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Analysts warn of investment slump

By Xin Zhiming (China Daily)
Updated: 2008-10-15 10:54

As the Chinese economy slows, its fixed-asset investment has also weakened, and analysts said it may not pick up in the near term despite the potentially favorable fiscal policies the country has vowed to adopt.

The ongoing global financial turmoil will dampen China's export-related fixed-asset investment, analysts said.

Nominal fixed-asset investment growth in urban areas was 27.4 percent year-on-year in the January-August period, up from 26.7 percent in the same period last year. But deducting the factor of the rapidly rising producer price index (PPI), which gauges ex-factory prices, real growth in fixed-asset investment has slumped.

PPI rose 10.1 percent, an all-time high, in August, meaning the real rate of fixed-asset investment growth could be around 15 percent, analysts said. In August 2007, however, the country's PPI rose by only 2.6 percent.

The Chinese Academy of Social Sciences (CASS) forecast in a book published on Sunday that the country's nominal overall fixed-asset investment growth could be 24 percent for the whole of this year, or about 15 percent in real terms. Last year, real growth exceeded 20 percent.

Moreover, analysts said the slowdown in the global and Chinese economies, coupled with falling prices, may have made people anticipate a "deflationary" cycle.

Many analysts have expressed concern that economic growth could fall below 8 percent next year and the situation may worsen in 2010. And they are now forecasting that inflationary growth may further weaken to about 4 percent by the year's end and it could fall further next year if the current economic growth trend continues.

The "dual fall" in both economic growth and prices may mean the advent of a deflationary cycle, said Dong Xian'an, a macroeconomic analyst with China Southwest Securities.

"If people have the general view that the Chinese economy will continue to slow, it will be difficult to attract investment," Dong said.

The nation's top leadership has become well aware of the situation, with the recently concluded 3rd Plenary Session of the 17th Central Committee of the Communist Party of China pledging to stimulate domestic demand and give more support to tap rural economic potential.

"But it is not an easy job to boost domestic demand in the short term," said Chen Xingdong, chief economist of BNP Paribas Peregrine Securities in Beijing. "Therefore, China still needs to rely heavily on fixed-asset investment to maintain stable economic growth."

Increased rural investment would help shore up the country's investment drive. Given the supportive tone of the CPC Central Committee meeting, the government is expected to raise fiscal investment in both urban and rural areas.

"But I'm not sure how long it would take for this well-meaning policy to be fully implemented," Dong said.

Even if the government would like to pump more capital into big construction projects, it may not be financially capable of doing so.

"As economic growth weakens, the fiscal income of local governments, which rely heavily on the real estate sector, will decrease substantially next year," Chen said.