Fixed asset investment, or FAI, is a measure of capital spending that refers to any investment in physical assets, such as real estate, infrastructure, machinery, etc. FAI is pretty good measure of the level of investment in China.
In China, FAI data is compiled by the NBS, and published monthly, quarterly and annually and is broken down by type of investment and sector. The investment threshold for inclusion in data is 5m CNY. SOE enterprises will report their FAI data directly to the NBS with smaller project data aggregated regionally. In addition, investment in areas like railways, highways airports, etc., is reported directly by the relevant ministry or authority.
Interestingly, the data tends to show that investment is generally higher at the start of the year, and drops off as the year progresses. It’s not worth reading too much into this, as it seems to be an annual trend.
Why is this data important?
China, following other Asian development models, relies heavily on investment to drive growth. To facilitate this level of investment, China encourages household savings by restricting access to alternative investment options and gives SOEs preferential policies when borrowing this money for FAI. This emphasis on investment means that while living standards have progressed moderately, China’s overall economic importance has ballooned.
However, some believe that this level of investment is creating an unsustainable bubble. Those who believe this argue that too much investment leading to ‘overcapacity.’ This is dangerous because it means that eventually returns on investment will no longer be sufficient to cover the costs of the debt incurred to build it and hence will lead to a chain reaction of debt defaults across the economy.
The main problem is that for local governments to generate growth, construction is really the only game in town; or at least the only one that generates returns quick enough to reap political benefits. In addition, a culture of corruption and blurred lines of ownership that disproportionately rewarded government officials green-lighting infrastructure and construction projects provided more incentives for construction.
This over-investment in construction has had consequences; most visibly, oversupply has caused the appearance of ‘ghost towns,’ like Ordos in Inner Mongolia, that have yet to attract residents. And as meaningful infrastructure projects became scarce, local governments financed more grandiose projects to keep the growth train rumbling along.
Should this train come to an unexpected halt it will ultimately lead to a period of deflation – falling prices – that will lead to either political unrest, or an opportunity for China to expand its market share of world trade. Those who think this is likely to be a problem tend to focus their attention on the real estate investment data contained in the report.
The data is of additional importance to those engaged in currency and commodity markets as the investment tends to lead to a resulting demand for resources and hence the currencies with which they are purchased – for instance the Australian dollar.