China's government is now trying to reverse a slowdown in private investment as concerns rise over weakening support for economic growth.
On May 4, the cabinet-level State Council ordered a month-long investigation to see how local authorities are implementing government policies on private investment, official media said.
The inspection followed disappointing numbers on first-quarter investment and falling growth from the private sector, which provides over 60 percent of China's gross domestic product and 80 percent of its jobs, the official Xinhua news agency reported.
Total fixed-asset investment (FAI) of 8.5 trillion yuan (U.S. $1.3 trillion) rose 10.7 percent in the first quarter from a year earlier, according to the National Bureau of Statistics (NBS).
But growth, other than rural household investment, was heavily skewed toward the state-controlled sector, which increased investment by 23.3 percent. Private investment in fixed assets like buildings and machinery rose only 5.7 percent, down sharply from a 10.1-percent growth rate in 2015.
The NBS reported further weakening in April as private investment growth slipped to 5.2 percent in the four-month period, pulling total FAI growth down to 10.5 percent.
Risks to private sector
The government can essentially order state-owned enterprises (SOEs) to keep investing despite losses, but private investors are likely to be on their own in confronting risks, said Dwight Perkins, a Harvard University professor of political economy, emeritus.
"The private sector, of course, is not going to get bailed out, or at least it sees itself as not getting bailed out by the government," Perkins said in an interview. "They have to be more careful and, obviously, some of them are cutting back."
Premier Li Keqiang voiced concern for the consequences of a private sector slowdown.
"Only after these enterprises become vibrant, can the country maintain its economic vitality and ensure that economic growth stays within a reasonable range," said Li.
Some private investment bids had found "no door" for access to opportunity, Li said, according to the Hong Kong edition of the official English-language China Daily. "Forcible measures must thus be taken ... to create a fair investment environment," he was quoted as saying.
The focus on investment follows a 25-percent surge in yuan-denominated bank lending in the first quarter to sustain GDP growth at 6.7 percent, the slowest quarterly pace since 2009.
The State Council investigation of conditions for private sector investment raises concern that a disproportionate share of loans has gone to support deeply-indebted state-owned enterprises (SOEs), despite their smaller contribution to the economy.
Xinhua said that "the State Council can only do so much," suggesting that local officials and banks are still favoring China's 155,000 SOEs.
With the lending boom, the government has taken pains to deny that it has fallen back on stimulus policies to keep GDP from dropping below its target range of 6.5 to 7 percent for this year.
In April, Finance Minister Lou Jiwei spoke of "using monetary policy to buy time" for structural reforms to take hold.
In a lengthy interview published by the Communist Party's flagship People's Daily on May 9, an unidentified "authoritative person" criticized the policy approach.
"It is undeniable that existing problems are not thoroughly solved and new problems are revealed," the official said, as quoted by Bloomberg News. "Economic stabilization relies on the old method, which is investment-driven, and fiscal pressure in some areas has added up to possibilities of economic risks."
The probe on policy implementation is a sign that local officials have been steering funds into traditional infrastructure projects and SOE operations under their control, leaving less for the more productive private sector.
"The performance in Q1 came mainly on the back of government lending to infrastructure developers," Xinhua said. "At the local level, where the actual work takes place, red tape remains a major issue and private businesses still find it difficult to get the loans they need."
On May 14, the China Banking Regulatory Commission (CBRC) sent an "urgent notice" to banks to clear away any roadblocks to granting loans for private investment, according to Reuters. Banks were ordered to report back by May 20, it said.
On Friday, the National Development and Reform Commission (NDRC), China's top planning agency, said it was expanding the investigation to 12 additional provincial regions in a second round of inspections.
A first round had covered 18 provinces and autonomous regions, the NDRC said without disclosing results.
Decline in opportunities
Having the means to invest is one thing, but having the motivation is quite another.
Aside from lending bias, the Xinhua report cited a decline in opportunities for private investment in manufacturing as a result of China's huge surplus of production capacity.
"Slowing growth in private investment is caused by overcapacity in manufacturing, a big part of China's economy and previously the first choice for private investors," said Zhang Hanya, president of the Investment Association of China, a government-affiliated think tank, as quoted by Xinhua.
Private investment growth cooled gradually in 2015 from last year's first-quarter rate of 13.6 percent, but it has dropped sharply since the start of this year, according to NBS data.
Growth decelerated steeply in the January-April period from a 6.9-percent rate in the first two months of the year.
The biggest drag has been in the industrialized northeast region where private investment of 272.4 billion yuan (U.S. $41.6 billion) fell 23.1 percent from a year earlier.
Total FAI in the region of 394.3 billion yuan (U.S. $60.2 billion) during the period also plunged 24.7 percent, suggesting even greater SOE distress.
Despite a temporary uptick in stimulus-driven steel production, investment in the category of ore mining, smelting, and pressing of ferrous metals fell 20.2 percent.
China's leaders have stressed a shift toward innovation and consumption as economic growth factors, but investment and production have been slowing too fast to provide support, while overcapacity has sapped profits and kept prices low.
The forces have been felt in the latest inflation figures as the consumer price index (CPI) rose 2.3 percent in April, while the producer price index (PPI) fell 3.4 percent. The PPI loss was milder than in March but still marked four consecutive years of declines.
"Overcapacity is a huge problem in China right now," said Perkins. The effects have spread through both the private and state sectors, due in part to the huge inventory of unsold housing from previous commercial investment.
"That feeds back into the steel sector, cement, aluminum—all of which have massive excess capacity. A lot of those have big state firms," Perkins said.
Last year, the inventories of 137 listed real estate firms topped 3 trillion yuan (U.S. $461 billion), China Daily reported, citing figures from Shanghai-based financial data provider Wind Information Co., Ltd..
Weak export demand has also discouraged investment and added to capacity excess.
In April, exports rose 4.1 percent in yuan terms but fell 1.8 percent in U.S. dollar terms, due to depreciation. In the first four months, exports were down 2.1 percent in yuan and 7.6 percent in dollars, according to customs figures.
Private investment has also suffered in industries like textiles and apparel, where China is no longer competitive.
"The most labor-intensive, private sector export-oriented firms are hurting because wages have gone way up," Perkins said.
Forced to choose
The slowdown in private investment also appears to reflect a poor response to the government's bid to draw private funding into the state sector under a "mixed ownership" plan to revitalize SOEs.
The 20-page plan for public-private partnership (PPP), issued last September by the Communist Party of China (CPC) Central Committee and the State Council, allowed private access to sectors including shipping, telecommunications and banking, but it has been criticized for falling far short of privatization and leaving state management in control.
A weakening of private sector investment may force the government to choose between faster SOE reforms and even greater reliance on less-productive SOE investment and bank loans.
NBS figures suggest that greater investment from the state sector and increased lending would be needed to compensate for further declines in the private sector, if China is to maintain FAI growth rates.
On May 10, the government signaled a possible shift in policy with reports that new lending guidelines for perennially-indebted SOEs known as "zombie companies" will be tested in about 20 cities this year.
But the big jump in first-quarter lending and FAI disparities may be signs that higher reliance on the state sector has already taken place.
Last year, private investment accounted for 64.2 percent of total FAI. In the first four months of this year, the private share fell to 62.1 percent.