Chinese private sector remains cautious on capital spending
Levels rise just 2.1pc, a sharp contrast to the 20pc annual growth in 2014, and 26pc in 2012
Companies in China are increasingly reluctant to step up their capital spending, because of expected lower returns due to the worsening structural problems in the economy, according to analysts.
And that could seriously jeopardise crucial efforts to shift the economy to a consumption-driven model that relies more on thriving of private enterprises, they say.
Private investment, which accounts for 60 per cent of total investment in China, posted its first negative growth in a decade in July, down 1.2 per cent from a year earlier, show the latest government statistics.
For the first seven months of the year, the total grew at the slowest pace on record, just 2.1 per cent, in sharp contrast with the 20 per cent annual growth in 2014 and the 26 per cent annual growth in 2012.
“Business sentiment has plunged, as private companies are not expecting good returns on capital investment, ” said Li Chao, an analyst from Huatai Securities.
“Slowing economic growth and conflicting government policy directions have also caused them to shy away from spending,” he added.
Although the central government has repeatedly published guidelines on encouraging private-sector investment, it has continued pouring money into basic infrastructure projects to stabilise economic growth, said Li.
This has led to a deterioration of structural problems and a further drop in overall returns on investment.
“The falling private investment, if not reversed, could eventually jeopardise China’s consumption story,” added Nathan Chow, an analyst for DBS Group Research, noting that private sector employment currently accounts for 80 per cent of all urban jobs.
Besides, the drop in private investment growth could lower productivity growth for the economy as a whole in spite of surging state investment.
“This is critical because productivity is one of the key drivers of potential growth,” Chow said.
Unfortunately, China’s accommodative monetary policy has so far failed to halt the slowdown in private sector spending.
In short, money is being ‘pumped into’ the economy, but it is not being recirculated in the usual loan/deposit manner
Companies are tending to “park their money in the bank”, rather than building new factories, which is evidenced by the divergence between M1 and M2 [measures of money supply]”, Chow said.
M1, which includes cash and current deposits, surged from 14 per cent in October to 24.6 per cent in June. M2, a broader measure of M1 plus time deposits, has decreased slightly this year.
“In short, money is being ‘pumped into’ the economy, but it is not being recirculated in the usual loan/deposit manner,” Chow said.
Adding to the complex difficulties facing the private sector, are market access and financing constraints.
“Those challenges cannot be solved by fiscal action, per se,” Chow said.
“To address the problem, speeding up market reforms is essential,” he added.
Suggested measures include increasing the proportion of direct financing.
“A properly functioning bond market would result in better capital allocation,” Chow said.
Currently, China’s bond market only equates to about 60 per cent of the country’s GDP. By contrast, the loan-to-GDP ratio is 140 per cent.
Equally important is to increase foreign holdings of bonds, which is just 2 per cent of the total at present.
“This would trigger demand for international ratings of domestic bonds, with the potential to improve disclosure and transparency,” Chow said.
The Chinese government also needs to speed up the process of creating a level playing field for non-state enterprises, he added.
