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Home arrow Economics arrow China’s Macroeconomic Outlook: Quarterly Forecast and Analysis Report, September 2016
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Policy Simulation: Macroeconomic Effects of Slowdown in Private Investment Growth

Background

In the first half of 2016, China’s private investment growth dropped sharply, triggering concern and heated discussion among policymakers and scholars. Given the easing monetary policy implemented especially in the first quarter, what made the private investment growth plummet? Some clues may be found by analyzing changes in shares of private investment in total FAI by industry (see Table 3.1).

First, in the first half of 2016, impacted by the dramatic fall in the private investment growth, the ratio of private investment to total FAI declined to 61.46%, from 65.13% in the same period a year earlier, down by 3.67 percentage points. On a similar comparison, the ratio in the tertiary industry decreased from 30.43 to 28.39%, down by 2.04 percentage points, contributing 55.66% of the decline. The ratio in the secondary industry dropped from 32.60 to 30.77%, down by 1.83 percentage points, contributing 49.98% of the decline. And the ratio in the primary industry increased by 0.21 percentage points (see Table 3.1). Therefore, the decelerating investment growth in the second and tertiary industry is the key factor to explain the significant drop in the private investment growth.

Second, as to the secondary industry, the ratio of private investment to total FAI in production and supply of electricity, gas and water, did not fall but rise, from 1.62% up to 1.90%. As shown by Table 3.2, after 2012, the ratio kept rising steadily, suggesting that in the urban public infrastructure and services sectors, there is no evidence that the private investment has been crowded out, though the proportion of private investment is relatively small. In the first half of 2016, the key factor to explain the decline of the ratio in the secondary industry is the decelerating private investment growth in manufacturing and mining, where the former contributing 95.09% of the decline, and the latter contributing 17.43%. It is noteworthy that the decline of the ratio in mining did not first took place in the first half of 2016 but after 2012, though it is true that the decline has expanded since early 2016.

© Springer Nature Singapore Pte Ltd. 2017 35

Center for Macroeconomic Research of Xiamen University,

China’s Macroeconomic Outlook, Current Chinese Economic Report Series, DOI 10.1007/978-981-10-3280-6_3

Table 3.1 Shares of private investment in total FAI by industry (%)

Variables

Private

investment

Primary

industry

Secondary

industry

Tertiary

industry

2012H1

Proportion in total FAI

62.14

1.67

32.84

27.64

2013H1

Proportion in total FAI

63.74

1.61

32.69

29.44

Change in proportion

1.60

-0.05

-0.15

1.80

Contributions

100

-3.40

-9.31

112.67

2014H1

Proportion in total FAI

65.14

1.79

32.78

30.58

Change in proportion

1.40

0.17

0.09

1.13

Contributions

100

12.22

6.75

81.03

2015H1

Proportion in total FAI

65.12

2.11

32.60

30.43

Change in proportion

-0.02

0.32

-0.19

-0.15

Contributions

100

-1947.47

1126.77

920.69

2016H1

Proportion in total FAI

61.46

2.31

30.77

28.39

Change in proportion

-3.66

0.21

-1.83

-2.04

Contributions

100

-5.64

49.98

55.66

Source CQMM team calculations on CEIC data

Furthermore, in terms of subsectors of manufacturing, ratios of private investment to the FAI in non-metallic minerals, ferrous metals and non-ferrous metal smelting and pressing processing were down by 0.38, 0.04 and 0.14 percentage points respectively, in total contributing 32.59% of private investment growth in manufacturing. Ratios in general-purpose machinery and special-purpose machinery manufacturing fell rapidly as well, contributing 10.53 and 13.61% of the decline in private investment growth in manufacturing. As some of most valuable equipment has been installed in general-purpose machinery and special-purpose machinery manufacturing, such as mining, metallurgy, construction, metal processing, and so on, the decline of the ratios in these two sectors may also closely related to the private investment’s exit from these sectors, besides, affected by the government’s measures to constrain the capacity in these sectors (see Table 3.3).

