Economic Watch: More private investment will put China's recovery on firmer ground

While China's economy recovery has its foundation in government spending on infrastructure, falling private investment is breeding concern that ground for the resurgence may not be firm enough.

A Wednesday meeting of the State Council chaired by Premier Li Keqiang decided to begin a month of investigation into exactly how central government policy on private investment is put into practice by local authorities.

Private investment is important in stabilizing growth, adjusting structure and creating jobs, read the statement released after the meeting.

"Any decline in private investment will affect the vitality of China's economy," it continued.

China's GDP grew 6.7 percent in Q1, slowing slightly from 6.9 percent in the preceding quarter, but still in line with the official 2016 target range of between 6.5 percent and 7 percent. In the first three months, indicators have shown the economy running more or less within that range. Urban job creation and growth of household incomes met their targets, while house prices and sales are picking up, at least in the biggest cities.

It is the sustainability of the recovery that is coming under increasing scrutiny. The performance in Q1 came mainly on the back of government lending to infrastructure developers. Private investors seem to be sitting tight.

Fixed asset investment as a whole rose 10.7 percent in Q1, while that from private investors grew by only 5.7 percent, down 7.9 percentage points from the same period last year. Investment from public sources rose 23.3 percent and accounted for one third of the total. Compare this with the past decade when private investment rose consistently, usually by two to three percentage points more than the average.

Another alarm bell is that the ratio of private investment to total investment fell to 62 percent in Q1 against 65 percent in Q1 last year.

"Support for near-term growth may further increase longer term imbalances, particularly if it leads to a rapid increase in investment by state-owned enterprises that does not yield benefits in terms of profitability and value added," Moody's said in a note.

The importance of private investment cannot be overemphasized. The private economy regularly contributes more than 60 percent of GDP growth and provides over 80 percent of jobs.

Since 2005, the State Council has been active in encouraging private investment. Infrastructure projects that were previously off-limits have been gradually opened up and in Nov. 2014, six new areas -- environmental protection, agriculture, water, urban utilities, transportation and energy -- were liberalized.

But the State Council can only do so much. At the local level, where the actual work takes place, red tape remains a major issue and private businesses still find it difficult to get the loans they need. Fettered as it is, the zeal of private investors has yet to bring about the transformation so eagerly advocated by the central powers.

"Slowing growth in private investment is caused by overcapacity in manufacturing, a big part of China's economy and previously the first choice for private investors," said Zhang Hanya, head of the the Investment Association of China.

Private investors are adopting an wait-and-see attitude, Zhang said, and more could be done to meet their needs in terms of financing, legal guarantees and policy.

At Wednesday's meeting, Premier Li said third-party assessment will ensure that the policies and incentives for private investment reach their intended targets.

"Only when private companies do well, can the general economy have the vitality to run in an appropriate range," Li said. Endi