It is essential that China find a way to revive this lynchpin to its prospects for further rapid modernization and growth

Private investment has been the most active force in China's economy, but since the beginning of 2016, private investment has consistently been low, with weakness in the willingness to invest.

This situation is reflected in three aspects. First, the growth of private investment has decreased. In 2015, the growth of private investment was 10.1 percent higher than that of the previous year. But for the first half of 2016, the year-on-year growth was only about 2.8 percent.

Second, the growth of private investment is lower than the average growth of fixed-asset investment. Private investment had always been the fastest-growing segment of fixed-asset investment. In 2012, the growth of private investment was 24.8 percent, 4.2 percent higher than the whole society's fixed-asset investment growth.

Third, the differences in growth have meant that share of private investment in fixed-asset investment is decreasing. During 2014 and 2015, private investment accounted for about 65 percent of all fixed-asset investment, but this year the ratio dropped, and for the first half of 2016 it decreased to 61.5 percent, a drop of 3.6 percentage points.

Private investment is mainly from nonpublic sectors in China, which play an increasingly important role in China's overall economy. Nonpublic sectors - including private companies, individuals and some forms of foreign capital - have contributed about 60 percent of China's GDP, 80 percent of the employment, and 50 percent of the taxes.

In the past few years, about 70 percent of China's rapid foreign investment has come from nonpublic sectors. After the 2008 world financial crisis, private investment has been the main force ensuring stable growth, restructuring of the economy and steady employment. So the recent slowdown of private investment has attracted a lot of attention.

The main reasons for this phenomenon include, first, China's ongoing economic slowdown, given that private investors are not very optimistic and hesitate to invest. Second are access restrictions, keeping private companies from being treated the same as state-owned companies in aspects such as market access, resources allocation and government services, so they cannot undertake certain investments even if they wanted to do so. Third are restrictions on financing, since it is difficult for private companies to acquire sufficient capital at a reasonable cost. Fourth is that nonprivate investment is pushing private investment away from certain areas. Nonprivate investment includes public investment, and also some types of foreign capital and other types of funds.

Then there's the misbehavior of government officials, and failed promises from local governments, which also affect private investment.

All these reasons influence the growth of private investment, but one important reason has not yet been mentioned. Based on our contact with entrepreneurs, the decrease in private investment is mainly due to the difference in profit outlook for investing in the real economy, and in the financial and real estate industries. Private investors can invest in the real economy, in which case those investments become part of private fixed-assets and GDP, or they can put capital in the financial market or properties. The choice of private investors greatly influences private fixed-asset investment.

Since the 2008 financial crisis, China's real economy has been slowing down and its costs have been increasing, so profit margins and the rate of return on investment have fallen sharply. Entrepreneurs cannot see the future of the real economy and are hesitating about investing more. On the contrary, investment in the finance sector, or in the real estate, have brought big returns.

There are ways of managing money in the financial market to produce returns higher than those from investing in the real economy. Gains made from buying an apartment can even outpace a company's annual profits. Huge profits have seduced entrepreneurs in traditional industries to give up on their main business and the real economy, and move their money into the financial and real estate sectors. Our research finds that this year's sharp drop in private investment growth has a lot to do with rapid increases in real estate prices and transactions.

So in order to promote the healthy development of private investment, apart from relying only on incentive policies, we should also change the rates of return for real economy investment, and for financial and real estate investments.

We should make development of the real economy an important agenda item for China by increasing the rate of return in the real economy and also controlling the overly high rate of return in the real estate and financial markets. This would reawaken private companies' interest in the real economy.

The author is a member of the academic committee at International Monetary Institute of Renmin University of China. The views do not necessarily reflect those of China Daily.