China's Fabled Growth

News is out that China’s GDP growth rate hit a 10 year record at 10.7% for 2006.

What might be more important is that 50% of Chinese economic activity is from fixed asset investment. When you consider that India’s fixed asset investment is under 30% of GDP and the US and UK’s is around 17%, then you begin to understand why China is using up 30% of the world’s supply of raw materials. The signs are apparent everywhere you look in China’s booming cities. Looking around Shanghai or Guangzhou you could easily see a dozen skyscrapers under construction in any direction.

Everyone’s looking for the Chinese economy to slow down a bit. However, the US economy hasn’t slowed down the way it was expected to. The appreciating yuan only serves to check inflation pressures (at 2.8%) and attract more foreign investment.

What may eventually trip China up is domestic demand. As the IMF pointed out earlier this week, China’s economy is still too dependent on trade and foreign investment. As I mentioned before, this definitely seems to be the case for the software market. Were investment to truly slow down, the shift to domestic consumption could be rough.