China Investment Cools As Tariff Fears Climb – Analysis

By Michael Lelyveld

Investment growth in China appears to have stalled as the country faces the uncertainties of its tariff war with the United States.

All major categories of investment suffered declining growth in reports for April from March or four-month rates compared with first-quarter results, according to figures from the National Bureau of Statistics (NBS).

The agency has tried to downplay the diminishing results, reporting investment growth as “stable.”

But the latest data for the categories of fixed-asset investment (FAI), foreign direct investment (FDI), and outbound direct investment (ODI) are all down from previous growth marks.

The across-the-board slippage comes despite the government’s campaign to counteract economic “headwinds” with pro-growth policies, as well as first-quarter reports that were seen by some as a sign that the downturn was bottoming out.

The weakening trend has also defied relentless efforts by the NBS and official media to dress up the data by either obscuring the comparable growth rates from relevant time periods or omitting them altogether.

“I see the stories put a positive spin on the numbers, whatever the underlying facts. Guess that’s the Chinese approach,” said Gary Hufbauer, nonresident senior fellow at the Peterson Institute for International Economics in Washington.

While the government had already counted on declining or more “sustainable” economic growth rates before the tariff war started last year, the recent readings on investment may threaten to reduce growth further over a longer term.

“I would attribute more than half of the deceleration to trade and investment battles,” Hufbauer said by email.

Eroding confidence

The simultaneous slowdown in FAI, FDI and ODI means that domestic investors are holding back on commitments not only within China but also outside the country, while foreign investors are hesitant about the Chinese market as well.

“What’s going on has to erode business confidence in the long-term outlook for both world trade and investment, two pillars of Chinese success,” said Hufbauer.

Perhaps most telling is the apparent April weakening in FAI, which includes investment in long-lasting domestic assets like buildings and machinery.

In the first four months, FAI of 15.6 trillion yuan (U.S. $2.3 trillion) rose 6.1 percent from a year earlier, down 0.2 percentage points from first-quarter results. For unexplained reasons, the NBS does not report the most recent monthly figures alone.

The four-month pace was still faster than the 5.9-percent annual growth rate for 2018, the NBS noted. But even so, it was only a shadow of the 20.2-percent average annual growth that China achieved between 1981 and 2017, according to an NBS posting last September.

According to the NBS, the bright spot in the four-month period was high-tech manufacturing with 11.4-percent growth in FAI. The primary sector, including extraction of resources, lost 0.1 percentage points from the quarterly rate.

The FAI lag may be a sign that the government’s strategy for drawing private capital into state-owned enterprises (SOEs) through public-private partnerships (PPP) hasn’t worked.

Government attempts to channel investment may be depressing both private and SOE commitments at a time of trade war concerns.

Growth of private sector investment fell 0.9 percentage points from the first quarter to 5.5 percent in the four- month period, while state sector investment growth stood at 7.8 percent. The NBS gave no state sector figure in its three-month report.

Slowdown likely worse

Derek Scissors, a resident scholar at the American Enterprise Institute who compiles the China Global Investment Tracker, said the real extent of the slowdown is likely to be worse than the NBS says.

“We can’t replicate even their weak investment figures. Ours are much lower,” said Scissors. “And the collapse is entirely due to SOEs not investing,” he said.

Over 8,600 PPP projects were registered by the end of 2018 for planned investment of 13.2 trillion yuan (U.S. $1.9 trillion), according to the Ministry of Finance.

Nearly 4,700 projects, or 54 percent, had “entered the implementation stage,” with combined investment of 7.2 trillion yuan (U.S. $1 trillion), the official Xinhua news agency reported in February.

Growth of foreign commitments to the Chinese market also appears to be fading, based on China’s official figures.

The lower numbers are all the more remarkable in light of the “opening-up” measures and new promises of access that China has made to foreign investors in response to U.S. pressures on the trade imbalance.

Non-financial FDI rose 6.3 percent in yuan terms from a year earlier to 62.95 billion yuan (U.S. $9.1 billion) in April. The growth rate fell from 8 percent in March, while four-month FDI slipped to 6.4 percent from 6.5 percent the month before.

The figures suggest that investor worries about the future of U.S.-China relations have outweighed the benefits of access breaks.

Last year, FDI of 885.6 billion yuan (U.S. $128.3 billion) rose by a scant 0.9 percent in yuan terms, the Ministry of Commerce (MOC) reported in January. That was a far cry from the boom years of 2004-2008, when annual increases averaged over 26 percent, according to World Bank data.

‘Still optimistic’

Last month, Foreign Ministry spokesman Lu Kang argued that foreign investors remain positive about China, citing recent decisions by several multinationals to increase their commitments.

“As a matter of fact, even though the United States has been threatening to raise tariffs on Chinese products for more than a year, foreign investors’ enthusiasm to invest in China remains high, and they are still optimistic about the Chinese market,” Xinhua quoted Lu as saying.

But FDI could also face new hurdles within China, particularly in the high-tech sector, as the result of recently-expanded powers of the National Development and Reform Commission (NDRC) to conduct “economic security” reviews.

Last month, the South China Morning Post compared the new role for the nation’s top planning agency to national security functions of the Committee for Foreign Investment in the United States (CFIUS), suggesting that retaliation against U.S. investment could become part of the trade war.

Foreign investment in China’s high-tech sector was a highlight of the official FDI report for the first quarter, as investment in technology industries jumped 50.6 percent from a year earlier, accounting for 27.5 percent of FDI during the period, Xinhua reported.

But the conflict over U.S. restrictions on telecom giant Huawei Technologies Co., Ltd. suggests that major sources of FDI growth in the high-tech sector could soon be off limits.

A chilling effect

Beijing’s threat last week to draw up a list of “unreliable entities” for possible retaliation could also have a chilling effect on FDI decisions.

China’s outbound investment also suffered in the April slowdown with a 3.3-percent increase in the four-month period to 233.4 billion yuan (U.S. $33.8 billion), compared with a 4.8-percent gain in the first quarter from a year before.

China’s non-financial ODI has spiked and plunged wildly over the last few years as the government has cracked down on speculative buying of foreign assets including real estate, sports clubs, entertainment companies, and hotels, raising capital flight risks.

In its monthly reports, the MOC routinely claims that no new investments in such sectors have taken place, and the tepid growth of ODI now seems to have fallen into the general sluggish pattern of investment despite the government’s publicized push for its Belt and Road Initiative (BRI).

In its latest report, Xinhua said that Chinese companies had made U.S. $4.61 billion in investments in 50 BRI countries during the four-month period without giving any growth figure or period for comparison.

Xinhua also gave no figure for investment in BRI countries in its first-quarter ODI report.