Thirdly, as to the tertiary industry, the share of private investment in the FAI in transport, storage and post declined to 2.06% in the first half of 2016, from 2.20% in the same period last year, down by 0.14 percentage points, contributing 6.96% of

Table 3.2 Shares of private investment in the secondary industry by sector (%)

Variables

Private investment in the secondary industry

Production and supply of electricity, gas and water

Construction

Mining

Manufacturing

2012H1

Proportion in total FAI

32.84

1.23

0.50

1.89

29.21

2013H1

Proportion in total FAI

32.69

1.30

0.40

1.74

29.34

Change in proportion

-0.15

0.07

-0.10

-0.15

0.13

Contributions

100

-49.61

68.18

100.72

-86.53

2014H1

Proportion in total FAI

32.78

1.36

0.44

1.58

29.50

Change in proportion

0.09

0.06

0.04

-0.17

0.16

Contributions

100

66.07

45.46

-175.54

170.21

2015H1

Proportion in total FAI

32.60

1.62

0.43

1.30

29.32

Change in proportion

-0.19

0.26

-0.01

-0.27

-0.19

Contributions

100

-140.87

4.52

147.84

101.23

2016H1

Proportion in total FAI

30.77

1.90

0.37

0.98

27.58

Change in proportion

-1.83

0.27

-0.06

-0.32

-1.74

Contributions

100

-14.86

3.43

17.43

95.09

Source CQMM team calculations on CEIC data

the decline. The share in water, conservancy, environment and public facilities only slightly declined by 0.01 percentage points, contributing 0.63 of the decline. The shares in education and health and social work, did not fall but rise, up by 0.03 and

0.04 percentage points respectively. The shares in culture, sports, and entertainment, together with public management, social securities, and social organizations, declined slightly as well, contributing very few to the decline (see Table 3.4). By contrast, the shares in these six sectors in the first half of 2015 were all up over those in the same period a year earlier. Nevertheless, the private investment in these sectors only accounts for 22.23% of the total in the tertiary industry, suggesting that changes in the private investment in these sectors are not the main factors to determine the changes in the tertiary industry. The main factors may lie behind the changes in other sectors in the tertiary industry.

As data on the private investment in other sectors in the tertiary industry are not available, we cannot find out which sectors are the main forces to determine the decline in private investment growth directly. However, the following evidence may be helpful.

