Avoiding the Visible Hand of the State
Private investors continue to lead the state despite slower growth
In the midst of the noise surrounding financing for private companies and state-led stimulus to combat weaker growth this year, it may come as somewhat of a shock that investment by private companies is a major driver of the current recovery in fixed investment growth and by some metrics even lead in the total value of fixed investment in the economy.
Beginning this year, the National Bureau of Statistics has begun to regularly report on monthly minjian (民间) investment – or non-state domestic investment. The new reporting metric is part of a broader State Council plan – the new 36 clauses - to stimulate lagging domestic investment by encouraging non-state domestic investment in sectors previously dominated by state-owned entities. Have these firms delivered so far?
The size of the newly reported numbers this year seems to suggest they have delivered. Non-state investors were not only the largest investors in the economy but their growth rate has remained resilient in spite of weaker growth over the last several quarters. For the first 9 months of 2012, non-state fixed investment accounted for over 62% of all urban fixed investment over the period with annualized growth rate of 25.1 percent compared with just 20.5 percent for urban fixed investment as a whole. Meanwhile, the state sector (including sino-foreign joint ventures) has only delivered some 34.9% of fixed investment with annualized growth of only 7.4%. Likewise, solely foreign, Hong Kong, Macau, and Taiwanese owned companies only delivered 3.8% of all fixed investment this year.
Non-state domestic investment numbers are a useful tool for gauging the potential size of somewhat opaque ownership of limited liability corporations and joint-stock corporations in China, but it is one of the broader definitions of private investment, and it has its drawbacks. One of the greatest concerns is the use of majority ownership to determine whether a firm is private, meaning that while the majority of the capital may be owned by an individual or a collective enterprise, there could be the visible hand of the state lurking as a minority stakeholder.
However, even if we are to take the strictest definition of private investment, one based solely on firms registered with the Ministry of Commerce as a private enterprise, things are still looking pretty good. For the first 9 months of this year, the annualized growth of accumulated fixed investment by firms registered as private enterprises was 25.5%, compared with only 14% from state-owned enterprises and 16.3% from foreign, Hong Kong, Macau, and Taiwanese companies. Moreover, while using this metric brings the total share of private enterprises fixed investment in the economy down to 25.5% - below state-owned and state-owned holding companies - it still shows a rising share up from 23.8% in January 2011. In contrast, the state share has fallen from 40% in January 2011 to 32.9% in September 2012.
Perhaps the most important takeaways from this data - besides proving that private not state investors are driving investment growth - is the resilience of private investors to the current slowdown. Private investment growth today, even at its low for 2012, remained above the lows of 2009, where annualized growth dipped down to 23.4% in January 2009. More importantly, for those concerned about the role of the state, in contrast to the beginning of 2009 where state-led investment increased dramatically to make up for weakness in private and foreign fixed investment, private investment has continued to dominate growth throughout 2012.
Although it is unlikely we will see private investment recover to the rapid growth rates of the past, the fact that private investors continue to outpace the state – enough to drive a recovery in fixed investment this year - is a good sign that China is finding better ways to navigate the new world of slower GDP growth.