http://www.barrons.com/articles/the-gloom-about-chinas-private-sector-is-overdone-1471935990
Best Minds
The Gloom About China's Private Sector Is Overdone
Derek Scissors
There has been concern recently over the fate of China's private sector, ranging from Premier Li Keqiang to the Wall Street Journal. It is said to be struggling, in need of quick government help. But China's own numbers do not support this view and the current obsession with it needs to ease.
That the private sector is struggling rests heavily on one key strand of data, along with many ensuing explanations of it. A series from the National Bureau of Statistics' (NBS) on fixed investment excluding rural households shows "Investment Actually Completed by State-owned and State-controlled Enterprises" climbed 22% through July and private investment only 2%.
This is just one cut. The same series from the NBS when divided by status of registration looks entirely different. Here, "Investment in Fixed Assets, State-owned Enterprises" fell 6% outright while private investment rose 8%.
The quotes highlight that the categories are not exactly the same. The first, widely used set of numbers is aggregated such that state and private represent about 96% of the total. In the second series, they represent only 53%, with other categories such as "collective" and "foreign-funded" kept separate.
Derek Scissors - Asia economist at the American Enterprise Institute
Simplification is fine for journalists facing tight word limits. It's odd that policy makers and investment advisors would invariably prefer it. One question obscured by the simplification is how registered state enterprises accounting for 21% of spending in the disaggregated series can invest less while state-controlled enterprises accounting for 35% of spending in the aggregated series see rapid investment gains.
Not surprisingly, it is the more detailed series which may clarify: wholly state-owned limited liability corporations report fixed investment more than doubled through July. A certain kind of state firm is extremely active, perhaps offsetting clearly less activity at other state firms. This seems like material information in the matter of China's slowing investment, but is almost never discussed.
Unfortunately, the same trick can't explain how registered private firms boast 8% investment growth versus only 2% for all private investment. Non-wholly state-owned limited liability corporations reported growth of 25%, those from Hong Kong, Macao, and Taiwan 19%, and foreign-funded 12%. Declining investment in the registration series are either in very small categories or ones that could be either private or state, such as "other." The 2% number for all private investment is hard to derive.
Bad enough this apparent clash is never mentioned among the now thousands of China-watchers. But other NBS series place weight on the side of the private sector still outperforming the state sector this year. First, private firms are typically thought starved of credit; indeed, this is one of Premier Li's targets in the campaign to boost the sector.
NBS' source of funds data shows "self-owned [domestic] funds" as both larger and growing faster than the combination of state budget support and domestic lending (foreign investment is declining as a source of funds, but is very small). There is intense ambiguity in these figures, as the categories are not exhaustive. But they do not give evidence of a massive expansion in state support for any firms and they show what is typically seen as a predominantly private method of financing as still quite active.
A second hint is provided by industrial output. The category descriptions in the NBS monthly for output mirrors that in the aggregated series for investment, where state firms are investing far faster. Yet the output results don't reflect this at all: value-added industrial production by state-owned and state share-holding enterprises rose only 0.3% through July. Domestic private enterprises saved the day, adding 8.7% (foreign-funded output was 3.5% higher).
It is entirely possible for state firms to invest more and profit not at all – this may be China's biggest problem. But investing 22% more and not producing any more industrial goods would be a radical departure. If this is in fact what's happening, it would be state-owned industrial enterprises which desperately need help, not private firms.
For their part, if private enterprises are truly investing only 2% more but private industrials are producing almost 9% more, the latter deserve emulation in light of China's debt situation, not assistance. It seems more reasonable that both private investment and industrial growth are in the 8-9 percent range.
This short note necessarily omits multiple sets of statistics and is not conclusive. That is ultimately because official data themselves are not conclusive about the performance of the state and private sectors this year. Yet many people are jumping to conclusions. Better to just watch them jump.
Derek Scissors is a resident scholar at the American Enterprise Institute (AEI), where he studies Asian economic issues and trends. In particular, he focuses on the Chinese and Indian economies and US economic relations with China and India. He is author of the China Global Investment Tracker and the Chinese Investment in the US Dataset.
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Email: asiaresearch@barrons.com
There has been concern recently over the fate of China's private sector, ranging from Premier Li Keqiang to the Wall Street Journal.