Investment by Chinese state-owned companies is resurgent, surpassing private investment growth as Beijing tries to fuel its slowing economy.
But by backing investment by state firms, China’s government risks a financial reckoning that could injure world’s second-largest economy and is giving the Trump administration another reason to pressure Beijing on its economic policies.
Investment growth by state-owned companies surged to nearly 25% last year, eclipsing the roughly 3% growth recorded by the private sector.
Economists are divided on whether the trend will pass or marks a renewed effort by the government to use state coffers as part of a new industrial policy.
Nicholas Lardy, a senior fellow and top China hand at the Peterson Institute for International Economics, calls it temporary: “This is cyclical recovery, not an indicator of a resurgence of the state.”
Others point to China’s plan to upgrade its manufacturing sector as a revealing the new status quo. The U.S.-China Economic and Security Review Commission sees Beijing using the tools of the state to play a long game. The congressional advisory panel committee says state investment is evidence of an unfair, subsidized strategy to dominate critical sectors such as semiconductors, nanotechnology and biotech.
U.S. officials were optimistic when the Communist Party leadership said in 2013 it wanted market forces to play a “decisive” role in the economy. But in the intervening years, “it become increasingly apparent…China’s domestic reform agenda is aimed at strengthening the hand of the state and maintaining Chinese Community Party control—not promoting economic liberalization,” the commission said.
That is not to say the private sector isn’t involved: The share of profits from the industrial sector outpaces the state sector by 2 to 1, an about-face from a decade ago.
But Mr. Lardy says private investment is likely meager now because there are fewer profitable investment opportunities as China’s economy slows and global demand remains lackluster. The country has already overbuilt in several industrial sectors, including steel and aluminum. … (read more)