How can fixed asset investment still be growing so quickly?

Derek Scissors of the neoconservative American Enterprise Institute is puzzled at how China's fixed asset investment (FAI), which accounts for over 40 percent of GDP, can still be growing at a faster clip than consumption, when official Chinese figures show that nearly 85 percent of Q1 growth came from consumption alone.

A quick consultation with Wikipedia helps:

Gross fixed investment is defined as total business spending on fixed assets, such as factories, machinery, equipment, dwellings, and inventories of raw materials, which provide the basis for future production. It is measured gross of the depreciation of the assets, i.e., it includes investment that merely replaces worn-out or scrapped capital.

So to arrive at a rough approximation to validate the official Chinese breakdowns of growth contributions, let's use a Q1 2015 baseline GDP of 100 units, broken down as 51 consumption, 42 investment, and 7 net exports. In Q1 2016 both consumption and investment in fact rose by around 10 percent, meaning an additional 5.1 and 4.2 units of consumption and investment, respectively. However, if investment depreciation was 1.4 units (i.e. a third of new plant, real estate, etc. was simply to replace old capital stock), that means the net addition to investment GDP is only 2.8, bringing the new total to 44.8, while consumption GDP increments by the full 5.1 units to 56.5. Now combining this with net exports falling by 1.6 units (yes, the Chinese trade surplus has shrunk substantially over the past year), that makes total Q1 2016 GDP 56.5 + 44.8 + 5.4 = 106.7 units, or a 6.7 percent growth over Q1 2015 (the official year-on-year increase reported last month).

It follows from this that consumption accounts for 5.1/6.7 or 76.1 percent of GDP growth, investment for 2.8/6.7 or 41.8 percent, and net exports for -1.4/6.7 or -20.9 percent. This isn't terribly far off from the official Chinese stats: 84.7, 35.8, and -20.5 percent, respectively.

What this shows is that the apparent discrepancy noted by Mr. Scissors - between the growth contributions of investment versus consumption as against their individual growth rates - is reflective of the high capital turnover ratio in China. This squares well with anyone who has even a rudimentary intuitive grasp of the Chinese economy: it may be the world's factory floor and builder extraordinaire, but on the whole its capital investment and formation processes are highly wasteful and inefficient - even aside from the fact that much of it is redundant. And it's actually gotten better over time. In the past, when FAI easily outstripped consumption as opposed to being only marginally faster like today, that's because it was even more wasteful and inefficient - at the worst, perhaps nearly a full half of new investment was to swallow up depreciated old assets. And that was when investment's share of GDP was closer to a whopping 50 percent than to 40 percent today.