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03 January 2012


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John Ross

You already made the point that the 2008 financial crisis showed that the misallocation of capital was far worse in the US than China - the entire US financial system was bankrupted.
If there were a serious average misallocation of resources in China this would show up in a bad ratio between investment and GDP growth in China. But there is no statistical evidence for it - indeed the reverse is the case.
1. Total factor productivity (TFP) studies find that TFP growth in China is high - much above the US.
2. The ratio of the percentage of fixed investment in GDP to GDP growth in China is much lower than in the US - i.e. investment in China is much more effective in producing GDP growth than in the US.
So overall the statistics show that the efficiency of investment from the point of view of growth is much higher in China than the US. Evidently there will be individual pieces of inefficient investment, which will be counterbalanced by super efficient pieces of investment to produce the average. Precisely because all such processes are averages is why only anecdotally pointing to individual pieces of inefficient investment doesn't prove anything - these will always exist in every economy. The systematic statistics show the efficiency of investment in China from the point of view of growth is high.


What about the significant threat of misallocation of resources? Granted the US experienced this but a state controlled system can hide the reality of it a lot longer. How do we know this isn't the case in china if investors are effectively having capital stuffed down their throats?

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John Ross

  • Is Senior Fellow at Chongyang Institute for Financial Studies, Renmin University of China

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