Rekindling China's animal spirits

CHINA'S gross fixed capital formation has been falling since 2010, driven mainly by a steady decline in private investment (Chart 1). Credit-fuelled public infrastructure spending has replaced private investment (Chart 2) to keep GDP growth from falling significantly below 7 per cent since the current economic downcycle began in 2013. The persistent weakness in private-sector investment on the back of rising credit growth is puzzling. It prompted Beijing to send in May 2016 nine inspection teams across the country to find out why the private sector was not investing.

Cyclical and technical factors

After a two-month study, the investigators concluded that slowing macroeconomic growth momentum, favouritism towards state-owned enterprises (SOE), failure of the local governments to implement effective measures to boost private investment and corruption crackdown were the culprits for stymieing China's "animal spirits".