Private Investment on the Verge of Collapse, Chinese Economy Enters Single Digit Era

I covered the recent private investment report here: What Rebalacing: Private Service Industry Investment Declines 0.1 pc, writing:

The separate private investment report shows there's no rebalancing of investment: the slowdown is most evident in service sector investment, where growth was only 2.2 percent YTD and actually fell 0.1 percent in May. Meanwhile YTD investment growth in primary industry is 17.9 percent. Investment in auto manufacturing and electrical power generation lifted total private investment growth in May.

The very sector supposedly pulling growth forward as the economy "rebalances" experienced a recession in the month of May. I haven't seen that discussed too widely, perhaps because it was not an officially reported data point last year, but it can be reconstructed from the numbers provided.

Zhong Wei of the China Financial Forty Forum (CF40) Academic Committee, and Director of the Financial Research Center of Beijing Normal University addresses this situation in recent article. The headline translates to: Cliff -style drop in private investment - Chinese economy standing on the edge (钟伟：民间投资断崖式下滑——站在悬崖边缘的中国经济)

Decline in private investment the first reason, the Chinese economy is experiencing since 1978, a rare long cycle down, and presently cannot see exactly where the bottom will be. Since 1978, the Chinese economy has had its ups and downs, but since 2010, China and the duration of the economic downturn deeper than people expected, and will continue downward. In this process, we can observe from three aspects. First, China's current economic growth compared with 2010, nearly cut in half; Second, China is currently suffering from the production side a rarely seen since the Asian financial crisis long period (PPI) deflation; third, since 2014 China's reserves fell $ 800 billion, which is very rare in history, and the current foreign exchange reserves continued loss of pressure has not been reduced. These have shown that the economic downturn in China did not see the bottom of the time, whether it is private or foreign investment, have become more cautious. We do not know through the dark tunnel after dawn, or longer dark tunnel.

Decline in private investment the second reason, is state-owned economy is crowding out the private economy and foreign investment. We can observe two typical examples of the existence of crowding-out effect. One is from 2004 to 2010, a large number of studies have shown that state-owned enterprises continued to increase leverage, and leverage private enterprises plus the magnitude is not so big. As another example, after 2010 to the present counter-cyclical process, since the driving force more powerful political pressure and exemption, government procurement, bank loans are more likely to state sector, local governments or infrastructure investment, and government the state-owned economy is increasingly strong extruded non-state-owned economy, private enterprises also will be continuously squeezed out.

Led to the decline of private investment third reason is increasingly clear positioning of state-owned enterprises and strengthening, but the positioning of the private economy has become increasingly blurred and rigid. We can observe two aspects to locate the problem. First, the state-owned enterprises, foreign-funded enterprises, private enterprises in China What is the role of the market economy status which respectively? We were surprised to find that only state-owned enterprises positioning is very clear, state-owned enterprises are the backbone of the Republic, the economy dominant position can not be shaken, but still become bigger and stronger. And, under the governance structure of state-owned enterprises, party committees should play a more important role. In contrast, the private economy and foreigners positioned throughout the mixed-economy which is ambiguous. Although the private economy plays an important role in GDP creation, employment, taxes, etc., but positioned in the economy as a whole which is more ambiguous. At present, private enterprises, foreign-funded enterprises which are in difficulties and change, contemplating changes in the process, but if we do not make fundamental changes of policy, development of private enterprises can not effectively support private enterprise will position itself and long-term development of confidence, resulting in a very large impact.

Decline in private investment the fourth reason is the temporary investment of private, privileged relief measures did not achieve practical results. Over the past decade, the State Council issued a number of items to encourage private investment and encourage private measures, but these are temporary, localized, short-term incentives, or it can be said to be privileged. But in fact, the pursuit of private capital is not the privilege of relief, but long-term, predictable, transparent and equal rights, equal rights equivalent to the state capital investments. China is currently among different ownership enterprises, it has not done in the market environment, legal environment, financial resources and environment of equal rights. In the business environment is not yet an equal rights environment, whether it is the policy of the past decade, or may be introduced later this year to next year's new preferential policies to encourage private investment, it is useless to try and boost confidence in private investment.

Decline in private investment the fifth reason is the confidence of private enterprises through long-term investment cycle began to weaken. This is not a phenomenon unique to this year, as early as in the past three or four years on the performance was very adequate. This three-pronged approach can be observed. The first perspective, around the beginning of 2014 and the Spring Festival, China's real estate investment sudden appearance of a cliff-like drop. Among the real estate investment, private investment accounted for a lot. We can see, since 2014, real estate is characterized by private investment has begun to emerge confidence shaken. Only after September 2015, in October, the situation is deteriorating real estate investment began to ease. The second perspective, from the beginning of the year to now, above-scale industrial enterprises ROE, ROA, and net profit after tax rates of the main business is not the case of a significant downturn, private enterprises tend not to investment in new equipment, no longer optimistic about the long-term economic growth, but to compress sales cycles, capital return. This indicates that private companies do not have an idea through the cycle of long-term investment. The reason why the rate of return in the real economy there is no significant deterioration, there have been new investment in less than ideal conditions, may be that private enterprises are worried about the long-term return on investment. Another possibility is that the Chinese economy will come about L-shaped recession and regain upward trend worried. The third perspective, the Western countries such as the United States, and the situation in China is very similar to the cash holdings of US listed companies more and more, has exceeded one trillion US dollars, the United States listed company's cash dividend payout ratio has more than 50%, which it is very rare. So many US companies are willing to hold cash and dividends that the US company's willingness to invest is not strong, but China's performance is more prominent.

2016, the Chinese economy is a landmark in terms of years, the Chinese economy fully into the era of double-digit single-digit age. In addition to foreign trade, GDP growth fell from double digits to single digits, beginning in 2016, China's consumption growth, fixed asset investment growth, broad money supply M2 growth rate will probably fall to single digits and China's economic downward trend will continue.

He goes on to offer solutions, such as capital controls to defend the RMB, protect real estate, and promote private industry.