Since the beginning of this year, China’s manufacturing investment has shown strong resilience and expansion potential, becoming an important support item for the growth of gross domestic product (GDP) beyond expectations. What are the drivers behind the rapid growth? In this regard, the Financial Times reporter interviewed Dr. Edge Spring water, chief analyst of western securities.

Chief analyst, Western Securities, Edge Spring Water. Doctor of Economics, Renmin University of China, graduate student of Ford Class of Sino-US Economics Training Center; National Bureau of Statistics 100 economists survey invited experts.

Profit-seeking of capital is the core driving factor of active investment

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Financial Times: Could you introduce the current situation of China’s manufacturing investment?

Bian Spring Water: At present, manufacturing investment accounts for more than one-third of China’s fixed investment, which is the fastest growing component of fixed asset investment in the past three years. According to the data released by the National Bureau of Statistics, manufacturing investment in 2023 accounted for about 34% of China’s fixed asset investment, which is the highest proportion of the fixed asset investment structure.

China’s manufacturing industry is dominated by private investment, and the participation of market-oriented subjects is relatively high, but it does not mean that it is completely driven by market forces. In theory, the structure dominated by private investment indicates that the degree of marketization of manufacturing investment is high, but considering the differences in driving factors affecting enterprise investment, some non-market forces can also promote the growth of manufacturing investment.

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Financial Times: What specific factors do you think can influence manufacturing investment?

According to the different drivers of investment, manufacturing investment can be divided into active investment and passive investment. Active investment is usually based on the optimistic market expectations of enterprises, optimistic about the development prospects of industries or products, and take the initiative to build or expand projects; Passive investment may be due to the aging of existing equipment, environmental protection or safety standards and other factors, the enterprise has to upgrade technology or equipment, and then rebuild the original project. Judging from the changing trend in recent years, the proportion of reconstruction investment (passive investment) has continued to increase since 2011, and will reach 34.9% in 2021.

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As far as active investment is concerned, the profit-seeking of capital is the core driving factor, that is, the continuous improvement of profitability is a necessary condition for enterprises to actively expand capital expenditure. If companies can earn a good return on capital through investment and expect this return to be sustainable, then there is an incentive to expand capital expenditure.