China Focus: Slowing private investment demands gov't efforts to level playing field

For years, China has been gradually easing restrictions on private investment, but slowing growth in the sector since the start of 2016 shows that the government needs to do more to level the playing field for them; allowing them to play a bigger role in pepping up the broader economy.

Official data showed fixed asset investment made by private companies increased 5.2 percent year on year during the January-April period, marking a big retreat from the 10.1-percent seen in 2015.

The expansion was also much lower than the 10.5-percent growth in overall fixed asset investment. Previously, these two indicators usually moved in tandem.

In contrast, state-sector investment surged 23.7 percent, compared with the 10.9-percent gain in 2015.

"The data showed China's stabilizing economic growth in the first quarter was mainly driven by government policies. If private investment fails to take up the slack when the effects of pro-growth policies fade out, growth may once again head downwards," noted Zhang Jun, analyst with Morgan Stanley Huaxin Securities.

The private sector regularly contributes more than 60 percent of China's GDP growth and provides over 80 percent of jobs.

The torpid growth in private investment, which came amid sluggish market demand and industrial overcapacity, echoed the downtrend in manufacturing and real estate industries, the two sectors most favored by private investors.

Private investment accounts for 88 percent of manufacturing investment, 85 percent of real estate investment, and only 28 percent of infrastructure investment, according to a CICC report.

"Private investment has easier access to the second industry because of low entry barriers and less government intervention," according to Wu Yaping, analyst with the Investment Research Institute under the National Development and Reform Commission.

In infrastructure and some service industries such as railways and healthcare, private investors mostly have slim chances for participation as state-linked companies still dominate.

More worrying, banks and financial institutions in China have a habit of leaning toward state-backed borrowers over risk concerns, making it hard for private investors to access funds.

With China's economy facing persistent downside risks, more drastic policies, to clear obstacles for private investment, should be put in place, analysts advised.

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

At the local level, however, where the actual work takes place, insufficient implementation and red tape remain major hurdles.

Despite the improvements, China was ranked 84th among 189 countries in ease of doing business, according to the World Bank "Doing Business Report."

"There is still significant room to streamline regulations. In terms of fiscal policy, cutting taxes and lowering social security contributions can play a greater role," a CICC report noted.

To arrest the investment slowdown, the State Council earlier decided to begin a month of investigation into exactly how central government policy on private investment is put into practice by local authorities. Endi