Investment Above All
In an interview with Caixin, Agricultural Bank of China Chairman Jiang Chaoliang made the following statement:
Economic growth primarily relies on exports, consumption and investment. But in the current circumstances it's very difficult to get these three things on par with one another. With a slow recovery in the U.S. and the euro debt crisis still facing an uncertain future, exports are unlikely to have a strong contribution to growth.
Consumption takes time to grow because it requires large improvement in the social-security network and greater varieties of consumption choices. Neither can be realized in a short time. So increased consumption can help maintain but not significantly stimulate economic growth.
This leaves us with only investment. Maintaining steady investments thus becomes all the more important.
This statement provides a bit of insight into the current thinking of Chinese policymakers. While China's leaders have paid lip service to promoting consumption for years, including many one-off actions like appliance rebates, overall economic policies have favored investment at the expense of consumption for almost a decade.
Financial repression is the principal method by which investment is privileged at the expense of consumption. But a panoply of other policies such as subsidized energy and land favor investment as well.
Chinese policymakers have rightly decided that real estate investment has become excessive and have stuck to their guns in imposing tough restrictions designed to slow the housing boom. But without the corresponding structural rebalancing to increase consumption, growth is slowing down too quickly for comfort. As a result, local governments have been pushing hard for new investment projects to prop up growth, the $130 billion investment plan in Changsha being the most egregious example.
The low hanging fruit of infrastructure investment was likely plucked during the building spree of 2009-10. A move similar in scope now would result in lower returns to growth and add significantly to local government indebtedness.
The need to boost investment has prompted an acceleration of plans to increase private investment in industries that are currently state-dominated. China Daily reports that in the first half of this year private investment in the oil and gas exploration, education, and health sectors surged 89 percent, 40 percent, and 43 percent, respectively. This is on top of the trend of private investment accounting for an increasing share of total investment. Whether this increase in private investment results in changes that promote economic rebalancing remains to be seen. It’s possible that private shareholders will demand that these state owned enterprise-dominated industries begin to pay higher dividends.
The effort to boost investment right now may soften the blow from declining real estate investment, but it is not sustainable. Jiang Chaoliang is right to point out that boosting consumption will take time, but that only adds to the imperative that this type of reform start now rather than later. The structural problems with the economy cannot be patched over with new infrastructure projects.