[20081120]UBS China Question of the Week - How Large Is Public Investment?

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