It's crucial to get the cash flowing again

If private investors see areas where they can make money, and policies and laws safeguard their rights, they will gladly invest

Due to China's economic slowdown, profit margins in many industries have dropped and it has become harder to find investment targets, so Chinese companies are sitting on their cash.

Analysis shows that this trend has also come about partly because the government's policies to encourage private investment are unclear.

Bloomberg reports that cash held by Chinese companies in the second quarter of 2016 rose by 18 percent in the first quarter, the biggest increase in six years. If we exclude banks and securities traders, the total is $1.2 trillion. The growth is even faster than in the United States (13 percent) and Japan (1 percent).

The trend is also a sign that private investment in China is slowing. Statistics for the first half of this year show private fixed-asset investment was 15.88 trillion yuan ($2.38 trillion; 2.1 trillion euros), up only 2.8 percent year-on-year.

The figures show the slowdown in manufacturing is also hitting the service sector. When exports drop, consumer demand for services and the willingness to invest in the sector are affected.

Private investment growth in the services sector, or tertiary sector, has fallen the sharpest. In 2014, it grew 18.6 percent year-on-year, and in 2015, 9.4 percent. However, in January and February of this year it was 4.6 percent, while for the first half it was just 1.6 percent.

In the secondary sector, which refers mainly to manufacturing, the year-on-year growth rate fell from 16.7 percent in 2014, to 9.4 percent in 2015 and then to 2.8 percent in the first half of this year.

Private investment in the primary sector, involving the use of natural resources such as farming or mining, actually grew 20 percent in the first half of 2016, but the total volume was relatively small: just 597.3 billion yuan, compared with 7.95 trillion yuan for the secondary sector and 7.33 trillion yuan for the tertiary sector.

Encouraging more private investment has become an important task for the government. Premier Li Keqiang has held many meetings to discuss the issue, while local authorities have released policies to tackle the problem.

Not long ago, the State Council asked ministries to send teams to Beijing and the provinces of Liaoning, Anhui, Shandong, Henan, Hubei and Qinghai to review the situation in these places, point out any problems and the root causes, and put forward suggestions for how to improve.

The China Banking Regulatory Commission has a different view on the slowdown in private investment. Yu Xuejun, chairman of its supervisory board for key state-owned financial institutions, has highlighted several phenomena in China's economy, such as the slowdown of private investment and an asset shortage. He says the reason the nation's economic development has shifted from relying on exports to relying on domestic consumption is driven by investment.

He also said that, in the past, capital flowed to brick-and-mortar enterprises, mostly manufacturing, commercial logistics and real estate, but now it flows to the financial platforms of local governments or to enterprises owned by the central government, mostly those involved in infrastructure construction.

The private investment slowdown is also a currency problem, as companies and individuals hold cash but don't have investment opportunities, which results in an asset shortage.

But from my perspective, there are several direct reasons for the slowdown.

One is that the prospects for the economy are unclear, so private investors are in a wait-and-see situation. Plus, the market environment is not good, so there is concern about risks, while the debt held by enterprises is mostly high and the credit environment is worsening.

Financing for private companies is also shrinking. Banks are reluctant to lend money to private companies that lack collateral, so they are willing to lend only to government projects. In addition, improper policies are making the space in the market for private companies even smaller.

Yet the biggest problem is that private investors find that there is no profit margin. The policies, the market fluctuations and the financing difficulties - these are not new problems; they were there even when private investment was dynamic. So why have they become major obstacles now?

Many entrepreneurs say, "It looks like we have so much cash everywhere, but it's becoming more difficult to use the cash to make money."

If private investors see areas where they can make money, and policies and laws safeguard their rights, investment will flow, even without encouragement.

During the ongoing economic transformation, the biggest measure China could take is a large-scale opening of the market: reduce restrictions on investment, improve the market environment, and encourage private capital to form consortiums to invest.

If private investment doesn't increase, the economy will not be able to recover.

The author is a senior researcher with Anbound Consulting, a think tank for public policy. The views do not necessarily reflect those of China Daily.

(China Daily European Weekly 08/26/2016 page13)