High risk for China's economic correction: S&P

China has invested too much and may be poised for an economic correction should the investment cycle experience a downturn, said Standard & Poor's in a new report.

The report — titled The Investment Overhang: High For China; Intermediate For Australia, Canada, France, And Most BRICS — analyses whether countries are investing too much relative to their returns.

Among a sample of 32 economies, including the world's 20 largest, S&P compared each country's investment-to-GDP ratio against real GDP growth, and categorized the economies into four risk buckets: high, intermediate, less, and least. The categories indicate the degree of risk it sees of an economic correction due to over-investment.

"What we found is that China has the highest risk of an economic correction because of low investment productivity over recent years," said S&P's credit analyst Terry Chan.

"We believe the level of a country's investment overhang can be a leading indicator of a potential economic correction. Specifically, an investment line above the growth line signals diminished returns on investment," Chan said.

"If this trend were maintained over a long period, and the absolute investment-to-GDP percentage remained high, we believe there would be a greater negative impact on real GDP growth when the economy corrects. Therefore, the longer the period and the greater the size of the overhang, the larger would be the economic correction," Chan added.

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