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Macroreview: Deconstructing China's Investment

07-16 18:40 Caijing

Caijing's chief economist says that if this year's fixed asset investment growth rate is 30 percent, then fixed capital will increase by 25.4 percent.

By Shen Minggao

(Caijing.com.cn) China is heavily dependent on investment for GDP growth. In 2008, gross capital formation (GCF) and gross fixed capital formation (GFCF) set new records at 43.5 percent and 41.1 percent of GDP.

GFCF is a measure of net new investment in fixed capital assets by enterprises, government and households during an accounting period such as a quarter or a year.

However, statistics for investment are the least transparent among all figures. China's National Bureau of Statistics releases two types of figures: monthly urban fixed asset investment and quarterly national fixed asset investment.

The ratio of urban fixed asset investment to national fixed asset investment has been growing. Urban fixed asset investment made up 83.2 percent of national fixed asset investment in 2004 and the figure rose to 86 percent. Investment is reflected in GDP by GFCF.

But the GFCF is released annually and often lags half a year behind real-time. Due to a lack of statistics, most analysts have to resort to monthly and quarterly statistics to project GFCF. The total contribution to GDP by investment is determined when stocks as well as GFCF are taken into consideration.

Is national fixed asset investment a reliable indicator for gross fixed capital formation and the contribution to GDP? It depends on the correlation between the two.

Total investment in 2008 reached 17.2 trillion yuan and the GFCF stood at 12.6 trillion yuan, a difference of 4.6 trillion yuan. In 2002, an additional 1.07 yuan in investment resulted in 1 yuan fixed capital but in 2007 and 2008, 1 yuan of fixed capital required 1.79 yuan and 1.68 yuan in investment.

Investment is a concept of flow. Anytime a company or an individual increases fixed asset investment can be counted as investment. Fixed capital is a concept of stock. Only newly created fixed assets can be counted in.

Xu Xianchun, deputy director of the National Bureau of Statistics (NBS), said that the difference between investment and gross fixed capital formation is that investment includes the purchase of land, old equipment and old buildings but they are not included in GFCF.   

NBS has not released breakdown figures on land, old equipment and old buildings. It is hard to estimate the size of the three items, which are included in investment but not in GFCF. 

Take the year 2007 as an example. According to NBS statistics, real estate developers spent 487.3 billion yuan on purchasing land. The government collected 1.2 trillion yuan in land fees, according to news reports. The 1.2 trillion was counted as fixed asset investment but not as gross fixed capital.

There were few statistics about the next item, old equipment and old buildings. Old equipment was frequently sold and bought in the 1990s as state-owned enterprises upgraded their equipment. In 1998, the ratio of investment to GFCF reached 99.1 percent, the highest in years.

Regarding the third item, household projects of less than 500,000 yuan, according to NBS, total registered capital of private companies were 9.4 trillion yuan in 2007, 1.8 trillion yuan more than the figure in 2006. Self-employed individuals' registered capital reached 749 billion yuan, an increase of 90 billion from last year. If a quarter of the registered capital was used for fixed asset investment, the total investment would be 500 billion yuan.

In addition, NBS said the 2007 investment in exploration and computer software was 7.86 billion yuan. Domestic spending on software in 2007 reached 100 billion yuan.

Finally, the difference between real property sales and investment in the housing development is also included in investment but not GFCF. Total profit before tax was 327.54 billion yuan.

The above analysis indicates that the high ratio between investment and GFCF cannot be explained away by land fees, old equipment and old buildings. Other possible reasons include exaggerated statistics of fixed asset investment; low efficiency of fixed asset investment; and some capital written off by the phasing out of non-efficient projects.

From analysis of household projects of less 500,000 yuan, spending on exploration and software and the difference between property cost and sales, about 900 billion yuan of fixed capital was not included into fixed asset investment.

If the 900 billion was excluded from fixed capital, the ratio of investment and gross fixed asset formation will rise to 142 percent from 130 percent. Investment needed for an addition of 1 yuan fixed capital will exceed 1.79 yuan. If the above analysis stands, the growth in fixed asset investment does not mean a correspondingly higher contribution to GDP.

After the analysis of relationship between fixed asset investment and fixed capital, we can estimate the size of the quarterly fixed capital. Based on the 136% ratio of investment to fixed capital in 2008, suppose this year the ratio rose to 142% -- the 28.8 percent of fixed asset investment will bring about 24 percent of GFCF. The estimate is in line with Xu's NBS estimate.

With more investment being injected into the economy, the gap between fixed asset investment and fixed capital will widen. If this year's fixed asset investment growth rate remains 30 percent, then fixed capital will grow by 25.4 percent.

1 yuan = 14 US cents

Shen Minggao is Caijing's chief economist.       

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