Variables

Manufacturing

Nonmetallic

minerals

Ferrous

metal

smelting and pressing processing industry

Non-ferrous

metal

smelting and pressing processing industry

General -purpose machinery

Special-purpose

machinery

Automobile

Manufacturing

Electrical

machinery

and

equipment

Computer communi-cations and other electronic equipment

2012H1

Proportion in total FAI

29.21

3.17

1.06

0.96

2.09

2.03

1.58

2.06

0.97

2013H1

Proportion in total FAI

29.34

3.07

0.99

1.07

2.20

2.09

1.60

1.95

1.08

Change in proportion

0.13

-0.10

-0.08

0.10

0.11

0.06

0.02

-0.11

0.11

Contributions

100

-73.81

-60.92

80.67

85.74

42.73

16.79

-83.10

84.33

2014H1

Proportion in total FAI

29.50

3.04

0.81

1.02

2.30

2.07

1.59

1.97

1.02

Change in proportion

0.16

-0.03

-0.18

-0.05

0.10

-0.02

-0.01

0.02

-0.06

Contributions

100

-20.75

-111.77

-29.31

61.77

-10.80

-5.69

11.65

-38.63

2015H1

Proportion in total FAI

29.32

3.02

0.63

0.96

2.28

2.08

1.60

1.91

1.16

Change in proportion

-0.19

-0.02

-0.18

-0.05

-0.02

0.02

0.01

-0.06

0.14

Contributions

100

8.99

94.74

28.59

10.60

-8.82

-3.04

30.93

-75.70

2016H1

Proportion in total FAI

27.58

2.64

0.58

0.82

2.10

1.85

1.63

1.92

1.10

Change in proportion

-1.74

-0.38

-0.04

-0.14

-0.18

-0.24

0.03

0.01

-0.06

Contributions

100

21.74

2.56

8.29

10.53

13.61

-1.76

-0.72

3.51

Source CQMM team calculations on CEIC data

Variables

Shares in

private

investment

Transport, storage and post

Water, conservancy, environment and public facilities

Education

Health

and

social

work

Culture, sports, and entertainment

Public management, social securities, and social organizations

2012H1

Proportion in total FAI

27.64

1.58

1.64

0.30

0.17

0.53

0.51

2013H1

Proportion in total FAI

29.44

1.80

1.89

0.33

0.21

0.64

0.38

Change in proportion

1.80

0.22

0.24

0.03

0.04

0.11

-0.13

Contributions

100

11.95

13.53

1.88

2.10

6.13

-7.41

2014H1

Proportion in total FAI

30.58

1.97

2.20

0.38

0.24

0.69

0.37

Change in proportion

1.13

0.17

0.31

0.04

0.03

0.05

-0.01

Contributions

100

15.44

27.41

3.70

2.88

4.79

-0.78

2015H1

Proportion in total FAI

30.43

2.20

2.47

0.39

0.34

0.73

0.40

Change in proportion

-0.15

0.23

0.28

0.02

0.10

0.04

0.03

Contributions

100

-149.85

-182.68

-12.99

-65.89

-27.71

-18.70

2016H1

Proportion in total FAI

28.39

2.06

2.46

0.42

0.38

0.66

0.32

Change in proportion

-2.04

-0.14

-0.01

0.03

0.04

-0.07

-0.08

Contributions

100

6.96

0.63

-1.48

-1.90

3.41

3.73

Source CQMM team calculations on CEIC data

vo

  • 1. According to the Classification of Sectors of China’s National Economy (GB/T 4754-2002), excluding the above mentioned six sectors, the rest of sectors in the tertiary industry are: wholesale and retail trades, information transmission, computer services and software, finance, real estate, leasing and business services, scientific research, technical services and geologic prospecting, and services to households and other services. It is some of these sectors that contributed 88.66% of changes in the decline of private investment growth in the tertiary industry in the first half of 2016.
  • 2. Among the above mentioned seven sectors, wholesale and retail trades, together with the private investment in real estate, are two major sectors. Take real estate for example, the domestic investment in real estate development reached 8.66 trillion yuan in 2014, and investment from the state-owned and state holding enterprises (SOEs) and the collective-owned enterprises in total accounted for about 85% of the total, most of the rest was private investment.
  • 3. In the first half of 2016, as the growth of the total retail sales of consumer goods stayed stable, the private investment in wholesale and retail trades would not change too much, suggesting that changes in the share of the private investment in real estate be the major determinant to the decline of private investment growth in the tertiary industry. As shown by Fig. 3.1, in June, 2015, for real estate development, the growth rate of the investment from the SOEs went up sharply from 2.7% at the end of 2015 to 17.0% in January, 2016, overtaking that from the total FAI for the first time, while in the same period the rate of property investment only slightly rose from 1.0 to 3.0%, suggesting that the relatively lower growth rate of the investment from non-SOEs dragged down that of total investment. On account of this, the share of investment from SOEs rose from 15.0% at the end of 2015 to 16.6% in June, 2016, 2.0 percentage points higher than that in the same period a year earlier.
Growth rates of property investment from SOEs. Source CQMM team calculations on CEIC data

Fig. 3.1 Growth rates of property investment from SOEs. Source CQMM team calculations on CEIC data

Furthermore, in terms of incremental funds in the real estate development, in the first half of 2015, the investment increased by 193.6 billion yuan over the same period a year earlier, and the share of investment from SOEs was only 6.01%. By contrast, in the first half of 2016, the investment increased by 267.6 billion yuan over the same period last year, and the investment from SOEs grew by 115.4 billion yuan, accounting for 43.1% of the total increment.

In summary, the dramatic drop in the share of private investment in total FAI is attributable to the following two direct causes:

First, the private capital accelerated to exit from those manufacturing sectors with overcapacity, and in the meantime, due to technology barrier, shortage of funds, or entry barrier, the private capital was not able to enter into some high-end manufacturing sectors and some quasi-public services, leading to decelerating growth of private investment. These exiting funds turn to invest in the fictitious economy, such as commodity futures, housing markets in upper-tier cities, dollars markets, gold markets, and so on. In addition, some of them outflew, making the growth rate of OFDI accelerated significantly in the first half of 2016.

Second, the growth rate of private investment in real estate in the first half of 2016 did not rise significantly, dragging down its share in real estate investment, while the share of the SOEs’ investment climbed correspondingly. One cause is that, owing to the bank credit preference and the relatively high fund entry barrier, private capital, which endowed with limited funds and other resources, didn’t have the capability for competing with the SOEs in upper-tier cities, making incremental private investment really limited. The other cause is that most private capital was concentrated in lower-tier cities, where the property market is facing the pressure from destocking, making private capital reluctant to increase investment. Therefore, the fact that the private investment growth dropped dramatically in the first half of 2016 reflects the serious regional divergence of real estate. During the period that property boom in upper-tier cities coexisting with great pressure of destocking in lower-tier cities, it is hard for private capital to challenge the SOEs.

 
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