Reform, not just functional spending, key to manufacturing investment

China's manufacturing investment still shows resilience, maintaining further expansion in both scale and total volume. Preliminary estimates suggest that the current scale of manufacturing investment in China exceeds 15 trillion yuan ($2.17 trillion), accounting for nearly one-third of total fixed-asset investment.

In recent years, large-scale equipment renewal policies have taken effect, making equipment purchase investment a major driver of investment growth. In 2025, subsidies for large-scale equipment renewals funded by ultra-long-term special treasury bonds reached 188 billion yuan, leveraging more than 1 trillion yuan in total investment.

Meanwhile, the growth rate of manufacturing investment has shown a downtrend. In 2025, the growth of such investment slowed markedly compared with 2024, rising by 0.6 percent year-on-year for the full year, down 8.6 percentage points from 2024.

The uneven performance across industries remains quite evident. On the one hand, investment in sectors such as transportation equipment, automobiles, agricultural and sideline food processing, and general equipment manufacturing has maintained solid growth momentum. On the other hand, investment growth slowed significantly in sectors such as chemicals, nonferrous metals, specialized equipment and electrical machinery.

China also sees a clear regional divergence in manufacturing investment. Based on the latest estimates from various regions, the average growth rate of manufacturing investment in western China in 2025 was about 6 percent, significantly higher than the roughly 2 percent average growth rate in the eastern region.

Investment growth in major industrial provinces such as Jiangsu and Guangdong declined markedly, reflecting deep adjustments in the manufacturing sectors of some major industrial provinces. However, manufacturing investments in areas such as Chongqing, as well as Shaanxi and Sichuan provinces have grown strongly, fueled by industrial relocation and policy support.

Such a divergence possibly illustrates the effects of several underlying factors.

First, intensifying trade conflicts and extensive economic and trade restrictions have had a major impact on the confidence, expectations and investment decisions of manufacturing investors.

Over the past year, the United States has exerted pressure on China not only through tariffs, but also through non-tariff measures, which have significantly disrupted the expectations of business entities, leading many of them to adopt a wait-and-see attitude toward expanding investment and increasing production capacity.

In particular, the growing volatility of global trade policies has heightened uncertainty, making it difficult for export-oriented enterprises to make accurate forecasts and causing them to postpone new capacity investment.

Second, insufficient domestic demand is constraining the growth of manufacturing investment in China. The property market, in particular, remains in deep adjustment, and both upstream raw-material manufacturers and downstream consumer-goods producers linked to the real estate industry face shrinking demand.

Third, accelerating overseas expansion has created a diversion effect. In 2025, China's total outward direct investment across all industries exceeded $170 billion, with non-financial direct investment accounting for more than 80 percent. Real-economy industries dominate overseas expansion, while emerging sectors such as high-tech, green energy and the digital economy have become key investment highlights.

Chinese enterprises are increasingly extending their presence toward the higher end of the global value chain. The acceleration of overseas expansion has objectively created a "diversion effect" on domestic manufacturing investment.

Furthermore, rising payment arrears have affected economic circulation. Data from the National Bureau of Statistics showed accounts receivable of China's industrial enterprises above a designated size have reached 28.4 trillion yuan, a record high. The average collection period for accounts receivable among these enterprises has extended to 70.4 days, compared with 66.7 days in the same period of 2024. For manufacturing enterprises above a designated size, the average collection period is even longer, reaching 71.8 days. Slower collection of receivables and the growing problem of payment arrears have become an important factor affecting the investment cycle.

China is currently in a period of profound economic and social transformation. Both the changing times and practical realities call for a transformation of the country's macroeconomic policies, and the transformation of investment policy is a key lever within this framework. Be it fiscal policy or monetary policy, government investment or private investment, investment policy plays a key channel role for transmission and transformation.

Current policy places strong emphasis on linking expanding investment with efforts to boost consumption, aiming to promote a virtuous interaction between the two. However, in the circulation of the national economy and in policy practice, such an interaction is an extremely complex process, whereas expanding consumption to stimulate investment is more direct.

Therefore, adopting more policies from the household side to stimulate consumption and thereby drive investment is actually more direct and conducive to a virtuous cycle. We often talk about optimizing the business environment, but in my view, the most fundamental and decisive aspect of the business environment is ensuring that enterprises "have business opportunities and can make profits". Only with this can other improvements produce a multiplier effect and truly mobilize private investment.

In 2025, China implemented more proactive macroeconomic policies, raising the fiscal deficit ratio, and increasing the issuance of ultra-long-term special treasury bonds and local government special bonds.

Government investment has been substantial. Yet stabilizing investment and growth remains difficult. One main reason is that today's government investment is very different from that of the past. It now has the typical characteristics of "functional investment" rather than simple "growth-oriented investment".

"Functional investment" mainly refers to investments aimed at addressing weaknesses, strengthening weak links, preventing risks and safeguarding security. Such investments reflect national will and national strategy and must be undertaken under new historical conditions.

However, these investments often generate greater long-term benefits than short-term gains, and greater comprehensive social benefits than purely economic returns. As a result, while they may help stabilize investment and growth to some extent, they cannot be equated with those objectives. We should not assume that simply increasing "functional investment" will stabilize investment and the economy.

"Growth-oriented investment", by contrast, refers to investment that can stimulate further investment and drive production. During China's past period of rapid industrialization and urbanization, government investment often had the characteristics of growth-oriented investment, capable of driving both investment and production.

For example, major infrastructure projects such as railways, highways and airports once produced strong effects. Under the historical conditions of rapid industrialization and urbanization, the central government focused on major infrastructure projects, while local governments carried out smaller infrastructure development. Once major transportation infrastructure was established, local governments developed industrial parks and new urban districts around them.

These developments required supporting infrastructure, and industrial parks generated cycles of enterprises, industries and employment, while new urban districts generated cycles of population, consumption and services.

Today, however, China's industrialization and urbanization have entered a relatively stable stage. Government investment has shifted from being a long-term structural variable to a short-term variable. Even if transportation infrastructure continues to improve, local governments are unlikely to build large numbers of new industrial parks or new urban districts. Under the new historical conditions, investment policy should be better integrated with reform policies.

More reform-oriented policies are needed to activate investment, especially private investment.

The writer is a former director of the Department of Economic Forecasting at the State Information Center.

The views do not necessarily reflect those of China Daily.