Reference no: EM131234318

China's $29 test The fact that Wal-Mart can sell Chinese-made DVD players in the US for $29 (£16) is not just a testament to the miraculous productivity of the Chinese economy and the cheapness of its labor. It is also a warning of the dangers of over-investment. Chinese policy makers, justifiably proud of the announcement that the economy grew 9.1% in 2003, should consider the wider implications of the DVD phenomenon as they struggle to guide China in the right direction. Dong Tao of Credit Suisse First Boston in Hong Kong is among economists predicting a Chinese slowdown in the next three years - to 7% growth or less, he says - as investment stalls after a period of extraordinary exuberance. The oversupply of DVD machines as a result of too much investment three years ago is now being replicated in many other industries. China's already substantial output of steel, cars, textiles, ethylene, mobile telephones and much else besides is expected to double in the next three years, with unpredictable
and probably damaging results for prices. The country is on a wild, wild capex ride, says Mr Tao. ‘China is in a situation of severe over-investment.' Fortunately, Chinese leaders seem to agree. They are tackling the problem by trying to limit investment in overheated ‘bubble' sectors such as vehicle assembly and urban property. One of the most encouraging signs is that credit growth slowed in the fourth quarter of 2003, limiting the vulnerability of state banks already burdened with bad debts. As China enters a phase of more moderate growth the government is also right to shift the focus from investment to consumption, and to favor the neglected rural and inland provinces. In spite of the cheapness of manufactured goods, yesterday's data showed that China had pulled itself out of deflation thanks to rising food prices - a boon to productive peasants and an effective form of wealth redistribution from city to countryside. China's impressive economic performance in 2003, the best for seven years, was good for the country's 1.3bn inhabitants and good for the world, prompting the statistics chief who unveiled the figures to hail ‘a milestone in Chinese economic history'. For the first time, China's gross domestic product exceeded $1,000 per capita. In purchasing power parity terms, the country contributed 1.1% of the world's 3.2% growth last year, against 0.7% from the US and 0.2% each from Japan and Europe. Beijing even has a cushion to fall back on if growth slows faster than predicted, since most economists believe official figures are underestimates. Power consumption, transport statistics and other indicators suggest an actual 2003 growth rate of more than 11%. The tale of the throwaway DVD player, however, may yet return to haunt Chinese industry.

Question

1 What is meant by ‘the danger of over-investment'?

2 What are the benefits of ‘shifting the focus from investment to consumption'?