China: Productive investment is the key - Westpac

In view of Elliot Clarke, Senior Economist at Westpac, as we move toward and then past November’s five–yearly National People’s Congress, authorities are likely to pull back on public investment, increasing the economy’s reliance on underlying private investment.

Key Quotes

“Further, if China is to prosper in the decade(s) to come, there needs to be a concerted effort towards efficiency and productivity – i.e. a drive for value creation. The road ahead for investment in China therefore increasingly lay with the private sector and efficient SoE’s.”

“China’s ‘One–Belt, One–Road’ initiative offers a way to effectively outsource low–value production and to make a wholesale shift toward activities with a higher value add. The related far–reaching transport projects also offer much improved access to key consumer markets across Europe and Asia.”

“However, to the extent that much of this investment will be undertaken in neighbouring countries by private firms (as well as the strongest SoE’s), there is a very clear need to make sure that the management of interbank and capital markets does not get in the way of private sector growth. Rather, credit made available to the private sector has to increasingly be on similar terms to the SoE’s. Further, the government’s FX controls also must not stymie productive, well–thought investment beyond China’s borders.”

“The restrictions as they currently stand do not preclude investment taking place. But it is easy to see how the potential for long delays in the process as well as uncertainty over how these rules may change in the years ahead could put off One–Belt, One–Road investment. Often highlighted is the degree to which China’s future rests with its consumers. However, the rise of the consumer can only take place if the nation’s labour resources are used effectively, with much–improved incomes and confidence across China’s disparate provinces necessary.”