China's unprecedented investment collapse puzzles economists and threatens growth

China’s collapsing investment is as unprecedented as it is hard to explain.

- Bloomberg

A plunge estimated at more than 11% in October from a year earlier was the worst single-month performance since the initial Covid lockdowns at the start of 2020, official data showed on Friday. A further crash in investment could prove destabilizing by affecting an activity that makes up nearly half of China’s gross domestic product, driving up risks for an economy already coping with a downswing in exports.

And yet economists are still struggling to square the unprecedented contraction with other statistics or to fully decipher its cause.

The precipitous slump in fixed-asset investment that began in July has yet to create a serious drag on growth. Gross capital formation, another measure of investment activity, even contributed to almost a fifth of the overall GDP gain in the third quarter.

“We can find some reasons to explain the investment drop, but it’s rather hard to understand how it dropped so much,” said Ding Shuang, chief economist for greater China and north Asia at Standard Chartered Ple. The drag from investment “will be even bigger” in the fourth quarter than in the prior three months, he said, predicting it “will be the most prominent reason for declining GDP growth.”

Adding to the intrigue is the fact that the downturn started at almost the same time as when the government launched a so-called “anti-involution” campaign to drain a glut in output across many industries. Still, it’s difficult to gauge the role played by that policy, since officials have issued no specific targets for restricting investment or capacity.

And though curbing industrial investment would put a lid on excess production, it might also hurt employment and household income in the absence of stimulus.