Spending spree begins - but don't expect 'big bang'
Mainland provincial and city leaders have laid out ambitious spending plans, reigniting speculation that a stimulus package similar to the programme launched during the 2008 global recession may be on the way.
But analysts caution against expectations of a 'Big Bang' stimulus and say the 2012 story is likely to be less exciting than that in 2008 as banks have become more prudent about evaluating risks linked to local borrowings, and sagging land sales will continue to limit the capacity of local authorities to spend heavily.
'We expect further policy easing and additional stimulus measures, but no 'Big Bang' stimulus packages,' said Bank of America Merrill Lynch economists led by Lu Ting.
Echoing these cautions, UBS Securities economist Wang Tao said: 'We would not be holding our breath for another big stimulus.'
The 'regional stimuli' outlined by governments from Changsha in the central Hunan province to Guizhou in the southwest were largely wishful thinking, said Wang. 'Banks have been more cautious this time.'
In addition, the central government's insistence on not relaxing its property policies has limited the ability of local leaders to use land or property to finance ambitious investment projects, she added.
Changsha, capital of Hunan and a 45-minute drive from Mao Zedong's hometown, announced in late July that it would recommend 195 projects to investors in a bid to attract total investment of 829.2 billion yuan (HK$1 trillion). The plan followed a 3 trillion yuan package unveiled by the Guizhou provincial government to focus on eco-tourism infrastructure.
Elsewhere, Guangzhou announced a major metro construction expansion plan. The Ministry of Railways last week said it would sell bonds worth 27 billion yuan to partially fund 1.7 trillion yuan of rail projects.
The plans revived memories of a massive stimulus programme kicked off by Premier Wen Jiabao in 2008.
That 4 trillion yuan package, financed with a lending binge that flooded the economy with cash, helped China successfully wade through the global financial turmoil caused by the subprime mortgage woes in the United States and turned China into the world's second-largest economy.
But it also caused property prices to sizzle in the major cities, created asset bubbles and fuelled inflation.
Most analysts agree that infrastructure investment will likely pick up this quarter and next, as local authorities - many of them newly appointed - still have strong motives to launch new projects to spur regional economies. Gross domestic product has traditionally been a reference to gauge their political future.
Still, the acceleration may be modest.
'Banks don't have any clear plans to boost lending,' to local governments, said Zong Liang, vice-general manager of the Strategic Development Department of Bank of China
'Some good projects may get more lending, but there won't be overall changes across all sectors,' said Zong.
'The massive loan scale seen in 2008-09 won't be repeated.'
Zong expects total new loans extended in 2012 by the entire banking sector will amount to around 8.5 trillion yuan, in line with the goal set by regulators at the beginning of this year.
That will represent a 13.8 per cent increase in bank loans, far below the more than 30 per cent surge seen in 2009, when the stimulus programme spurred over 9 trillion yuan of new lending.
Citigroup forecast new yuan loans may have fallen to 634 billion yuan in July after rising to 920 billion yuan in June as lenders have less resources to tap due to a decline in deposits.
Meanwhile, concerns over a possible deterioration in banks' asset quality in the next few years persist, as some local governments may fail to repay their debt.
While echoing the Politburo's call for 'putting stabilising growth into a more important position' in the second half of this year, the People's Bank of China pledged last week to continue to strengthen control on bank loans to local governments' financing vehicles.
Although the banking sector's average bad loan ratio stayed low at 0.9 per cent at the end of March, it may rise in the years to come as more problems may be exposed when more long-term projects are due after 10 or 15 years.
Beijing's first audit of local government borrowings last year found authorities accumulated 10.7 trillion yuan worth of debt, of which 80 per cent was bank loans and 70 per cent would mature in five years. Regulators allowed banks to roll over some of the loans to local governments at the beginning of this year, according to state and foreign media reports.
The debt level of mainland companies is already higher than what may be deemed as safe according to international standards, warned Li Yang, deputy head of the Chinese Academy of Social Sciences, a research institute backed by the Ministry of Finance, according to a report by Beijing Business Today.
Li said the combined liabilities carried by Chinese companies had reached 107 per cent of the country's GDP in 2011, among the highest of all countries, the report said. More risks would surface should there be another massive stimulus programme like the one in 2008, he cautioned.
Still, there is a chance that bank lending may accelerate as needed in the second half, as indicated by the central bank in its quarterly monetary policy report.
Funds will be directed to support strategically important sectors, environmental projects, cultural and media services, high-end manufacturing, innovation, and water projects, as well as ongoing major infrastructure building, such as railway construction, the central bank said. It also pledged to further 'adjust the structure of existing loan assets'.
Everbright Securities chief economist Xu Gao said there was still a possibility that the central bank may increase bank credit to accelerate existing projects or start new investments if economic growth is found to slide too fast.
'The bottom line is that if the government wants to revive growth, it can,' according to Ren Xianfang and Alistair Thornton, two Beijing-based economists at IHS Global Insight.
'But it doesn't come free,' they warned.
Amount of bonds, in yuan, the Ministry of Railways will sell to partially fund a 1.7 trillion yuan metro expansion in Guangzhou