China Wasting Its Huge Capital

China is awash with capital. But a sizable hunk of it is going into vanity projects, real estate speculation and unprofitable expansions of capacity in already unprofitable industries.

Is China wasting so much capital that it puts the country's future at risk?

Previously, when asking just how sustainable China's economic boom is for the long term, we looked at the issue of exploited workers. Now let's ask how much capital China has to invest in building its future.

The government's foreign-exchange reserve -- the result of the country's huge trade surplus with the rest of the world -- stands at more than $1 trillion. Direct investment in China from other nations came to $111 billion in 2006. The country's famously high individual savings rate, estimated at about 16% of gross domestic product by the World Bank in 2006, has stocked banks with $4 trillion in deposits.

Chinese corporations are actually saving even more than individuals, about 22% of GDP, according to the World Bank. The Chinese government actually shows a surplus, kicking in savings equal to 6% of GDP to the national pot of capital.

But China doesn't always spend that capital wisely. In recent years, stories of vast amounts of capital poured into wasteful vanity or speculative projects have grown increasingly common.