Private investment is down 7.3% y/y so far this year, held back by the uncertain economic outlook. State firms have stepped in to fill the gap. Despite a sharp downturn at the time of China’s lockdown in Q1, their capital spending rose 2.1% y/y during the first half of 2020. State investment is likely to be especially strong in the second half given the government’s planned ramp-up in infrastructure spending. This will support the economic recovery but will lead to increased reliance on government-owned firms. Their share of investment will soon surpass the most recent peak in 2017 and is on track to reach its highest level since 2010. (See Chart 1.) This bodes ill for resource allocation and financial stability over the medium term. State firms already struggle to put existing capital to efficient use –their return on assets in industry is less than half that of private firms. The surge in their investment is therefore likely to weaken their balance sheets, with any increase in potential output unable to keep up with the resulting jump in debt.
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