Private sector still trying to navigate China's new normal

The good news is that the private sector is further along the credit cycle, and private sector fixed asset investment has stabilized, rising from a cyclical bottom of 3.9% in 2016 to 6.5% in 2017. It could even surprise to the upside this year given the positive correlation to global growth. This matters because genuine improvement in the economic health of the Mainland will hinge on the private sector (which is still trying to navigate China’s so-called “new normal”). 

Headlines outside the Mainland have focused on how Xi has been advocating greater state control in the economy. Less attention though has been on Premier Li Keqiang who has been championing a largely pro-business agenda — streamlining administration approvals and reducing red tape, and easing, or even removing, scores of regulations.

The aim is to make it easier for private businesses to operate. Private firms account for 90% of businesses, 70% of patents, and 60% of investment. At the end of 2017, there were 27.26 million private enterprises, employing 341 million people. The cumulative decisions of these firms will increasingly shape the economy and, by implication, fiscal and monetary policy (see Figure 1 below).

This is especially true for 2018 given the anticipated slowdown in property activity. Government restrictions are starting to bite; and, investment already faces headwinds. Furthermore, though we expect proactive fiscal policy (and monetary policy to remain neutral and prudent), local governments will find it harder to fund infrastructure projects. Therefore, investment could take a hit this year (see Figure 2 below).

Beijing has known this for some time, and has tried to pitch public-private partnerships (PPP) to the private sector. So far, most PPPs have actually been between the government and SOEs, which doesn’t really solve the problem. In fact, it contradicts government efforts to reduce the debt burden on the state sector. Recognizing this, the National Development and Reform Commission (NDRC), the Ministry of Finance and the State-Owned Asset and Supervision Administration Commission (SASAC) recently released guidelines to encourage genuine private participation.   

Hopefully, PPPs won’t need to be the trigger inducing broader private sector involvement. Luckily, private investment in China is closely linked to the performance of the export sector. And, the outlook for global trade growth in 2018 is solid, which could push manufacturing investment towards 6%-7%, from 3.1% y/y in December 2017.

Nevertheless, the mostly likely silver bullet will be more efficient price signals and also some creative destruction — which would help private companies identify opportunities more accurately. But, we don’t foresee this in 2018 (see Figure 3 below).

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