Photographer: Qilai Shen/Bloomberg

Fast-Growing China Provinces Can’t Quit Investment Addiction

  • Total investment in five fastest-growing provinces exceeds GDP
  • Top performers depend on property, infrastructure investment

When it comes to China’s economy, investment is still king.

In the five fastest-growing provinces, total fixed-asset investment exceeded the sum of their gross domestic product in the first three quarters of this year, according to new data from 29 of 31 provincial governments. In Chongqing, Guizhou, Tianjin, Jiangxi and Anhui, combined total investment was 6.56 trillion yuan ($969 billion) versus their combined economic output of 6.37 trillion yuan, the data show.

QuickTake China's Pain Points

Despite a transition toward services and consumer-led growth, investment by the government, developers, or companies is still the engine fueling the fastest expansion rates. While the economy looks resilient for now -- the latest evidence of strength coming Tuesday with data showing the official manufacturing gauge jumped to a two-year high -- the addiction to investment and rapid credit growth needed to fund it is a growing concern.

China’s government has vowed break its stimulus addiction by boosting services, which accounted for more than half of the overall economy’s output last year for the first time, and consumption, a major prop this year. But quitting the old build-it-and-they-will-come mentality is proving harder to do at the provincial level as it remains the quickest way to juice GDP.

"In the provinces that benefit from the central government’s support, we see investment there is higher," because poorer regions get money funneled from richer ones, said Louis Kuijs, head of Asia economics at Oxford Economics in Hong Kong. Regions such as Beijing and Shanghai "already have a lot of infrastructure, so they have less need for high investment."

Fixed-asset investment measures capital spent or committed on assets such as machinery, land or buildings, and it usually adds up to less than GDP. An investment number that exceeds GDP is possible because the former is a sum of spending, while the latter measures the value added of goods and services produced in that period.

Such investment on a national level equated to about 81 percent of GDP in the first nine months of this year. Gross capital formation, which tallies investment’s actual contribution to the economy, has yet to be announced for the first three quarters of 2016. For 2015, gross capital formation comprised 44.1 percent of GDP, while consumption made up 52.4 percent and net exports added 3.4 percent.

Elevated investment levels in some provinces suggest those economies need such spending to help propel growth in the absence of other drivers like consumption and exports, according to Tom Orlik, chief Asia economist for Bloomberg Intelligence in Beijing. "The more advanced, coastal regions rely much less on investment."

Investment in the sprawling national capital equals 33 percent of output, and 23 percent in Shanghai. In Guangdong, the biggest provincial economy, investment equates to 39 percent of output, the most recent data from those regions show for the year through September.

Various Paces

Twenty-nine of 31 provinces have released GDP through the third quarter. Thirteen reported cumulative growth in the first nine months accelerated from the pace in the first half, while nine reported their expansions slowed. The remaining seven were unchanged.

As usual, provincial and national data don’t square with one another. All but one province reported a growth rate faster than the national level of 6.7 percent, a sign provincial officials could be inflating economic growth to help boost career prospects.

The inland city-province of Chongqing continued its three-year streak of coming out on top, posting a 10.7 percent expansion. Guizhou, a mountainous region with ambitions of becoming a major center for data storage, came in a close second at 10.5 percent.

At the back of the pack was Shanxi, home of the biggest coal mining operations, which accelerated to a 4 percent pace in the first nine months from 3.4 percent in the first half. Liaoning in the industrial northeast, which contracted 1 percent in the first six months, hasn’t released its latest data.

Most of China’s provinces don’t report quarterly data, only cumulative totals.

Property Boost

As for real estate investment -- a past engine of growth -- it was a mixed picture. Developers were more confident in inland regions such as Ningxia and Henan, with investment there increasing 26 percent and 24 percent year-on-year respectively. Growth champs Chongqing and Guizhou saw real estate investment decline.

Major cities with the biggest home-price gains didn’t get much of a growth boost from property investment. Beijing’s contracted 7.5 percent from a year earlier while Shanghai’s increased 8.7 percent.

Infrastructure Lift

As for China’s infrastructure addiction, there are few signs of it ending any time soon. Economists forecast increased fiscal support as China ramps up spending on infrastructure. Analysts surveyed by Bloomberg estimate the fiscal budget deficit will reach 3.6 percent of GDP this year.

Some provinces are already betting big on roads and rails. Inner Mongolia’s spending in the first nine months jumped 49 percent from a year earlier, while Shandong’s surged 31 percent and Guizhou’s was up 28 percent.

China must spend at least 15.7 trillion yuan, more than India’s GDP, on infrastructure this year to keep the expansion at 6.7 percent, according to estimates by researchers at Minsheng Securities Co.

— With assistance by Xiaoqing Pi

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