Global infrastructure and Anti-Pollution Projects can extend China’s Investment Growth model

Michael Pettis has made the case that China’s growth has to slow because the investment fed growth model that China has used is running out of projects with good returns. Therefore, China has to transition to primarily domestic consumption for future growth

China’s total outbound investment is estimated to increase from about $100 billion in 2013 to $600 billion in 2025. This would provide China with 2-3% of GDP growth and high return projects to apply investment. During 2011-12, the global infrastructure market rebounded from the global financial crisis, and will continue to grow between 6-7% yearly to 2025. Increasing the quality and productivity of infrastructure in Asia, Europe, America and Africa will increase the market sizes particularly in developing countries. This will boost the export and trade that China has with those countries.

China will shift its $4 trillion of reserves from portfolio investment (much of which goes into US treasuries) towards higher-yielding direct investment. ODI is also good for trade. In countries where China invests the most, Chinese exports have also gained market share at a faster-than-average rate (with the exception of some European countries due to EU tariffs). Demand and jobs do not follow ODI out of China: indeed, ODI creates larger external markets for China’s exports. Finally, increased capital and trade flows both help in China’s quest to internationalize its currency, the renminbi.

Overall, close to $78 trillion is expected to be spent globally between now and 2025 on capital projects and infrastructure.

China will also invest in high value anti-pollution projects.

The health costs of air and water pollution in China amount to about 4.3 percent of its GDP. By adding the non-health impacts of pollution, which are estimated to be about 1.5 percent of GDP, the total cost of air and water pollution in China is about 5.8 percent of GDP.

China’s economy will go from $8.5 trillion this year to about $12-20 trillion in 2018 (depending upon RMB currency appreciation). The cost to China will be $490 billion to 1.2 trillion in each of the years. It will be in the range of $3-5 trillion over the 5 year timeframe.

I think China could productively spend three to four times its current military budget over five years ($2.1 – 2.8 trillion over 5 years or $420 billion to $560 billion per year) on anti-pollution measures that offset the 5.8% GDP losses.

China still has productive gains from urbanization.

High speed rail is providing economic value by improving transportation and urban integration in China.

This will be expanded with a high speed rail network that links to Asia and Europe.

Lower oil prices will help China.

China will also be getting a lot of fairly low priced natural gas from Russia.