China Uneasy Over Investment Drop

An analysis by Michael Lelyveld
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A worker cleans the street in front of a construction site on a rainy day in Huangshan, eastern China's Anhui province, Dec. 9, 2015.
A worker cleans the street in front of a construction site on a rainy day in Huangshan, eastern China's Anhui province, Dec. 9, 2015.

China's government has grown increasingly anxious about an apparent slide in private investment as the economy struggles to meet official growth goals.

Government planners have been on alert since April when first-quarter data from the National Bureau of Statistics (NBS) showed growth of private investment in fixed assets like buildings and machinery dropped sharply to 5.7 percent from 10.1 percent for all of 2015.

On May 4, the cabinet-level State Council ordered an investigation into local practices affecting private investment following a meeting chaired by Premier Li Keqiang.

"The importance of private investment cannot be overemphasized," said a commentary by the official Xinhua news agency, noting that the private economy generates over 60 percent China's economic growth and over 80 percent of its jobs.

Since then, the cumulative growth numbers for private investment this year have only gotten worse, falling to 5.2 percent in April, 3.9 percent in May and record lows of 2.8 percent in June and 2.1 percent in July.

The cumulative growth figures indicate that private investment started shrinking in June compared with year-earlier rates.

Meanwhile, total fixed-asset investment (FAI) growth, excluding rural households, declined only slightly from 10 percent at the end of 2015 to 9 percent at midyear and 8.1 percent in July, NBS data said.

From looking at the numbers, an observer would conclude that the steeper declines in the private sector were responsible for dragging total investment down, while state-owned enterprises (SOEs) were still supporting growth.

Government inspections

Official responses to the reports suggest the government believes that is the case.

Government inspections have been followed by warnings to local authorities about equal access to credit for private enterprises, new guidelines and reform promises, all apparently to no avail.

In July 18, Premier Li urged new efforts to stimulate private and mixed-ownership investment by "removing obstacles" and blocking funds to state-owned industries with surplus production capacity.

One week later, a top planning agency official argued that the government ought to boost public investment for SOEs "to offset the effect of lackluster private capital" and keep the economy going, Xinhua reported.

"Given the slowdown, the government should begin to invest more, partly through special construction funds, to stimulate investment and stabilize the economy," said Zhang Yong, deputy director of the National Development and Reform Commission (NDRC).

On Aug. 4, the NDRC voiced its concern again, suggesting that private investment should be encouraged with preferential policies and access to previously off-limits sectors like electricity and telecommunications, where SOEs have been favored in the past.

Xinhua cited drops in business confidence and investment for exports, while some economists pointed to higher risks for private enterprises which lack the same level of support from state banks as SOEs.

Government officials noted fundamental problems in attracting investment for economic growth.

"Businessmen invest for profit, and it is understandable that they hold up investment when traditional sectors such as manufacturing and real estate now offer only marginal profits due to a lack of innovation," Zhang said.

Breaking the cycle

The government's focus on falling private investment reflects concern that it has not fostered a favorable business environment as it tries break the cycle of perpetual credit for unproductive but politically-connected SOEs with "supply-side reforms."

But beyond that, the official hand-wringing may be seen as a setback for the government after years of promoting a shift from investment-led growth to a consumer-driven economy.

Worries about weakening of traditional growth factors like FAI and exports may only be a sign that the government has realized that economic transition will take longer than the replacement of one slogan with another in the official press.

But a closer look at the NBS data may raise questions about whether the private sector is to blame.

Although the agency announces the growth rate of private FAI in monthly reports for the press, it publishes entirely different figures in supporting statistics on its website.

In its Aug. 12 press release on seven-month data, for example, the NBS lists the growth rate of private investment as 2.1 percent, but its supporting table for FAI by business registration shows the rate for "private enterprises" as 8.3 percent.

What would appear to be the same category is apparently not.

Derek Scissors, an Asia economist and resident scholar at the American Enterprise Institute in Washington, said the NBS webpage on "fixed assets by status of registration" represents a long-established and relatively consistent series of data broken down by business type.

But the categories are confusing and complex, ranging from SOEs to "state joint ownership enterprises," "collective joint ownership enterprises," "joint state-collective enterprises," and limited liability corporations of various types. The NBS lists 28 categories of FAI in all.

At some point, the agency merged some of the categories in its press reports on private investment, reflecting non-state participation in various forms of businesses and limited liability corporations listed on the Hong Kong stock exchange.

Sketchy explanations of the NBS calculations make it impossible to evaluate the reported private investment problem without getting down into the weeds.

A footnote to the NBS data suggests that the headline figure for private investment consists of a hodgepodge of business categories, including collective enterprises, joint- stock cooperative enterprises, private partnerships and their investments "in the mixed economic components with industrial and commercial registration."

Hard to tell

How much is really private or state-controlled is hard to tell.

"They grabbed some firms out of this category. They grabbed some firms out of the other category," said Scissors.

"The Chinese have oh-so-helpfully aggregated the data into state and private. They don't tell us how they aggregated them, and everyone uses them anyway," he said.

The result is that no one can be sure what the publicized drop in private FAI growth percent means, since the 8.3- percent rate for purely private firms is actually stronger than the 8.1-percent growth for all FAI, while the growth rate for the category listed as "state-owned enterprises" is much weaker at a negative 5.7 percent.

Looking at the details, an observer would conclude that purely private business is pushing up the investment total, not dragging it down.

Although its process is unclear, the NBS has created a broader investment category and labeled it as "private" in compiling its press release figures, making it seem that declining FAI growth is attributable to the private sector rather than SOEs, although many companies are likely to remain under functional state control.

"We don't have sufficient information in the big category of limited liability corporation investment to say that we know which ones are state and which ones are private," Scissors said.

The internal massaging of the numbers may renew questions about whether China's policy makers have access to more accurate data when making economic decisions or whether they rely on widely-doubted official growth rates.

Despite the steady slippage in investment numbers, China maintained its official 6.7-percent growth in gross domestic product through the second quarter, contributing to continued skepticism about GDP claims.

Another possible interpretation is that the weak private investment figures publicized by the NBS are an example of the "real" data that government officials are using to guide economic policy, which could account for the State Council's concern.

But the lower private FAI numbers may also serve political purposes on both sides of the debate over SOE reforms and efforts to cut production overcapacity.

"The state side can say we told you that you can't trust the private sector, so you should support us, and reformers can say if you don't support the private sector, we're all doomed," Scissors said.





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