Price of not spurring investment high

With trillions of yuan in private money parked, it behooves officials to make domestic projects more inviting

It's described as "cliff-type" decline by some observers in the Chinese-language business press - a general fall in private investment since the beginning of the year.

Most precipitous is the fall in northeastern provinces, where private investment is most needed to fill the role left by rusty, half-century-old, state-owned enterprises to create local jobs.

Liaoning, the northeastern province with the largest industrial base, registered a negative 58.1 percent year-on-year change in the first half of the year.

Liaoning may be the worst case, but it is a surprise to hear that there was a setback, although relatively small, in such major interior provinces as Sichuan and Anhui.

Nationwide, in the first half of the year, the private sector's contribution to overall investment in fixed assets totaled 15.88 trillion yuan ($2.4 trillion; 2.2 trillion euros), showing an increase of only 2.8 percent year-on-year, thanks in main to the continuous growth in private sector investment in the more competitive coastal areas.

But growth of 2.8 percent in June was already lower than one month earlier. The same index stood at 3.9 percent in the first five months, and the difference actually showed a more serious decline taking place in June, or the last month of the period covered by the report.

So much of a decline, as some commentators in the Chinese-language business press have noted, could mean an unprecedented negative growth nationwide.

It means, at least, that the whole country saw no meaningful growth in private sector investment in the first half of the year.

Indeed, the problem had become so serious as to warrant the central government's new guidance on the reform of investment and corporate finance practices, issued on July 18, and on the same day, a joint meeting of cabinet members and provincial leaders, chaired by Premier Li Keqiang, on the "healthy development" in social (meaning nonstate sector) investment.

Private investment used to account for more than half of China's investment in fixed assets, and contributed 60 percent of its GDP growth and 80 percent of new jobs. The setback can't be taken lightly. It may reflect several levels of significance, and most importantly a lack of rewards that investors expect from the domestic market.

By contrast, data from the Ministry of Commerce show that also in the first half of the year, China's direct investment abroad witnessed a strong increase. Its investment outside the financial industry exceeded 580 billion yuan, an increase of almost 50 percent.

Funds committed to overseas manufacturing - what used to be China's advantage - hit 110 billion yuan, an annualized increase of as much as 245 percent.

However, there has yet to be a major outgoing flood of capital, as a result of rising currency costs overseas relative to the yuan, and a lack of competitive offerings. The prospective return from property ownership overseas is still below the level of Beijing, Shanghai and Shenzhen.

There is still a huge sum of private money, some say 30 trillion yuan, parked in China, waiting for information about potentially more lucrative opportunities, domestic or overseas. Although it is senseless to channel that amount of capital to industries that already have excessive capacity, it is a shame that it is not used for productive purposes, especially when the country as a whole still carries a huge debt burden.

There are areas still closed to private investment, as the premier acknowledged. In some cases, when the old institutional barriers are knocked down, bureaucratic resistance remains.

The government should try to direct the temporarily directionless capital to projects at home. To do so, it should, as the central government acknowledges, iron out bureaucratic resistance while opening up new ground for the investors, with decent terms and due protection.

This, perhaps, is the best thing it can do to adapt to the so-called new normal.

The author is an editor-at-large of China Daily. Contact the writer at edzhang@chinadaily.com.cn