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Special Report

Only a Brief Relief

Famed economist argues that over-reliance on investment to stabilize growth is nothing but a temporary relief measure that will lead to disaster

By NewsChina Updated Apr.1

Earlier this year, a series of major provincial infrastructure projects began nationwide, such as in Jiangxi, Shandong and Jiangsu provinces.  

In December 2018, the Central Economic Work Conference stated that with its tremendous potential in investment demand, the country must reinforce investment’s pivotal role, encourage investment in municipal infrastructure and strengthen rural infrastructure construction and public facilities. 

Stabilizing investment has long been an effective measure to drive economic growth in China.  

On February 26, the National Development and Reform Commission, China’s top planning body, predicted that infrastructure investment would see moderate growth, while investment in manufacturing and real estate would remain stable but experience a degree of downward pressure. 

During an exclusive interview with NewsChina, Liu Yuanchun, vice president of the Renmin University of China, argued that while the country’s investment growth slowdown is unavoidable, maintaining growth rates within a reasonable range is still crucial. 
NewsChina: What is your assessment of China’s infrastructure, manufacturing and real estate industries in 2018? What will change in 2019? 

Liu Yuanchun: Investment in manufacturing rebounded in the second half of 2018 compared with the first half and in 2017. However, it remains at a relatively low level. In 2019, the manufacturing industry is expected to encounter more pressure.  

To begin with, China’s manufacturing industry is export-oriented and the sluggish world economy will affect China’s exports. What’s more, there is uncertainty over whether recent negotiations will resolve the China-US trade frictions. China’s automobile market is expected to remain stagnant in 2019 and there is room to adjust the real estate industry despite its recent warming-up. In 2018, infrastructure in China witnessed sluggish growth and this year it is expected to rebound.  

NC: Stabilizing investment is a priority for the central government. Is a policy adjustment needed?  

LYC: Since July 2018, a series of measures were in place to improve the weak links in infrastructure, and infrastructure investment increased by three or four percent against the negative growth in 2017. The main investors nowadays, however, are private enterprises facing difficulties such as high prices in financing and declines in prospective earnings. In 2019, policy-led investment will rise significantly but private investment is likely to slow down, making the effects of stabilizing investment unnoticeable. 
NC: You have argued recently that private investment has reached its peak. What do you mean by that? 

LYC: From a market perspective, the private economy has reached the peak of the investment cycle. Despite controversies over the status of the private economy last year, private investment reached a growth rate of 8.9 percent in 2018, up from 2.2 percent in 2016. The private economy will experience a reversion and a short-term fluctuation. As a result, if there are no measures boosting private investment, it will likely experience a noticeable fall. Early this year, the central government introduced 18 support measures to help private enterprises with the difficulties and high prices of financing.  

Private investment decline surfaces when an economy turns from high-speed growth to medium-high-speed growth. It’s also a result of a falling savings rate. We need to prevent a sharp drop in investment and debt-driven investment. We must define the goals for stabilizing growth in 2019 so that investment growth is not pursued at all costs. 
NC: China is in a transition period from high-speed growth to high-quality growth. In your opinion, which economic indicators need special attention? 

LYC: Generally speaking, economic indicators include returns on investment and the output ratio of new capital. Nowadays, investment plays an increasingly important role in driving GDP growth but investment efficiency is relatively low. 

From the micro perspective, profit rates on cost and financial returns on new capital are dropping for some enterprises. So are returns on equity. The medium- and long-term strategy is to accelerate the shift in the forces that drive development. The old growth drivers are seeing declines in returns. In recent years, achievements have been made to cultivate new growth drivers, which have seen rapid development. But these new economic forces are still weak in promoting GDP growth. It’s difficult for a small horse to drive the big cart of the Chinese economy in the short term. It takes time to replace old growth drivers with new ones, and the investment growth rate also needs time to shift gears. 
NC: What measures should we take to improve investment efficiency? 

LYC: Investment in public services and tertiary industries is inadequate, and we need structural adjustments to open more areas for investment. Some areas, however, received excessive investment. State-owned enterprises (SOEs) gain monopolized profits to invest excessively in other industries, placing private enterprises in a difficult situation. SOEs are reluctant to shoulder social responsibilities and some public service sectors are not open to private enterprises, leading to weak investment in public services and weak supply of public services. Starting last year, the central government aimed to enhance investment by addressing the weak links. 
NC: How can China stabilize investment while preventing risks? 

LYC: Stabilizing investment is a part of stabilizing growth. Investment should be made by competent market entities who are willing and able to invest. It’s time to depart from the investment modes of the past with an over-reliance on policy and government-led investment. 
NC: In 2018, public-private partnerships (PPP) and local government debts came under more scrutiny. Will this affect the motivations of local governments to invest? 

LYC: Nowadays, local governments at all levels are confronted with the pressure of capital, but the central government has introduced a series of measures including the issuing of special bonds and local bonds to try to ease the investment bottlenecks local governments face.

A major problem for local governments is a lack of investment motivation because of environmental requirements, all kinds of inspections, local debt and the neglect of duty of some government officials.  

Generally, investment by local governments and SOEs is not likely to rebound in the near future. 
NC: You previously mentioned that stabilizing consumption is more important than stabilizing investment. Can you explain that? 

LYC: It’s a long-term strategic adjustment. The current sluggish economy derives from weak demand and an excess of supply. Weak demand is reflected in the decline of consumption, the investment growth rate and changes in imports and exports. The three engines driving economic growth all experienced changes. 

To attain a relative equilibrium of aggregate supply and demand in the short and medium term while improving risk resistance, an important strategy is keeping consumption at a reasonable level and preventing the consumption growth rate from suddenly dropping.  

Over-reliance on investment to stabilize growth is nothing but a temporary relief that will lead to disaster. Prior investment in the real estate industry to stabilize economic growth is likely to yield an outcome: the more investment made, the more likely the economy is going to collapse.  

In recent years, the declining consumption growth rate and the constraints on economic transition have yielded noticeable side-effects. It’s even more difficult to promote consumption once it declines and short-term adjustments are needed.