The catch is that the private sector is sitting on its hands - with good reason
(BEIJING) China’s economy is perking up but will not be out of the woods until private-sector investment takes up the baton of growth from the government’s capital-spending binge.
And that, many economists say, is more likely to be a story for 2010 than this year. For with profits falling and sectors such as steel, cars and property already wallowing in excess capacity, the private sector has every reason to sit on its hands.
‘It’s hard to say when we’ll see the full impact of the stimulus on private-sector investment even though there’s been a surge in investment by state-owned enterprises (SOEs) over the past months,’ Li Jianwei, head of macroeconomic research at the Development Research Centre (DRC), a think-tank under the State Council, told Reuters.
A breakdown of China’s 28.6 per cent year-on-year rise in urban fixed asset investment in March shows the 4 trillion yuan (S$875 billion) stimulus plan announced by the government last November is having a dramatic effect.
New projects surged 87.7 per cent from a year earlier; investment in railways doubled; central-government projects rose 30.4 per cent; and SOE spending rose 37.7 per cent.
But outlays on real estate, which makes up nearly a quarter of fixed investment and is a proxy for overall capital spending by the private sector, was up just 4.1 per cent.
The discrepancy shows how the ruling Communist Party is able to quickly mobilise huge resources when the need arises.
Local authority planners had plenty of public works projects that were ‘shovel-ready’ and were simply awaiting the green light from the central government.
Now, with economic recovery the overriding political imperative, Beijing is giving its stamp of approval in a matter of days, according to media reports.
One telling indicator is that Caterpillar Inc’s sales of hydraulic excavators in China rebounded to near-record levels last month after falling almost to zero last autumn, Jim Owens, chief executive of the construction equipment maker, said on Wednesday.
The central government is in fact financing just under 30 per cent, or almost 1.2 trillion yuan, of the overall stimulus.
Beijing aims to drum up the rest from local governments, state-owned banks and private-sector enterprises.
For now though, private firms are dragging their feet.
China CITIC Bank Corp Ltd has channelled most of its loans so far this year to government-backed investment projects or to the rail, road, telecoms and energy sectors.
But the country’s seventh-largest lender has not seen strong loan demand from small firms or exporters, Wu Beiying, the bank’s vice-president, told reporters on Wednesday.
Economists say that the private sector is in effect being squeezed out by state firms with a lock on public works contracts.
‘Private firms find it hard to benefit from government-initiated projects such as bridge and road-building,’ said Xing Zhiqiang at China International Capital Corp in Beijing.
The government is aware of the need to crowd in private investors, not crowd them out.
‘To confront the global financial crisis, we must seek to intensify investment by the private sector and firms, expand investment demand and adjust and improve the structure of investment,’ the Cabinet said on Wednesday.
The private sector’s involvement is crucial because it is the major engine of China’s economy. It accounts for about two-thirds of output and provides about 75 per cent of jobs.
‘Currently it’s better and easier to call it a 1.18 trillion yuan stimulus plan, as nobody can tell when and how much private-sector investment can be catalysed,’ said Mr. Li.
‘At the macro level, the weak industrial performance is likely to weigh on industrial enterprises’ investment activity in the near term, especially in the private sector, as solid profit growth provides a significant part of funding,’ Wang Qian, an economist at JP Morgan in Hong Kong, said in a recent report. The World Bank expects market-based investment to shrink 1.3 per cent this year after two years in which it contributed the bulk of overall fixed-investment growth. Government-influenced capital spending, by contrast, is likely to leap 26 per cent, it reckons.
Goldman Sachs economists Helen Qiao and Yu Song are more confident. They believe that private investment in industry and property will revive as soon as the second half of this year and lead the economy on a charge to recovery.
By contrast, Lu Zhengwei, chief economist at Industrial Bank in Shanghai, does not expect a rebound in private investment until the second half of 2010; and for Nie Wen, an analyst at Fortune Trust Co in Shanghai, stronger capital spending depends crucially on signs of stabilisation in the export sector. ‘Rebuilding confidence might take a lot longer than expected,’ he said. -- Reuters
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China recovery hinges on private sector
The catch is that the private sector is sitting on its hands - with good reason
(BEIJING) China’s economy is perking up but will not be out of the woods until private-sector investment takes up the baton of growth from the government’s capital-spending binge.
