By Jamil Anderlini at the Financial Times
Ghost cities" lined with empty apartment blocks, abandoned highways and mothballed steel mills sprawl across China's landscape – the outcome of government stimulus measures and hyperactive construction that have generated $6.8 trillion in wasted investment since 2009, according to a report by government researchers.
In 2009 and 2013 alone, "ineffective investment" came to nearly half the total invested in the Chinese economy in those years, according to research by Xu Ce of the National Development and Reform Commission, the state planning agency, and Wang Yuan from the Academy of Macroeconomic Research, a former arm of the NDRC.
China is this year on track to grow at its slowest annual pace since 1990, and the report highlights growing concern in the Chinese leadership about the potential economic and social consequences if wasteful investment leaves projects abandoned and bad loans overloading the financial system.
The bulk of wasted investment went directly into industries such as steel and automobile production that received the most support from the government following the 2008 global crisis, according to the report.
Mr Xu and Ms Wang said ultra-loose monetary policy, little or no oversight over government investment plans and distorted incentive structures for officials were largely to blame for the waste.
"Investment efficiency has fallen dramatically [in recent years]," they say in the report. "It has become far more obvious in the wake of the global financial crisis and has caused a lot of over-investment and waste."
Beijing has in recent years sought to move from its investment-heavy, credit-dependent growth model to one that relies more on consumption and services.
But slipping growth rates this year have seen it fall back on loose credit and government-mandated infrastructure investment to prop up the economy and ensure steadily rising employment.
Much of the investment in recent years has been funneled into real estate projects, but apartment sales and prices have fallen this year, leading to fears of an impending property crash. Most of the industries that feed the real estate sector, such as steel, glass and cement, are awash with overcapacity and have been hit hard by the property downturn.
Misallocation of capital and poor investment decisions are not the only explanation for the enormous waste in China's economy. A significant portion of China's post-crisis stimulus binge was simply stolen by Communist Party officials with direct responsibility for boosting growth through investment, according to separate estimates by Chinese and overseas economists.
For the past two years, President Xi Jinping has been engaged in a wide-ranging anti-corruption inquiry that has engulfed thousands of officials.
Jonathan Anderson, founder of Emerging Advisors Group, the consultancy, estimates that about $1 trillion has gone missing in China in the past half-decade as a result of weak oversight and the enormous opportunity provided by the investment boom. "That translates into maybe 5 percent of GDP per year worth of skimming off the top," he says.
"Think about it: every local government wakes up one morning in 2009 and finds that the central authorities have lifted every single form of credit restriction in the economy," he says. "With no one watching the till, it would be awfully hard to resist the temptation to sidetrack the funds, squirreling them away in related official accounts or paying them out through padded contracts to other connected suppliers and friends."