UBS China Question of the Week - How Large Is Public Investment?
The government's recent announcement of investing RMB 4 trillion by 2010 <br/>to stimulate domestic demand has caught the world's attention. As usual, <br/>the devil is in the details. The lack of precise detail in the <br/>announcement has led to questions and scepticism on the size of the <br/>actual stimulus and the influence the government might have on the <br/>economy. To help answer these questions, it is important to know how <br/>much the Chinese government normally invests in the economy. Just how <br/>large is China's public sector investment? <br/>Our Answer <br/>- Apparent government investment from the budget is small, accounting <br/>for about 4% in total fixed asset investment. Data from the sources of <br/>funds data on fixed investment show that investment with budget funds <br/>has declined to 3.9% of total investment in 2007, from the peak of 7% in <br/>2002 (Chart 1). This is consistent with the expenditure data from the <br/>budget, where it used to show lines for "capital construction" (since <br/>2007, the budget classification has changed). <br/>- Actual government investment has been substantially larger, accounting <br/>for 15% of total fixed capital formation in 2005. Since a portion of the <br/>spending by various ministries and sectors is investment, the flow of <br/>funds data in the national account would reveal a more realistic and <br/>thorough picture on government investment, although they come with a <br/>long lag (Chart 1). Government investment peaked in 2001 when it <br/>accounted for almost 26% of total fixed capital formation (9% of GDP), <br/>but has since dropped to 15% in 2005 (6.4% of GDP). Government <br/>investment in 2007 was most likely less than 15% of the total as well. <br/>- Government-mandated investment and public sector investment are of <br/>course even larger. By government-mandated investment, we mean direct <br/>government investment plus the various infrastructure investments <br/>conducted through local governments' investment arms or infrastructure <br/>entities. The latter are mostly not financed by the budget, but by <br/>corporate bonds or bank loans. We estimate this to be about 22% of total <br/>investment (27% if utility is included). In addition, there are still <br/>many large state-owned enterprises in the industrial sector in China, <br/>especially those related to the resource and basic material industries. <br/>Including large industrial SOEs, then China's public sector investment <br/>could be easily more than 35% of overall investment. <br/>- How do these data relate to the RMB 4 trillion or the RMB 1.18 <br/>trillion that will be put out by the government? We can easily see <br/>government investment (consistent with the flow of funds data in Chart <br/>1) rising to 20% or more in 2009 from 15% in 2007 (equivalent to <br/>additional 2-3 percentage points of GDP, or 600-900 billion). Half of <br/>the additional government investment could be financed by increased <br/>deficit, and the other half from reducing other non-investment spending. <br/>The bulk of the RMB 4 trillion would likely fall into the <br/>"government-mandated investment" category, financed by corporate debt <br/>and bank loans. It is still not clear how much of the 4 trillion will be <br/>"new" or additional investment, but as private sector investment is <br/>likely to be weak or even fall, the rise in public sector investment can <br/>help to maintain a solid growth in overall investment. <br/> [attach]10101[/attach]<br/>页:
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