Don’t panic over China private investment crash

Bloomberg

Alarmed by a collapse in private investment in China and a surge in state spending? Calm down, say three analysts, who argue that data problems are exaggerating the trend.
Investment numbers this year aren’t completely comparable with 2015 because they include firms that recently migrated from the private to the state sector, says Nicholas Lardy, a senior fellow at the Peterson Institute for International Economics in Washington. Research firm Rhodium Group and economist Louis Kuijs at Oxford Economics Ltd. have spotted the same discrepancy.
“Policy makers and the market should not worry unnecessarily about misleading data purportedly implying a scary sudden divergence in 2016 between private and non-private investment,” Kuijs said in a report last week.
Amid concern over growth in private investment plunging to a record low, China’s top economic planning agency last week announced a plan to open more sectors to private firms. Meanwhile, the nation’s cabinet unveiled a blueprint to lower corporate costs and raise profitability within about three years.
During a group interview on Friday, Han Zhifeng, deputy head of the investment department at the National Development and Reform Commission, said China’s economic slowdown is making private investment sluggish, which he described as a “periodic difficulty”. Although private investment growth will continue to slow, he said, it is “not likely to be negative growth”.
Public-private partnership projects will be key to boosting private investment, Yi Yun, a finance ministry official whose job is to promote such projects, said during the same interview. She said the ministry is drafting a regulation to protect private investors in the partnerships.
Private investment has slowed “but not as much as official data suggest,” says Lardy, who has studied China for more than three decades.
The jump in state investment in the first half appears to result partly from the government’s intervention in the stock market a year ago, when a bailout of more than 1 trillion yuan led the government to become a dominant or controlling shareholder in companies that hadn’t been state controlled, Lardy said. But the National Bureau of Statistics didn’t reflect those ownership changes in its monthly data until January, he said.
“So the surge in investment by state companies this year is real, but the data are not completely comparable with earlier data since they include investment by firms that have recently migrated into the state ownership category,” he said.
Kuijs says the sharp acceleration in non-private investment isn’t plausible because sectors where state enterprises are known to be strongly
represented haven’t seen soaring investment growth this year. Growth in investment in utilities edged up to almost 20 percent in the first seven months from 16.6 percent last year, while investment in coal and mining has plummeted, he says.
Rhodium research analyst Andrew Coflan notes the likelihood that a
shift in ownership of private firms by the state was only accounted for statistically in January, which he says would be understandable given the scope of the change.
“Private investment and overall fixed-asset investment are undoubtedly slowing, but the actual decline is likely less severe than indicated by the official data,” Coflan said. “January’s opaque reorganization reinforces questions regarding its role for both market and policy analysis.”
While the data issues on investment likely exaggerate the trends, Bloomberg Intelligence economist Tom Orlik says they don’t fundamentally alter the narrative of a
state-sponsored stimulus offsetting weak spending by cautious private-sector firms.