And that, many economists say, is more likely to be a story for 2010 than this year. For with profits falling and sectors such as steel, cars and property already wallowing in excess capacity, the private sector has every reason to sit on its hands.
‘It’s hard to say when we’ll see the full impact of the stimulus on private-sector investment even though there’s been a surge in investment by state-owned enterprises (SOEs) over the past months,’ Li Jianwei, head of macroeconomic research at the Development Research Centre (DRC), a think-tank under the State Council, told Reuters.
A breakdown of China’s 28.6 per cent year-on-year rise in urban fixed asset investment in March shows the 4 trillion yuan (S$875 billion) stimulus plan announced by the government last November is having a dramatic effect.
New projects surged 87.7 per cent from a year earlier; investment in railways doubled; central-government projects rose 30.4 per cent; and SOE spending rose 37.7 per cent.
But outlays on real estate, which makes up nearly a quarter of fixed investment and is a proxy for overall capital spending by the private sector, was up just 4.1 per cent.
The discrepancy shows how the ruling Communist Party is able to quickly mobilise huge resources when the need arises.
Local authority planners had plenty of public works projects that were ‘shovel-ready’ and were simply awaiting the green light from the central government.
Now, with economic recovery the overriding political imperative, Beijing is giving its stamp of approval in a matter of days, according to media reports.
One telling indicator is that Caterpillar Inc’s sales of hydraulic excavators in China rebounded to near-record levels last month after falling almost to zero last autumn, Jim Owens, chief executive of the construction equipment maker, said on Wednesday.
The central government is in fact financing just under 30 per cent, or almost 1.2 trillion yuan, of the overall stimulus.
Beijing aims to drum up the rest from local governments, state-owned banks and private-sector enterprises.
For now though, private firms are dragging their feet.
China CITIC Bank Corp Ltd has channelled most of its loans so far this year to government-backed investment projects or to the rail, road, telecoms and energy sectors.
But the country’s seventh-largest lender has not seen strong loan demand from small firms or exporters, Wu Beiying, the bank’s vice-president, told reporters on Wednesday.
Economists say that the private sector is in effect being squeezed out by state firms with a lock on public works contracts.
‘Private firms find it hard to benefit from government-initiated projects such as bridge and road-building,’ said Xing Zhiqiang at China International Capital Corp in Beijing.
The government is aware of the need to crowd in private investors, not crowd them out.
‘To confront the global financial crisis, we must seek to intensify investment by the private sector and firms, expand investment demand and adjust and improve the structure of investment,’ the Cabinet said on Wednesday.
The private sector’s involvement is crucial because it is the major engine of China’s economy. It accounts for about two-thirds of output and provides about 75 per cent of jobs.
‘Currently it’s better and easier to call it a 1.18 trillion yuan stimulus plan, as nobody can tell when and how much private-sector investment can be catalysed,’ said Mr. Li.
‘At the macro level, the weak industrial performance is likely to weigh on industrial enterprises’ investment activity in the near term, especially in the private sector, as solid profit growth provides a significant part of funding,’ Wang Qian, an economist at JP Morgan in Hong Kong, said in a recent report. The World Bank expects market-based investment to shrink 1.3 per cent this year after two years in which it contributed the bulk of overall fixed-investment growth. Government-influenced capital spending, by contrast, is likely to leap 26 per cent, it reckons.
Goldman Sachs economists Helen Qiao and Yu Song are more confident. They believe that private investment in industry and property will revive as soon as the second half of this year and lead the economy on a charge to recovery.
By contrast, Lu Zhengwei, chief economist at Industrial Bank in Shanghai, does not expect a rebound in private investment until the second half of 2010; and for Nie Wen, an analyst at Fortune Trust Co in Shanghai, stronger capital spending depends crucially on signs of stabilisation in the export sector. ‘Rebuilding confidence might take a lot longer than expected,’ he said. -- Reuters
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