China's Unsustainable Investment Boom

The Chinese fixed-asset investment boom of the past decade has been unprecedented. While all low-income countries have required outsize capital stock additions to make the leap to middle-income status, China's current boom is unmatched by anything on the record books. In fact, by some measures of physical capital, China already looks more like one of the world's leading developed economies, rather than the middle-income economy it is. We don't believe China can continue to rely on building more skyscrapers, highways, and manufacturing plants to sustain the kind of GDP numbers its citizens and global investors have grown accustomed to. In the next 10 years, the onus for growth will rest on Chinese households: their willingness and ability to consume. If consumption fails to grow at a rate well above historical norms, the economy may be able to muster only 5% growth at best, a far cry from the 10% average from 2001 to 2010.