Investment key to stable growth

Fixed-asset funding in industry and real estate sector will be the most convenient tool for China

One of the most important signals sent out at the "two sessions", the annual meeting that brings together China's national legislators and political advisers, is that the judgment of top policymakers toward the economic trend has changed. In the delicate balance between economic growth and reform, the leadership is leaning toward stabilizing growth. Based on this change, investors should adjust their strategies and focus of industries.

To be more specific, top policymakers are now convinced that the Chinese economy faces more difficulties than a year ago. In the Government Work Report, which Premier Li Keqiang delivered on March 5 to the National People's Congress, the top legislature, he said: "The difficulty for stabilizing (economic) growth is growing." Therefore, as widely expected, the government lowered this year's economic growth target to 7 percent from last year's 7.5 percent.

When setting the tone for the work of 2015, the report said: "Development is of overriding importance, which is the foundation and key to solving all problems."

By comparison, the most important task of last year, as listed by the work report, was reform. This is a clear indication that top policymakers' judgment of the economic priority has changed. Stabilizing growth has moved up the priority list.

This change is not a total surprise. In fact, since the middle of last year, when the quarterly GDP growth was lower than the yearly target, Li has stressed frequently the importance of maintaining economic growth within a reasonable range. Monetary policies were then loosened several times to support economic growth. The latest such loosening came just a few days ahead of the opening of the "two sessions", with the People's Bank of China cutting interest rates.

Top policymakers have obviously reached a consensus at the "two sessions" that downward pressure is the largest enemy amid the fragile global economic recovery and difficulties in pressing ahead with China's restructuring and rebalancing. Based on that understanding, policy setting will change accordingly.

The first change will be monetary policies. Although this year's Government Work Report says the central government will continue to deploy a "stable" monetary stance, it is highly expected that the stance will lean toward "neutral", with more loosening in sight. Reductions of required reserve ratios for lenders, which can help pump more liquidity into the market, are a convenient option for the central bank if first quarter economic figures are not satisfactory.

Further interest rate cuts are also on the cards if policymakers think the downward pressures are too high. In this sense, the scenario that the central bank stays indifferent when the market grapples with a credit crunch as serious as in the middle of 2013 will not be repeated. In short, we are going to expect a more amiable central bank throughout this year.

Based on this judgment, the monetary supply will likely be relatively ample and cost of financing will remain much lower. This would be good news for most of companies, especially those faced with funding issues.

Apart from easier credit, opportunities will also emerge while the government will definitely step up efforts to boost investment.

To understand this, it is needed to first understand why investment will become the most important focus of the government.

As mentioned above, maintaining economic growth has become a major task of this year, but looking at the three major economic engines, fixed-asset investment appears to be the most and only convenient tool for the government. Trade, the traditional economic engine, is muted amid weak global demand.

The other engine, domestic consumption, cannot be easily and quickly stimulated because of Chinese people's saving habits and high worries of further economic slowdown, despite the government's wish to make consumption the largest economic propeller. Hence investment remains the only choice.

Therefore, it is not surprising that investment in public products is highlighted in the Government Work Report.

This is clearly a confirmation that the seven packages of investment projects listed late last year by the National Development and Reform Commission will be the key areas of government support this year. These areas are information, power grid, oil and gas networks; clean energy; oil, gas and mineral resources supply; food and irrigation; transportation; ecology and environmental protection; and healthcare and elderly care.

Other than these public-product industries, another industry that is likely to receive government support is real estate. The Government Work Report delivered some key messages related to the property industry.

Curbing speculative activities is no longer included in this year's report, suggesting an overall policy relaxation for the industry. "Property market controls" are now a thing of the past. What replaces them is the expression of "stabilizing housing consumption". Clearly, the industry's role in bolstering economic growth, especially amid fears of steeper slowdown, has been recognized by top policymakers.

Local governments are expected to have a bigger say in local property markets, as the report stresses "local conditions" must be considered in rolling out policies in different regions. This means that some areas, where property markets are not performing well, are now allowed to roll out even more aggressive policies to bolster markets. By comparison, big cities such as Beijing and Shanghai may apply milder supporting measures and retain their home-purchase restrictions as property prices there are still stable.

In addition, the affordable housing sector and reconstruction of areas with sub-standard housing will continue to be areas attracting government investment and supports.

Generally speaking, the property market is likely to offer more investment opportunities, although the profit margin of the industry will not be as big as it was a few years ago. The private sector is expected to be more than welcome in making investments this year, with the government at all levels promoting the practice of public-private partnership.

Investment is seen as the savior of the economy, but making investment needs a lot of money. Although the budget deficit is set at 1.62 trillion yuan ($260 billion) for 2015, an increase of 270 billion yuan from a year ago, to ensure the government has enough money to invest, the government itself cannot meet the demand for all investments.

The model of public-private partnership is preferred by the government to leverage the financial strength of the private sector. Central government departments such as the National Development and Reform Commission and the Ministry of Finance are eyeing supportive measures for this kind of model.

Local governments, such as Jiangxi and Shandong provinces and the Guangxi Zhuang autonomous region, all rolled out projects that look for partners under the public-private partnership model. Although these projects are often public welfare projects with low profit margins, their stable profitability and government guarantee can offer private investors a good opportunity.

Similarly, private investors may also find opportunities in the advanced reforms of State-owned companies as the Government Work Report calls for mixed-ownership reforms.

But private companies must be mindful of risks in both the public-private partnership model and mixed-ownership reforms. As both endeavors are new things without many set examples, it is not known how the government and State-owned enterprises are willing to make interest concessions to get the involvement of the private sector. There are reports that some public-private partnership projects are not attractive and that the weight of private companies are far less than their shareholding in a State company. So it is indeed up to the government to treat the private sector equally instead of merely seeing it as a source of financing.

The author is a Shanghai-based financial analyst. The views do not necessarily reflect those of China Daily.