# **Appendix 3. Investment Slowdown in China**

_Investment growth in China has halved since 2012, in a rebalancing towards more sustainable growth. Private investment growth slowed sharply amidst a policy‐driven decline in investment in state‐owned enterprises._<sup>_30_</sup> _Most recently, stimulus‐driven infrastructure investment through share‐holding enterprises has partly offset a decline in private and SOE investment. Private investment weakness has reflected deteriorating business confidence and weak return prospects. The investment slowdown in China has weighed on output growth in other countries, especially commodity‐exporting EMDEs._ China is deeply integrated into the global economy. Its imports account for one‐tenth of global imports, its output for more than one‐tenth of global output, its investment for one‐fifth of global investment, and its investment growth for 42 percent of post‐crisis global investment growth (during 2010‐15).

A policy‐driven rebalancing away from investment‐ and export‐driven growth towards a more sustainable growth model has been underway for several years (Hong et al. 2016). In the process, investment growth in China slowed sharply from a stimulus‐driven 21 percent in 2012 to 10 percent in 2015—with global repercussions.<sup>31</sup> China’s investment slowdown accounted for one‐third of the slowdown in global as well as EMDE investment growth from 2010 to 2015. Given the role of China in the global economy, it generated sizable adverse spillovers to other EMDEs.

Monthly data available for nominal fixed asset investment (FAI) suggests a further slowdown in 2016: growth in this measure fell to 8 percent (year‐on‐year) in October 2016 from 21 percent in the year to December 2012, with a sharp shift in composition from the private sector to the publicly controlled sector. FAI by state‐owned enterprises or enterprises with majority state participation grew by 20.5 percent (year‐on‐year) while private investment growth slowed to 2.9 percent (Figure 3.1).<sup>32</sup> Weak private sector investment adds to concerns about growth prospects as the private sector generates about 65 percent of total investment, around 50 percent of GDP, and 80 percent of employment.

Against this backdrop, this appendix addresses the following questions:

1. How has investment in China evolved since 2010?

2. What has driven the slowdown in China’s investment growth?

3. How large are the spillovers from China’s investment slowdown?

4. Which policies can support an orderly rebalancing of investment in China?

This appendix documents the slowdown in China’s investment growth as well as its shifting composition, with pronounced private sector investment weakness. The slowdown in China’s investment growth may

> Note: This appendix was prepared by Ekaterine Vashakmadze, Hideaki Matsuoka, and Trang Nguyen, with contributions from Raju Huidrom.

> 30 Private investment (“minjian” investment) is defined by the Chinese National Bureau of Statistics as the sum of Fixed Asset Investment (FAI) made by enterprises that are registered as collectively‐owned, cooperative, private sole proprietorship, private partnership, private limited liability company, business individual, or partnership of business individuals. Private (“minjian”) investment also includes FAI by those enterprises in which the above‐mentioned entities hold a controlling ownership stake. 31 Major stimulus was initiated in 2009.

> 32 In the remainder of this appendix, investment is measured as FAI (in nominal terms), for which monthly data are available. Unlike gross fixed capital formation (in real terms) in the national accounts, it includes purchases of land and other already‐owned assets. Real gross fixed capital formation from the national accounts is only available on an annual basis.

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