China: Invest in Productive Resources

This is the message in a recent analysis by Economy.com. The Chinese are saving too much and looking more to the worldwide stock market as a wealth-building engine instead of reinvesting in their own productive capacities. Thanks to a huge inflow of foreign direct investment, China has become a major goods producer. Much of this investment has come from U.S. companies trying to open the door to the Chinese market and also take advantage of current cost advantages for production. The Economy.com analysis points to long term problems with China's current economic strategy, and I think they have a point.

There is one point missing from the Economy.com analysis that I would add. Who did the Chinese learn this strategy from in the first place? Duh. Maybe there is a complimentary recommendation that should be made about how American companies handle their future profits once the economy gets fully back on track, and that is that U.S. companies need to plow a greater share of their retained earnings into new productive capacity instead of handing out huge stock dividends and paying uncalled for CEO bonuses.

I think we can count on the fact that many interesting twists and turns will characterize China's future economic development in coming years. Is China susceptible to some of the same problems that have hobbled Japan's economic development over the past decade? I see that potential, especially in looking at China's financial system.

The Chinese should adopt a prudent growth strategy that is sustainable over the long term. This will not be easy given the internal and external pressures to pump up the Chinese economy.