Morningstar published its analysis of the outlook for Chinese GDP growth and the investment potential in China’s inland provinces. Among the key arguments for sustained investment strength across China is a "build out" of the country's relatively poorer inland provinces. The hypothesis is that growing outlays on real estate, infrastructure, and manufacturing in less-developed provinces will underpin elevated nationwide investment growth and, as a consequence, keep the investment share of GDP at very high levels. Morningstar’s analysis of provincial-level data suggests considerably less potential for inland investment growth than commonly believed. Morningstar finds poorer inland provinces have been unusually investment-intensive even by elevated Chinese standards and excess investment is arguably worse inland.
If you are interested, please download the full report here.
Key takeaways of the research report include:
Consensus GDP growth expectations have moderated, but remain too aggressive, especially as it concerns investment. Any medium-term forecast that envisions 8% GDP growth almost necessarily assumes high investment growth and forestalls a true rebalancing to consumption.
Poorer inland provinces have been unusually investment-intensive even by China's heady standard. In the past decade, investment accounted for 68 percent of GDP growth in non-coastal provinces versus 52 percent nationwide. Presently, investment's share of GDP stands at 62 percent in the interior versus a national average of 48 percent. The median investment share among countries of a similar income level is 25 percent.
Heavy investment in poorer regions hasn't generated commensurately stronger economic growth. Incremental returns on the past decade's investment have been lower in poorer regions, implying comparatively fewer remaining opportunities for value-added investment.
Tangible measures of capital stock suggest greater overinvestment in poorer inland provinces. Morningstar observes larger excesses in infrastructure and residential real estate in the interior than along the coast.
Aggressive growth assumptions for China's interior underestimate the limitations imposed by geography and topography. The investment-export growth model successfully applied along the coast is likely to be less effective in the more isolated interior.
