World Bank ties China investment growth to profits

BEIJING, Aug 15 (Reuters) Investment growth in China has been strongest in sectors with high profits and in industries dominated by the private sector, the World Bank said on Tuesday.

The findings, reported in the bank's latest quarterly report on China, add a twist to a lively debate about how Beijing should rein in capital spending, which is rising at 30 percent a year.

Economists have increasingly pointed the finger of blame at local governments, whose officials have traditionally won promotion by delivering high rates of growth. The easiest way to do that has been to pour concrete.

The bank said it was not minimising the role of local governments, which carry out 10-20 percent of investment directly and provide extensive loan guarantees for local companies.

But it said its findings showed investment in the first five months was strongest in sectors that enjoyed the fastest profit growth, including transport equipment, machinery and textiles.

Total profits earned by Chinese industry rose 28 percent n the first half of the year, up 9 percentage points from the same period last year.

The bank said there was also a positive relationship between the return on equity in different sectors, measured by the ratio of net profit to owners' equity, and investment growth.

Finally, it found industries dominated by the private sector saw more rapid fixed-asset investment growth than in industries dominated by state-owned enterprises.

"We observe a few patterns that may be of some comfort to the authorities," Louis Kuijs, a senior economist at the World Bank's Beijing office, told a news briefing.

"The private sector and the incentives and considerations of the private sector are as much at the core of this investment boom as local government authorities," he said.

Kuijs said that, while profits at the firm level varied widely, the profitability of Chinese manufacturing at the sectoral level would stand comparison with many other countries.

"By and large in core manufacturing -- that would be true for both heavy industry and light industry -- the rate of return on own equity is not bad at all," he said.

Bert Hofman, the bank's lead economist in Beijing, added that state-owned enterprises were quite profitable overall.

He said the policy consequence of the growing private sector role in the economy was that the instruments deployed to affect investment behaviour would have to be geared more towards market incentives than administrative compulsion.

This would suggest a greater role for monetary policy, taxation and subsidy policies, Hofman said.

REUTERS VJ HT1732