Depression: State Council Investigates Drop in Private Investment

The private economy is slowing and the recent spike in investment is coming from SOEs and local governments. The State Council has noticed and has sent out investigation teams (dubbed a "rare signal" by the media) to find why private investment has slumped.

This isn't a mystery though.

Credit markets are in a depression, and governments/SOEs don't respond to market forces.
iFeng: 国务院罕见派出督查组释放了什么信号?
State Department sent a dispatch inspection teams for private investment, so that work is not common. Because, private investment and government investment is different from state-owned enterprises to invest, prescriptive administrative policies on social capital and private enterprise efficiency is not obvious, choose to send special inspection group from the local investment and financing system reform implementation was supervised government one of the few methods.

The move means that the current downturn in private investment in China, the situation has not enough vitality quite grim.
Today's State Council executive meeting said that the current private investment growth has declined, we must take powerful measures to promote policies fall further broaden access, to create a fair business environment to promote private investment stabilized to the good.
This was evidenced in the fixed asset investment data from April, which showed the growth in private investment was less than half the growth in total fixed asset investment.Local Govts and SOEs Keep Adding Fixed Assets, Private Economy Retreats
Fixed asset investment increased 11.2% in March versus the year ago March. Year to date, it is up 10.7%.

Private fixed asset investment increased 4.7% mom and 5.7% yoy. Mainly slowed by falling investment in the sectors with overcapacity. The Northeast private FAI is down 17.1% YTD.
Back to the iFeng article:
National Bureau of Statistics on the map, from 36 months in 2013 to 2015, the private investment growth has been higher than the growth rate of total social investment. But since entering since 2016, private investment began to split and the whole social investment, private investment growth all the way down, from 13.6% in 2015 over the same period dropped sharply to 5.7%. Private investment growth year on year cut by more than half. And in 2013, private investment growth rate has reached 23.1%, higher than the total investment of 3.5 percentage points; in 2014 a quarter of slow growth in private investment fell to 20.9%, the first quarter of 2015, private investment fell to 13.6%, only total social investment exceeded 0.1 percentage points. To the first quarter of this year, private investment has been significantly behind the whole society to invest 5 percent.
We have seen real estate investment and private fixed asset investment collapse from levels seen 2 years ago, but this creates only a blip in GDP.
In addition to private investment style appears cut down in the first quarter of this year, the State Council executive meeting today attach such importance to private investment background is another: the proportion of private investment in total social investment in the past 10 years there have been rare to decline. Since 2006 to 2012, the proportion of private investment in the whole society investment rose from 49.8% to 61.4% by 2015, private investment accounted for the proportion of the total investment reached 64.2%. But just past the first quarter 2016 data show that private investment in the country's total fixed asset investment in fixed assets accounted for to 62 percent, down 3.0 percentage points over the same period last year.

This contradiction reality show is a quarter of China's economy in 2016 is expected to exceed the steady rise of the truth behind: the actual expansionary fiscal policy and relatively loose money supply, with large-scale state-owned enterprises led to do infrastructure projects, continue to stabilize pressure of the real economy.
The article gives six reasons given for the slowdown:
Comprehensive analysis, the private investment from January this year the growth rate of total social investment derail suddenly fall for the following 6 reasons:

1; since the second half of 2015 began to force fiscal policy, focused on major infrastructure projects, and infrastructure projects due to the large-scale investment, long reporting cycle, investment and financing system is not perfect and other reasons, it is not always focused on the participation of private investment. China's state-owned enterprises still dominate major infrastructure investment.

2; private investment is more concentrated in the manufacturing sector, facing a severe decline in profits, to production, to the pressure on stocks, belonging to shrink overall adjustment, coupled with repeated outbreaks of debt default, the bankruptcy case, resulting in private capital available for investment is not enough.

3; the first quarter of 2016 although M2 balance reached 144.62 trillion yuan, up more than the annual target to reach 13.4%, but because of the capacity to the task, debt default cases frequent, leading private enterprises in obtaining credit funds actually more difficult. Private enterprise financing, financing your long-standing problem, the overall monetary policy easing in the premise, more prominent.

4; and the real economy continue to pressure the relatively pessimistic expectations, so many private firms make investment decisions more cautious and conservative.

5; part of the local government for security considerations, cautious, and other subtle factors in the implementation of the central micro growth, structural adjustment, to force the supply-side reform and the introduction of large-scale investment in infrastructure projects, naturally select state-owned enterprises.

6; some local governments for some reasons, initiative to promote private investment don't go far enough. This is actually an omission. Therefore, this omission has become one of the priorities of the State Council of the inspection work is about to start.
Long story short, China can force its governments and SOEs to invest, but unlike in 2008, private businesses cannot take on more debt. At least not without significant debt deflation, or currency devaluation to bring the balance sheets back into a more favorable balance. The current spike in economic activity is likely to fall off because there's no transmission mechanism from state investment to the wider economy without borrowers. China is turning Japanese.

Update: China takes measures to boost private investment
The upcoming examination will focus on the following areas:

-- Ensuring that the series of government incentives on encouraging private investment were effectively implemented.

-- Making sure there is relaxation on private investment market access.

-- Local governments are working effectively in serving private investors.

-- Guaranteeing a market of fair competition for private investors, and that all private investors are treated equally.

-- The government is expected to play a guiding role in encouraging private investment as well as stabilizing private investment anticipation.

-- Guaranteeing that sufficient financing support for private investors, particularly to small and micro businesses that may face financing difficulties.

-- Promoting cooperation between local governments and the public-private partnership.

-- Ensuring local governments and departments are working to maintain a steady growth in private investment.

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