By Wang Yanhang    Source: Global Times    Published: 2016-5-26

China saw a big drop in the growth of private investment from January to April this year. According to official statistics, China`s private-sector fixed-assets investment (FAI) rose by 5.2 percent year-on-year during the period, down from a 12.7 percent rise last year. By comparison, the total FAI excluding urban households rose 10.5 percent, down from 12.0 percent in the same period last year. Also, private-sector FAI accounted for 62.1 percent of China`s total FAI excluding urban households in the period, 3.2 percentage points lower than last year. Given the importance of private-sector FAI, the fallback will inevitably impact the country`s economy.

But we should also note that China is increasingly focused on the quality of investment rather than just the volume. What matters most for investment is prudence, and investors need to be cautious about risks instead of relying on expanded investment volume to dilute short-term risks.

Currently, as China faces the problem of overcapacity in certain industries, if the country simply highlights investment scale to maintain growth, the benefit of the investment expansion will be limited. So the main battlefield for FAI should be shifted toward revitalizing the existing stock of FAI.

The rapid development of China`s private sector has played a vital role in stabilizing growth, encouraging innovation and boosting employment. Abundant private capital has also relieved some of the pressure from difficulties in raising capital and high financing costs. Instead, the problem of finding suitably attractive investment targets has surfaced, and this is expected to remain an issue in the foreseeable future.

The change in the investment environment has provided unprecedented opportunities for private investment. Certain private enterprises are rational and mature in their investment, but we still need to address three issues to improve the quality of private investment.

The first is to tackle the idea of there being an implicit guarantee from the central government for local governments and State-owned enterprises (SOEs). If they have to shoulder their own debt risks instead, it would encourage them to resolve risks through market-based methods and to avoid less efficient investment.

The second is to establish a credit system for private enterprises in order to put a stop to the evasion of payment of bank loans, and avoid a "bad money drives out good" situation in which credible private firms suffer and unreliable ones benefit.

The third is to push for higher efficiency in government management. The government should strive to solve issues that are relevant to the interests of private investment, which include lowering the threshold and costs for market entry by private investment in certain industries; strengthening government management by reducing government inaction and arbitrary conduct; fostering a fair and competitive investment environment; and improving the quality of information disclosure. Meanwhile, the government should also take the initiative to lead the direction of investment and guarantee consistency and stability in policies. It should also step up the pace of cleaning up zombie enterprises using market-based methods rather than government bailouts.

The author is a senior fellow with the Chongyang Institute for Financial Studies at Renmin University of China.