Tons of money, wanton waste

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?
How much capital does China have 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.

For example, the government in Beijing ousted Shanghai Mayor Chen Liangyu last year, charging that city money was being used to fund "private" construction projects, such as using city pension money to build a 60-story Marriott hotel with a Ferrari dealership on the ground floor and a Shanghai version of Silicon Valley that combines high-tech office space with luxury apartments. Chen authorized plans for a branch of France's Pompidou Centre art museum and the world's tallest Ferris wheel. The city actually built a $300 million tennis arena and a $1 billion track for Formula One auto races.

This kind of waste of capital isn't recent -- the mayor of Beijing was dismissed in 1981 for the same lavish city spending that doomed Chen -- and it's countrywide. By 2005, China's central government had spent more than $250 billion to fix the bad-debt problems at the big four national banks created when bank officials approved loans based on political connections rather than creditworthiness. There's an additional $164 billion in bad debts outstanding, the government estimated in 2006. Credit rating agency Fitch, however, puts total troubled loans at $700 billion, which could result in $220 billion in bad loan losses.