In response to the slowdown in economic growth, China has begun to increase investment. In the investment field, China is most familiar with the infrastructural construction. The decline in infrastructure investment is one of the causes of the slowdown of the Chines economic growth this year. According to the Chinese National Bureau of Statistics, from January to August, the national fixed asset investment increased by 5.3% year-on-year, and the growth rate dropped by 0.2% from January to July. Among the three major investments, infrastructure investment is still the main reason for the slowing down. From January to August, infrastructure investment increased by 4.2% year-on-year; a decline of 1.5% from January to July and has reached a new low. Compared with the growth rate of 16.1% at the beginning of the year, the decline in infrastructure investment in August is worthy of attention.
Considering the demand, how much space does China's infrastructure investment have? What is the contribution rate of infrastructure and real estate investment to China's economic growth? Will accelerating infrastructure investment lead to an increase in government debt and offset the effort to de-leverage? These are all real problems the Chinese domestic and foreign markets are concerned of. Recently, Anbound's chief researcher analyzed this matter when he was interviewed by a renowned financial media from the United States.
Chan Kung believes that first of all, the basic observation of the external world on China is that China's infrastructure construction is deformed. For example, in 2017, China's infrastructure construction investment amounted to RMB 17.31 trillion, and the cumulative year-on-year growth rate has dropped to 14.93%, which is slightly lower than 2016. China's infrastructure investment accounts for about 20% of fixed-asset investment, while fixed-asset investment accounts for 45% of China's gross domestic product (GDP), which is leading among large economies. This proportion in the United States is about 22%, and Japan about 30%. It can be seen that the Chinese economy is very dependent on infrastructure investment. For China to maintain a certain economic growth rate, it has to rely on infrastructure investment. Should China decides to focus on other industries, both of the industries and the economic restructuring might not be able to adapt to that; this would means such change cannot be realized within the short period of time.
How much space, then, does China have for infrastructure investment? First of all, Chan Kung believes that this is related to the definition of "infrastructure". The infrastructure in China mainly refers to roads and bridges; such has been the case for decades. However, the actual infrastructure has wider definition; it can be said that all public service facilities are infrastructure. If we look at it this way, there is still a lot of room for infrastructure construction in China, such as solving water resources problems, improving land and resources, upgrading the communication network (such as 5G network), and even building a large number of football fields (there are very few football fields in China, and they might even be not as good as those found in the Latin American countries). Therefore, the demand for infrastructure investment in China is very large, but the investment focus needs to be shifted. Then there is also the problem of changing policy concepts.
Secondly, it must be acknowledged that the contribution of infrastructure and real estate investment to the economy has been quite huge in the past, but it is difficult have accurate statistics on this. It is generally estimated that the contribution rate of real estate to China's GDP is around 8%. However, Chan Kung believes that may be seriously lower than what it actually is. The structural factors of the Chinese economy are very strong, and China is a country with concentrated resources. Once the resources are concentrated in a few areas, they often have a huge impact, and the development speed is quite astonishing. This is the case for infrastructure and real estate, which is very important for the fiscal revenue of the local governments in China. Some local real estate income accounts for 100% of disposable income. Industry often follows the demand, so the contribution of infrastructure and real estate to the Chinese economy should be very large, and it is the main pillar industry in China.
However, infrastructure is different from real estate. Real estate has contributed a lot in the past, but the contribution of real estate to the Chinese economy will become increasingly negative in the future. This is not really because of debt, but rather because of the rapid rise in total social costs, which caused China to lose a lot of industries, especially the manufacturing industry, making many companies to become unsustainable. Infrastructure has long-term benefits; it is expected that infrastructure investment will still be China's main economic growth tool in the future; its space depends on the scale of investment, and this is actually the determination of the Chinese government.
Thirdly, the increase in infrastructure investment will certainly lead to an increase in debt. However, in the current world, with the monetary easing of the past period, it is common for the government debt to increase in different countries of the world. As long as the liquidity changes slightly, this would mean that government debt is rising. Chan Kung believes that the key is not the rise in debt levels, but in whether the debt structure is reasonable, if the issuance of bonds is orderly, and whether the bond market is well established. China is currently facing a number of issues in these areas, which are the reasons for China to adopt strict control measures.
Fourthly, it is understandable that the Chinese government is currently adopting strict controls on debt. On the one hand, China's debt is large, and the total amount of debt remains unclear, especially the scale of various implicit debts. On the other hand, there are serious problems in the order of bond issuance, where the system and the mechanism cannot keep up with that. In the past, China has underestimated the impact of debt on the national economy, and the required mechanism does not match the situation, which results in chaos. However, Chan Kung pointed out that China will not give up the necessary debt construction, which is an inevitable measure to avoid excessive economic fluctuations, and at the same time it is also a macro adjustment. As the cost rises, even if the increase of consumption is encouraged, the increase in total social costs means that one should not overestimate the consumption growth. Ultimately, China has to depend on investment. Consumption growth is a long-term thing, not a short-term one. Chan Kung believes that the Chinese policy department understands this very well, and does not deal with the matter with the academic or the classical economic theory's point of view.
Final analysis conclusion:
Under the downward pressure of the economy, China will definitely increase its infrastructure investment to prevent stall in short-term economic growth. But in order to avoid the structural problems of past investment, China needs to change its mindset and adjust its investment structure.
