Weijian Shan recently ignited a debate over the profitability of Chinese companies with his essay in the Far Eastern Economic Review “The World Bank’s China Delusion”, which had a reply in World Bank economists Bert Hofman and Louis Kuijs’ “Profits Drive China's Boom."
FEER’s blog told the full story.
To vastly oversimplify the positions, the World Bankers believe that the corporate sector is making healthy returns on its investments, and this is fuelling the high savings rate and fast growth in investment. Therefore Beijing can afford to be sanguine about the investment level, although the central government could improve efficiency by forcing state-owned companies to pay dividends back into state coffers.
Mr. Shan argues that while profits may have been growing in recent years, they are not nearly as high as some official statistics would have one believe, and it is bank credit which is fuelling the investment boom. The implication is that a large proportion of savings is going into unproductive investments, which will eventually cause more problems in the already precarious banking system.
Thank you Yan Wang for the heads up.