Employees of Hengtong Group, an optical fiber and cables producer in Suzhou, east China's Jiangsu Province, work on a production line on April 15

The Chinese economy has bottomed out and is stabilizing as economic growth remained within the reasonable range during the first four months of this year, judging by figures published by the National Bureau of Statistics. It is nonetheless alarming that private investment only increased by 5.2 percent during the same period, continuing a downward trend which had lasted for a long time. More worryingly, private investment has also grown at a slower rate compared to that of total social investment since the beginning of this year.

Although private investment has constantly been in decline from 2013 to 2015, its growth rates had always remained higher than that of total social investment. However, the 5.2-percent growth of private investment during the first four months of this year was 5.3 percentage points lower than that of total social investment during the same period.

This trend is likely to affect and hinder the implementation of measures aimed at stabilizing growth, restructuring the economy and preventing risks.

As the private economy accounts for over a half of the national economy, the rapid deceleration in private investment will endanger stable growth of the national economy. Therefore, it is of particular importance to reverse this downward trend and bolster private investment.

The slump in private investment can be attributed to both the supply and demand sides. Structural problems in the supply side have resulted in a low return ratio for private investment, discouraging prospective investors.

Overcapacity is the principal reason for the decline of private investment. Private capital has primarily been invested in the traditional manufacturing industries and the housing sector. After more than two decades of runaway growth, traditional manufacturing industries are suffering from severe overcapacity and the housing sector is under great pressure to destock. In the January-April period, private investment in the manufacturing sector only grew at a record low of 5.4 percent.

State-backed investment is squeezing out private investment. The proportion of private to social investment declined from the historical high of 65.4 percent last May to 62.1 percent this April. This indicates that although state-dominated investment in infrastructure construction has played a key role in shoring up this year’s economic growth, it has also squeezed out private investment instead of spurring it on.

On the other hand, inadequate overall demand is also one of the causes for the deceleration in private investment growth. China’s potential output far outweighs its actual output. Although this year's economic outlook is better than expected, the 6.7-percent growth rate still marks the lowest in 28 consecutive quarters. Given the potential economic growth rate of 6.5 to 7 percent, the output gap will continue to expand, exacerbating the lack of the overall demand—subsequently disheartening private investors.

Therefore, the rapid decline in private investment growth this year can also be attributed to sluggish domestic demand, poor implementation of streamlining administration, difficulties in financing and the squeezing out of private funding by state capital. Meanwhile, the drop in the producer price index—a key gauge that measures prices of goods at the factory gate—for four consecutive years has led to shrinking corporate profits.

Private investment needs to go through the crucible of structural adjustment. From a long-term perspective, the transformation and upgrading of private investment will contribute to the sustainable and healthy development of the private economy.

In the face of the continued deceleration in private investment growth, China should stick to its principle of promoting the non-public sector economy and pursue new development concepts featuring innovative, coordinated, green, open, and shared development.

The Chinese Government should pursue supply-side structural reform and cut overcapacity, destock, deleverage, reduce costs and improve weak economic links. Furthermore, it should create a market environment favorable for private investment by reducing costs and enhancing relevant fiscal and monetary support policies.

This is an edited excerpt of an article originally published in Economic Information Daily

Copyedited by Bryan Michael Galvan

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