Trust and Credibility: Crucial for Private Investment Growth

An all-star roster of high-level government officials descended on Beijing for a meeting chaired by Premier Li Keqiang on July 18. Senior officials from the State Council（Chinas cabinet）， provincial-level government heads and leaders of ministries and departments gathered for a sole purpose： to study how to promote the sound development of private investment.

The unprecedented number of highranking attendees at the meeting is illustrative of just how concerned Chinas policymakers are over the slowdown of private investment growth. According to the latest data from the National Bureau of Statistics， in the first half of 2016， private investment in fixed assets grew by a mere 2.8 percent year on year and accounted for 61.5 percent of total fixed assets investment， down 3.6 percentage points from the same period last year.

The slump in private investment growth is one of the major difficulties confronting the Chinese economy and， to a certain extent， is the biggest obstacle to achieving stable economic growth. Thats because， under the current economic structure， the stable growth of private investment has a direct bearing on the development of the real economy.

The growth of the real economy only stabilizes when that of private investment is firmly secured. At a time when the government and state-owned enterprises （SOEs） face mounting pressure to buttress their investments， the private economy may be able to provide a solution for the improvement of the Chinese economy. Moreover， unleashing the vitality of private capital is of great significance for the government to mitigate liquidity risks and to avoid the so-called “liquidity trap” —a situation in which injections of cash into the banking system by a central bank fail to decrease interest rates and hence make monetary policy ineffective.

The slowdown of investment by private capital is mainly caused by the following reasons： a lack of confidence from private firms regarding the broader economy， inadequate investment targets， and entrenched financing difficulties and high financing costs. Further adding to the investment quagmire are partly or completely obstructed investment channels， tedious approval procedures and invisible obstacles in various forms. Additionally， over the years， private capital has been keen on making more mergers and acquisitions in foreign countries， especially since the beginning of this year， leading to a slowdown of their investment at home.

Admittedly， the above-mentioned elements are important causes for the slowdown， but not the most crucial. A lack of confidence and credibility is the most significant reason for the slowdown.

Some might argue these are two very“vague” concepts， because they are a general necessity， not just in terms of private investment in a market economy. However， since the outbreak of the global financial crisis in 2008， private investment has had the tendency of being marginalized whilst government and SOE investments have been in the limelight.

In recent years， the image of private investors has been tarnished amidst frequent media reports of their power-for-money deals with some government officials. In addition， some private investors failed to get returns on their investments in government-led projects， undermining the credibility of local governments. But at the same time， some government-led projects have even stagnated due to a lack of follow-up funding from private investors， dampening the credibility of private investors.

Declining trust and credibility between the two sides undoubtedly casts a shadow over private investment， therefore dealing a blow to its growth.

Take the public-private partnership （PPP） projects as an example. Private investors find it difficult to get a fair share out of such projects despite their strong interest in them. On the one hand， local governments sometimes arent able to give private investors a reasonable return on their investments out of concerns over risks， therefore making some projects hard to proceed.

On the other hand， even if both sides reach a consensus on their cooperation， private investors are constantly worried that local governments might nonetheless break their word or whether their collaboration could continue should there be any change in officials. These talks eventually fall through and end up with no concrete results due to such concerns.

According to data from the Ministry of Finance， there had been 232 exemplary PPP projects as of June 30 this year， with a total investment of 802.54 billion yuan （$122.91 billion）. Of the total 119 investors that have signed PPP project contracts， only 45 percent are not SOEs.

Right now， Chinas top decision-makers are paying an unprecedented level of attention to private investment. But whether such attention could truly turn into incentives for local governments and private investors depends on more preferential policies.

The central authorities have recently released a guideline on bolstering investment and financing reform by cutting red tape， improving private investment management， diversifying corporate financing channels and accelerating the transformation of government functions.

Whether the investment environment for private capital can be improved depends on how well these policies are implemented by local governments. More trust and credibility should be granted to private investors by local governments， as well as vice-versa. If that can be accomplished， the slowdown of private investment growth can be effectively curbed and private investment can become a true stabilizer for economic growth.