section_path: Data/Investment cycles
section_name: Investment cycles
paragraph_text: Investment cycles
  
  Chinese investment has always been highly cyclical.
  
  In China, the majority of investment is carried out by entities that are at least partially state-owned. Most of these are under the control of local governments. Thus, booms are primarily the result of perverse incentives at the local-government level. Unlike entrepreneurs in a free-enterprise economy, Chinese local officials are motivated primarily by political considerations. As their performance evaluations are based, to a large extent, on GDP growth within their jurisdictions, they have a strong incentive to promote large-scale investment projects.
  
  A typical cycle begins with a relaxation of central government credit and industrial policy. This allows local governments to push investment aggressively, both through state-sector entities they control directly and by offering investment-promotion incentives to private investors and enterprises outside their jurisdictions. The resulting boom puts upward pressure on prices and may also result in shortages of key inputs such as coal and electricity (as was the case in 2003). Once inflation has risen to a level at which it begins to threaten social stability, the central government will intervene by tightening enforcement of industrial and credit policy. Projects that went ahead without required approvals will be halted. Bank lending to particular types of investors will be restricted. Credit then becomes tight and investment growth begins to decline.
  
  Chinese investment has always been highly cyclical.
  
  In China, the majority of investment is carried out by entities that are at least partially state-owned. Most of these are under the control of local governments. Thus, booms are primarily the result of perverse incentives at the local-government level. Unlike entrepreneurs in a free-enterprise economy, Chinese local officials are motivated primarily by political considerations. As their performance evaluations are based, to a large extent, on GDP growth within their jurisdictions, they have a strong incentive to promote large-scale investment projects.
  
  A typical cycle begins with a relaxation of central government credit and industrial policy. This allows local governments to push investment aggressively, both through state-sector entities they control directly and by offering investment-promotion incentives to private investors and enterprises outside their jurisdictions. The resulting boom puts upward pressure on prices and may also result in shortages of key inputs such as coal and electricity (as was the case in 2003). Once inflation has risen to a level at which it begins to threaten social stability, the central government will intervene by tightening enforcement of industrial and credit policy. Projects that went ahead without required approvals will be halted. Bank lending to particular types of investors will be restricted. Credit then becomes tight and investment growth begins to decline.
  
  Chinese investment has always been highly cyclical.
  
  In China, the majority of investment is carried out by entities that are at least partially state-owned. Most of these are under the control of local governments. Thus, booms are primarily the result of perverse incentives at the local-government level. Unlike entrepreneurs in a free-enterprise economy, Chinese local officials are motivated primarily by political considerations. As their performance evaluations are based, to a large extent, on GDP growth within their jurisdictions, they have a strong incentive to promote large-scale investment projects.
  
  A typical cycle begins with a relaxation of central government credit and industrial policy. This allows local governments to push investment aggressively, both through state-sector entities they control directly and by offering investment-promotion incentives to private investors and enterprises outside their jurisdictions. The resulting boom puts upward pressure on prices and may also result in shortages of key inputs such as coal and electricity (as was the case in 2003). Once inflation has risen to a level at which it begins to threaten social stability, the central government will intervene by tightening enforcement of industrial and credit policy. Projects that went ahead without required approvals will be halted. Bank lending to particular types of investors will be restricted. Credit then becomes tight and investment growth begins to decline.