Uncertain Prospects for Investment Growth in Private Sector

飞雪寒冰

Investment from non-state-owned companies accelerated in May but a continuation of the growth is still uncertain, Caijing economists said in a weekly macro economic bulletin published by Caijing.

Investment from China's private sector jumped 40.6 percent in May year-on-year, compared with 35.6 percent for April. The rise in May was about the same as that in 2007.

Investment from non-Chinese mainland companies, including Hong Kong-funded and foreign-funded firms, grew 5.3 percent, reversing the negative growth for April. Though this increase was a positive sign, investment was still much lower than the 20 percent rise experienced before the global recession.

Shen Minggao, Caijing's chief economist, said that investment growth in the private sector was mainly driven by the spillover effects from the government's 4 trillion yuan stimulus policies, as well as strong expectations of a global economic recovery rather than real demand from the market. Though the funding of the stimulus package mainly went to the public sector, private companies, as links on the production chain, also benefited.

Investment growth in the private sector will continue if three conditions - increased demand in the world market, robust domestic consumption and favorable government policies – are met, said Shen and He Yin, another economist at Caijing.

First of all, a rise in demand in the world market is not in sight as major developed economies are still mired in recession. Unless another country replaces the United States' role in running a deficit, China's trade surplus will decrease. The possible decline in trade surplus will worsen China's production glut

飞雪寒冰

Second, China's growth for retail sales improved in March but the rate was merely 15 percent, much lower than urban fixed asset investment growth. Unless the stimulus package boosts domestic consumption, it is hard to push up private investment.

Meanwhile, the growth has been uneven geographically. The chief economist pointed out that private investment rose greatly in Guangdong Province and Shandong Province but modestly in Zhejiang Province and Fujian Province.

Third, soaring government-backed bank loans may crowd out private investment, though a loose monetary policy may ease the debt pressure on private companies.  

Total investment for projects planned and started in May totaled 33 trillion yuan, according to the National Bureau of Statistics. Bank loans usually account for 30 percent of the total investment.

The two economists projected new bank loans in 2009 to surpass 10 trillion yuan, which will restrain private investment.   

The growth in private investment is a good sign for economic recovery but it will not last without solid market demand, they pointed out.