6,>++ 6,>"C 6,+D6 6,5>1 =,C1> =,1D1

15,=0= 15,C+= 15,+D+

:Sdong :Shai TS,in ESning Ou,ian

+.1

+.6 +.> +.+ +.6

Eastern /rovinces

8ebei PS,ing ASsu BS?hang 8Snan -Sdong

".+

+.C +.> +." +.D +.1

Centra /rovinces Ai in 8ubei 8EA :hanGi 8unan 8enan AiangGi 7nhui

C,5>0 D,+1> D,06C +,>"> +,C1" +,+"> +,0"" ",=CC

8enan Ai in Centra /rovinces :hanGi 8EA 8unan AiangGi 8ubei 7nhui

+." ".= +.0 ".C ".D +.6

D.C D.6

9estern /rovinces ;ong CSLing :haanGi %ingGia Tin,iang Hinghai :ichuan -uangGi Tibet -ansu <unnan -ui?hou
D,"0D D,165 D,0>D +,C5= +,D+> +,0+1 ",=0" ",0=0 ",05= 5,=61 5,D+" >,=D1

Tibet %ingGia ;ong <Snan -SGi 9estern /rovinces HShai :haanGi -ui?hou -ansu TS,iang :ichuan CSLing
".C ".D +.0 +.6 D.+ D.+ D.0 D." D." C.0 6.5

6.=

13

How inefficient is Chinas investment?

12 November 2 12

4ppen#iE 333D GDA /rowth b" province

China = /rowth rate b" province
% <o<, avg 5H15&"H15 0 D Eastern /rovinces :Shai PS,ing BS,iang -Sdong 8ainan ESning 8ebei :Sdong ASsu Ou,ian Tian,in Centra /rovinces 8enan 8EA :hanGi AiangGi 8ubei 8unan 7nhui Ai in 9estern /rovinces %ingGia -SGi Tibet TS,iang ;ong -ansu :haanGi :ichuan HShai -ui?hou CSLing <unnan
10.D 11.1 11.+ 11.6 11.> 15.5 15.C 15.6 15.> 1".+ 1".D 1".D =.+ =.> =.= 10.+ 10.C 10.= 11.= 15.0 6.C 6.> >.0 >." >.C >.> =.1 =.6 10." 11.6 1".D

10

1D

14

How inefficient is Chinas investment?

12 November 2 12

Recent research
FSD De!evera/in/ pro/ress report CND :he importance of in#ustria! po!ic" in the reba!ancin/ process CNHD How wi!! HB maintain its R<B e#/e? 4siaD 1 Iuestions CND Aessimism misp!ace# SGD Recession an# competitiveness :;D :hou/hts on CN: prospects 3DD ;hat #oes 9E1 mean for 3n#onesia FS >e#D Bernan6eJs setup 3DD Rates un#er upwar# pressure CND Fntan/!in/ the fisca! conun#rum GAD Not b" K4: a!one CNHD <ore than Hust Lnon2resi#ent conversionM 4FDD vo!ati!e in a stab!e ran/e SGD Sta/f!ation CND :he ro!e of human capita! in the reba!ancin/ strate/" :;D 4s !ow as it /ets 1 7ct 12 2+ 7ct 12 2' 7ct 12 CNHD BeiHin/ moves to boost HBs e#/e 1& 7ct 12 CNHD Hon/ Bon/s #ominant ro!e to remain 11 7ct 12 9tr!"D Economics2<ar6ets2Strate/" 1912 2 7ct 12 3DD >ocus on stabi!it" 2) Sep 12 HBD Difficu!t for propert" prices to fa!! 1+ Sep 12 1 Sep 12 2+ 4u/ 12 2) 4u/ 12 1* 4u/ 12 11 4u/ 12 1 4u/ 12 1 4u/ 12 2' Gu!" 12 CNHD 3mpact of wi#enin/ "uan tra#in/ ban# 1& 4pr 12 on #im sum mar6et 2 Gu!" 12 CNHD R<B !en#in/ set to cross bor#er in pi!ot p!an 3ND rate cuts premature 3DD :ra#e0 commo#ities an# imports FSD 4nother #own/ra#e 4siaD Ko!ati!e capita! f!ows c!ou# bon# mar6et out!oo6 1+ Gu!" 12 CND Chinas touch2an#2/o !an#in/ 1* Gu!" 12 3DD Can !ow rates sta" !ow? 1& Gu!" 12 CNHD 3t is time to review the persona! conversion Iuota 1 4pr12 , 4pr12 12 4pr12 1& 4pr12 11 4pr12 CND Cha!!en/es facin/ interest rate !ibera!iNation 2' 4pr 12 CND Swap rates to remain un#er #ownwar# pressure KND En route to economic stabi!it" :;D ;a/e hi6es comin/? :;D Fn#erperformin/ peers 3ND Ratin/s action imp!ications 1' <a" 12 + <a"12 , <a" 12 2* 4pr 12 2& 4pr 12 22 <a" 12 1 <a" 12 1, Gun 12 22 Gun 12 1 Gu!" 12 4siaD G!oba! recover" #ashboar# 3ND Capita! f!ows0 inf!ation to hurt 3NR CND EEportin/ more to 4frica an# ?4:4< 12 Gu!" 12 ' Gu!" 12 , Gu!" 12

CNHD :he acce!eratin/ pace of capita! account 2' 4pr 12 !ibera!iNation

BRD 3mp!ications of risin/ forei/n investment 2 Gu!" 12 in BR; bon#s

Disc!aimerD
The information herein is !ub ished by .P: Pan) Etd 1the #Com!any$4. It is based on information obtained from sources be ieved to be re iab e, but the Com!any does not ma)e any re!resentation or warranty, eG!ress or im! ied, as to its accuracy, com! eteness, time iness or correctness for any !articu ar !ur!ose. *!inions eG!ressed are sub,ect to change without notice. 7ny recommendation contained herein does not have regard to the s!ecific investment ob,ectives, financia situation and the !articu ar needs of any s!ecific addressee. The information herein is !ub ished for the information of addressees on y and is not to be ta)en in substitution for the eGercise of ,udgement by addressees, who shou d obtain se!arate ega or financia advice. The Com!any, or any of its re ated com!anies or any individua s connected with the grou! acce!ts no iabi ity for any direct, s!ecia , indirect, conseLuentia , incidenta damages or any other oss or damages of any )ind arising from any use of the information herein 1inc uding any error, omission or misstatement herein, neg igent or otherwise4 or further communication thereof, even if the Com!any or any other !erson has been advised of the !ossibi ity thereof. The information herein is not to be construed as an offer or a so icitation of an offer to buy or se any securities, futures, o!tions or other financia instruments or to !rovide any investment advice or services. The Com!any and its associates, their directors, officers and3or em! oyees may have !ositions or other interests in, and may effect transactions in securities mentioned herein and may a so !erform or see) to !erform bro)ing, investment ban)ing and other ban)ing or financia services for these com!anies. The information herein is not intended for distribution to, or use by, any !erson or entity in any ,urisdiction or country where such distribution or use wou d be contrary to aw or regu ation.

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