By Michael Lelyveld
China’s government appears to be stifling investment in the country’s economy as it tries to steer funding into preferred sectors for growth.
In a Sept. 6 report, the official Xinhua news agency highlighted the double-digit rise of investment in fixed assets like buildings and machinery since 1978, the start of China’s “opening-up” reforms.
From 1981 through 2017, China recorded 490 trillion yuan (U.S. $71.4 trillion) in fixed asset investment (FAI) with average annual growth of 20.2 percent, according to National Bureau of Statistics (NBS) data.
The contribution of FAI to China’s gross domestic product peaked at 48 percent in 2011 before settling down to 44.4 percent last year as the country’s focus shifted to consumption from “over-reliance on investment and exports,” Xinhua said.
What the article doesn’t say is that FAI growth has declined sharply and defied government efforts to revive it at a time when GDP growth has edged down and the economy faces pressure from abroad.
Investment growth has slowed from 10 percent in 2015 to 7.2 percent last year and 5.3 percent in the first eight months of 2018.
The latest rate is a record low since at least 1995, the Financial Times reported.
The government has noted the particular weakening of infrastructure investment as eight-month growth slipped to 4.2 percent from 19.8 percent in the year-earlier period.
In the first half of the year, the number of new infrastructure projects fell 0.81 percent while the investment value plunged 33.5 percent, the National Development and Reform Commission (NDRC) said.
The infrastructure falloff has been all the more remarkable because it has taken place in a sector that the government has traditionally controlled.
In July, the NDRC planning agency announced that it would supervise “all phases of (FAI) projects by local governments” following reports that local authorities were reluctant to proceed due to crackdowns on financial risk ordered by the central government.
While investment in expressways climbed 12.8 percent in the first six months, construction of rural roads rose only 1.8 percent, the Ministry of Transport said.
Premier Li Keqiang called for accelerating infrastructure projects, singling out construction of the Sichuan-Tibet railway, as the cabinet-level State Council called for more stimulus spending to spur the economy.
In July, the government also announced a pilot program to establish “special-purpose companies” under state ownership to push state capital investment.
The NDRC issued an FAI monitoring report seeking to highlight investment opportunities, citing 459,000 new proposed investment projects.
Reviving private investment
But while the number of projects rose 23.3 percent in the first half, investment in the projects, valued at 73.1 trillion yuan (U.S. $10.6 trillion), increased by only 6.9 percent, the official English-language China Daily said.
The government has claimed some success in reviving the growth of private investment, which rose 6 percent last year and 8.7 percent in the first eight months of 2018.
According to the official reckoning, private investment accounts for about 60 percent of GDP and more than 80 percent of urban jobs. Private investment rose 3.2 percent in 2016 and 10 percent in 2015, the NBS said.
State media reports suggest that private investment has been held back by suspicions that local governments have been using it as a back-door source of finance, adding to debt obligations.
Most recently, the NDRC has promised to take “further measures” to promote private investment such as easing market access while trying to steer it into preferred sectors, including new airports and aviation services.
Last month, the NDRC published a list of 28 civil aviation projects valued at 110 billion yuan (U.S. $16 billion), encouraging private investors to participate, Xinhua said.
The opening for investment may represent a fraction of the sector’s opportunities. China has 232 airports for civil aviation, with 32 serving 10 million or more passengers annually, the China Civil Airports Association said.
The government also plans to lower restrictions for private investment in infrastructure, public services, elder care and health care, an NDRC spokesman said on Sept. 6. Officials have made many similar promises in the past.
But government probes of private investment have competed with the incentives to encourage it, turning the net effect into a mixed bag.
Official suspicions have weighed heavily on public-private partnership (PPP) projects, despite a big push for the investments in 2014.
Earlier this month, a Ministry of Finance (MOF) office publicized figures for PPP projects indicating that a surprisingly large number had been shut down before they got off the ground.
As of August, 7,867 PPP projects had been registered with a combined investment of 11.8 trillion yuan (U.S. $1.7 trillion), the China Public-Private Partnership Center said.
Of the total, 3,812 projects had been signed and 1,762 had started construction. But 2,148 projects with investments of 2.5 trillion yuan (U.S. $364 billion) had been “eliminated” under the MOF’s crackdown on “zombie” PPP projects, Xinhua reported.
The effect of cross-purposes
It is hard to estimate the effect of opposing forces and initiatives within the government, but the cross-purposes may be dampening FAI growth.
Some economists say that FAI was due to weaken in any case as China moves to its next stage of growth.
“I think China is becoming more ‘normal’ in terms of fixed asset investment relative to GDP. As the service sector economy becomes a larger share of GDP, fixed assets will diminish,” said Gary Hufbauer, nonresident senior fellow at the Peterson Institute for International Economics in Washington.
“Conversely, R&D and technology expenditures in general will increase,” he said.
Hufbauer suggested that China’s investment patterns in traditional industries may be reaching a plateau.
“China has built all the steel mills the country will need for the next 50 years,” Hufbauer said by email.
Other experts say the FAI growth figures tell only part of the story because so much of China’s capital movement in the past was classed as investment, and much of the investment itself was unproductive.
“The 25-percent growth years were full of money movement that wasn’t true investment, not to mention an enormous amount of waste,” said Derek Scissors, an Asia economist and resident scholar at the American Enterprise Institute.
“At five-percent growth, the waste isn’t growing that fast because the central government no longer mindlessly praises spending,” he said.
Scissors was asked whether the central government is helping or hurting investment growth by trying to steer it into preferred opportunities like PPP projects and airports.
“Almost surely hurting,” he said. “Private money wants flexibility both with regard to the initial project and with regard to exiting early if that becomes the best choice at some point.”
“The government setting priorities only makes that more difficult,” Scissors said.