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But I disagree that the state should not invest at all

it depends on whether you consider “compulsory taxation” as a moral act or Immoral act.
if state needs to invest money, it can be done properly,logically and morally only if the taxations are NOT compulsory but VOLUNTARY.
That is, state need to find out various possible plans where it may invest and ask for voluntary contribution from citizens. The citizens interested in that plan may contribute freely, or they may decide to not to contribute. some citizen may decide not contributing direct money, but they may work for the project contributing in form of man-labor which in case of productivity is a wealth. Also that plan can in noway be forcible on those who do not agree with it in any sense, in terms of ideal free society. As for example, if state directs a space-shuttle programme, it should demand direct investment from the citizens. The interested citizens acessing the capability of scientists involved may invest in it. By investing freely, they become the profitable (or failure if the project fails) shareholders of the project. if project gains profits, that is, if the programme of space shuttle gets a positive run and state then get in position of commercializing the project to provide a space-roaming service for common citizens, the citizens who invested in it initially, enjoys the profits of the enterprise. it simply means that in free market, people/citizens/individuals have freedom to gather and make a profitable enterprise, but that enterprize holds no special rights over other enterprises.
In case of compulsory taxation in which we live, state owns all rights and none is hold by citizens. Citizens are investing machine with no right to access the workability and profit chances of a venture started by state. In lack of answerable responsibility, state enterprises suffers from monopolistic failure involves corruption and becomes the cause of suffering in some way or other.

I also agree with you on the massive ‘infrastructure’ spending so vehemently stressed by the World Bank, IMF and the media, <ahref=”http://www.nytimes.com/2009/02/06/world/asia/06japan.html”>this article</a> in the NYT has a very good perspective on the results of overinvestment in Japan.

But I disagree that the state should not invest at all, there are some areas in which only the state has the moral authority or moral responsibility to invest in. Also resources have to be under the control of local people not monetary profit-driven crony capitalists.

China is still trying, in vain, to control corruption with death sentence. Gong by the magnitude of the punishment, corruption must seriously be a BIG problem, like how this survey says (China ranked at 72, along with India and a few other countries): http://www.transparency.org/news_room/in_focus/2007/cpi2007/cpi_2007_table