2016-05-12

Why Did Private Investment Collapse? Private Investors Fled Public Projects

The State Council recently sent out investigative teams to find out why private investment collapsed in Q1. See: Depression: State Council Investigates Drop in Private Investment

The State Council again focused on private investment this week. 老虎财经:民间投资下滑说明了什么?
All the signs can be seen, the central government emphasis on private investment has reached unprecedented levels.
A report from Industrial Bank is quoted. It includes the charts below.

The first shows private investment falling across all industries. The box on top shows the frequency of various words found in articles by "authoritative person" appearing in the People's Daily. (See: Chinese Authority Puts Kibosh on Debt Fueled Rally) The boxes highlighted are: differentiation, leverage and inflation (left to right). The frequency of these words increased substantially from the January article (which mentioned the L-shaped recession), and mentions of reform almost fell in half (second box, 71 to 38).

Below that are the investment rates in industries with the overcapacity industries targeted for reform in red.
The report looks at foreign exchange holdings versus the gap between private investment growth y/y and total fixed asset investment growth, showing a correlation. The blue line is the foreign exchange holdings, gray the gap between private and total fixed asset investment growth.
It also shows there was a steep drop at the start of 2015. The gray line is private investment growth, blue the total fixed asset investment growth.
This next chart shows the change in the proportion of private investment in various industries, showing the rise or fall from March 2015 to March 2016. What it shows is the top industry, mining, has actually seen non-private investment fall faster, whereas at the very bottom of the list there is electricity, water, heat supply, above it is sports...the bottom of the list is dominated by traditional government controlled industries. The drop is therefore not a result of the overcapacity problem.

The punchline isn't a shocker: investment in fixed assets soared in government led infrastructure. This chart shows the gap between total FA investment growth and private FA investment growth in March, broken down by industry: primary, secondary and teriarty from left-to-right.
In the tertiary industry, private investment accounted for the fastest decline of some industries with common attributes, such as water and electricity supply, public administration, water conservancy construction , the most part of the investment should have been assumed by the government, but may be possible through the BT , of BOT (building - transfer) and other models transferred to the private sector construction, after construction is completed by the government the right to operating income and other forms of compensation.

The recent drop in the proportion of private investment in response to the economic downward pressure, high return projects to attract private capital dwindling, after the BT , of BOT - (construction gradually complete the next transfer) mode of private investment in infrastructure projects, sources of infrastructure funding the center of gravity continues to tilt toward the government. If in the future to promote the PPP model Pianman, investment in infrastructure projects may be constrained government budgets.
In other words, private investment is exiting the Build-Transfer (BT), Build-Operate-Transfer (BOT) and Public-Private Partnerships (PPP) and government is picking up the slack. Government budgets could be constrained by the need to make up for the missing private investment.

This breakdown shows where this is happening geographically. The left group is FA investment growth in March, the right private FA investment. Blue-Gray-Red is East-Central-West. It shows governments in central and especially west China having to greatly step up their investment.

The final chart highlights the drop in private FA investment in the northeast. From left-to-right is the East-Central-West-Northeast. Red is Jan-Feb growth, Blue is March.

Yesterday the State Council put out this statement: Government signals need to expand private investment
Premier Li Keqiang stressed measures to implement policies to increase private investment twice in less than a week, signaling that the government has attached great importance to the issue and that there are opportunities for private investment to find ways to grow.

A State Council executive meeting presided over by the Premier on May 4 decided on expanding private investment, and sent a supervision group to find the problems that affect the growth of private investment.

At a meeting on streamlining administration and delegating power on May 9, the Premier urged to work out a negative list of industry access to help private investment into the industries such as electricity, telecommunication, transportation, gas and petrol, public utilities, senior caring and education.

He also asked to remove the additional and discriminatory conditions set for private investment, and treat private and public enterprises equally to protect their legal rights.

Data shows that private investment has been a major driving force for the Chinese economy, as its proportion of total investment had increased to 61.4 percent from the 49.8 percent during the period from 2006 to 2012. And by 2015, the number increased to 64.2 percent.

However, there are concerns because the country’s private investment decreased this year, a rare situation in the last 10 years. In the first quarter, private investment only took up 62 percent of total fixed-asset investment, down three percentage points from to the same period last year and down 2.2 percent compared to last year.

The government’s policy is a timely measure to promote the increase of private investment, and if private funds can be utilized in more fields, it would be big help for stable economic growth, structural adjustment, supply-side reform and employment promotion.

To expand private investment, the government also needs to remove various investment barriers for private enterprises, and create a fair competitive environment. The most important thing is to effectively implement policies released by the State Council to spur private investment.

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