A sharp decline in reported investment in China suggests President Xi Jinping’s campaign against excessive industrial competition may be having an impact on the world’s second-largest economy.

The surprise fall in fixed-asset investment is only the second such contraction in decades and follows repeated warnings by Xi against price wars in sectors such as high-tech and green energy, a problem Beijing calls neijuan or “involution” and is widely associated with overcapacity.

“We must prevent a rush into a bubble economy,” Xi said in a collection of quotations on industrial development priorities published by Communist party magazine Qiushi this month.

While the quality of the fixed-asset investment data series has been questioned and some analysts suggest the October statistics may have been significantly affected by technical changes, the dramatic fall has potential implications for Chinese growth.

“Talking to a lot of Chinese corporates, there’s been quite a lot of caution on the investment side,” said Lynn Song, chief China economist at ING. “Since Beijing started talking about anti-involution measures midway this year, there might be more caution from the public sector as well.”

China’s economy has for decades been heavily reliant on investment, and the government has in recent years promoted in particular the development of high-end manufacturing of products ranging from electric vehicles to semiconductors.

Officials are under pressure to pursue GDP growth targets, but must contend with trade tensions with the US, an ongoing property slowdown, weak consumer confidence and deflation.

Government data released this month showed Chinese fixed-asset investment (FAI) fell 1.7 per cent in the year to October, following a 0.5 per cent decline recorded for the year to September. These were the only such falls in FAI reported in recent decades, with the exception of the early stages of the Covid-19 pandemic in 2020.

China does not release standalone monthly FAI comparisons, but the pace of the year-to-date fall implies a sudden year-on-year drop of 11 per cent in October.

Financial Times analysis of regional FAI data also shows it falling in more than a third of mainland China’s 31 province-level areas, compared with just three as recently as May.

The surprising scale of the fall highlights the difficulty of gauging the economic health of a country where the reliability of statistics is widely questioned.

“It’s really to me a mystery,” said Adam Wolfe, an economist at Absolute Strategy Research. Such a “broad-based slowdown” appeared to require something more than anti-involution policies, Wolfe said. 

Analysts at Goldman Sachs estimated that about 60 per cent of the fall in fixed-asset investment stemmed from “a statistical correction of previously over-reported data”.

In a report for investors this week, the analysts drew on commodity indicators, including cement production and steel demand, to argue that previous overstatements created space for the decline. “The recent FAI slump may be exaggerating the actual slowdown in investment momentum,” they wrote.

But they said that a combination of Beijing’s “anti-involution” policies, the property slowdown and slowing infrastructure-related fiscal spending could explain about 40 per cent of the decline.

Falling investment will add to the pressure on local governments to generate alternative sources of growth, especially given a fall in real estate prices that accelerated last month even as China’s property slump entered its fifth year.

Other areas of the economy are also faltering. China’s exports, after months of declining to the US, in October showed a sudden overall fall in dollar terms that Capital Economics said was driven by a “broad-based slowdown in shipments to non-US markets”.  

Zichun Huang at Capital Economics said exports were likely to remain a “meaningful driver of growth” but their contribution would be smaller than in recent years.

Household consumption is unlikely to help. Official data showed retail sales rose 2.9 per cent in October, their slowest pace in over a year. The government has tried to increase domestic consumption through a trade-in programme that allows households to buy subsidised goods.

Ting Lu, chief China economist at Nomura, pointed to an “inevitable slowdown in retail sales due to the payback effect of the trade-in programme” as one among several factors that would put pressure on Beijing to do more to stimulate demand.

Economists say that while Beijing is set to meet its target for GDP growth this year of “around 5 per cent” after above-target expansion in the first and second quarters, the coming few years will be challenging.

At a Shanghai trade fair this month, Premier Li Qiang set a target for national GDP to surpass Rmb170tn by 2030. China’s GDP was about Rmb135tn last year.

Economists said Li’s goal, together with Xi’s statement in 2020 that China could double the size of the economy by 2035, implied aiming for real annual growth of 4-5 per cent for the next decade.

“A significant step-back in China’s growth ambitions appears unlikely in the near term,” said Frederic Neumann, chief Asia economist at HSBC.

Given next year’s challenging outlook, there is a chance that policymakers slightly lower China’s growth target for 2026 to “above 4.5 per cent”, said Hui Shan, chief China economist at Goldman Sachs. But it is more likely that they will keep the target at “around 5%” and decide on further policy easing next month at an important annual party meeting, the Central Economic Work Conference, she said.

Over the next five years, China’s service sector would have to become a more important focus for the economy, “mainly because these industries are more labour-intensive and can create more jobs”, Shan said.

In the meantime, Xi’s anti-involution campaign implies further downward pressure on new investment.

The latest industry to crack down on over-competition is China’s lithium iron phosphate materials sector, which serves the country’s world-dominant battery industry. The sector is suffering capacity utilisation rates of just 50 per cent and has overall lost money for 36 consecutive months, according to Tang Yan, deputy secretary-general of the China Chemical and Physical Power Sources Industry Association.

“Disorderly competition . . . is constantly undermining the nation’s hard-won global supply-chain advantages,” Tang said this month, according to state media.