Local government plans signal robust investment
Provinces and municipalities aim to maintain economic growth of at least 10 per cent by ploughing more money into major projects
The mainland economy may continue to rely on investments this year, going by the development goals laid out by leaders from more than 30 provinces and municipalities.
Most local blueprints pledge to maintain 10 per cent or higher economic growth. The plans were made after national growth slumped to 7.8 per cent last year as demand cooled.
The most aggressive plans are from the local governments in western China. Guizhou, for example, is eyeing a pace of 14 to 16 per cent and fixed-asset investment growth of 30 to 40 per cent. Gansu and Xinjiang hope to expand investments by 30 per cent.
In the more affluent eastern region, targets are only slightly more modest. Flushed with success at boosting its economy to above five trillion yuan (HK$6.23 trillion) for the first time, Jiangsu plans to invest 490 billion yuan in major projects to keep annual growth at 10 per cent.
Only a handful of governments - Beijing, Shanghai and export hubs Guangdong and Zhejiang - set their growth targets in a range of 7.5 to 8 per cent. Local gross domestic product figures usually add up to more than the national output, in part because of a faulty mechanism to collect statistics. Still, the high numbers highlighted in local plans have aroused public attention.
Optimists might see in local governments' determination to stay on the high-growth track a comforting sign that the economy will not be allowed to slow this year. But many experts find the plans worrying.
Standard & Poor's says the mainland faces "the highest downside risk of an economic correction" in the world due to excessive investment.
Arvind Subramanian, a senior fellow at Peterson Institute for International Economics, said the investment-driven growth would "lead to a lot of imbalances down the road, including risky lending", causing impairment to the financial system.
As bank lending is still limited by capital bases, local governments have increasingly turned to bond sales and riskier shadow banking to raise funds.
Bonds issued by local financing vehicles more than doubled to 756.8 billion yuan last year, according to China Credit Rating senior analyst Huo Zhihui.
Outstanding bonds sold by such vehicles in the central and western regions rose to 40 per cent of national sales at the end of December, compared with 30 per cent a year earlier.
Huo said more risks might emerge later as the cash-generating capability of local financing vehicles in the poorer regions was weaker than that in the coastal east, and so were local governments' economic and fiscal powers.
"Pressures for debt repayment may become huge in 2018-19, when a bulk of the bonds sold last year mature," he said.
It is widely understood that much of the quantitative measures to gauge an official's performance are tied to local GDP numbers and the progress of major projects.
The party's new leaders have begun to guide local officials towards a more sustainable and healthy growth path. Party chief Xi Jinping has vowed to crack down on "unqualified" - meaning corrupt - members of the party. Premier-in-waiting Li Keqiang has expressed determination to push ahead with urbanisation and improve food safety.
Patrick Chovanec, an associate professor at Tsinghua University, said the leadership was well aware of the dilemma linked to local investment impulses. "Fixing that involves real economic adjustment that will not be painless. And it may even translate into substantially lower growth, at least in the short run. Are the leaders willing to accept that?"
The root problem was accountability and it would take time to sort that, Chovanec said.
As long as Beijing kept a top-down system under which local officials were evaluated by higher authorities, cadres would inevitably focus on the more "tangible" aspects such as GDP figures because things such as quality of life could hardly be measured, he said.
In their annual work reports, provincial leaders have extensively addressed the issues of income, health care and urbanisation. But the message on fast growth remains strong, given that there has been no fundamental change in evaluating economic management.
During a recent legislative meeting, Guangdong's new party chief Hu Chunhua alerted officials in Guangzhou to the rising challenge from cities such as Tianjin, which had the fastest growth of 13.8 per cent last year.
Luo Huining, the governor of Qinghai, recently said the province would need to maintain an average 12 per cent growth in order to double the output by 2020 from 2010, the national goal set by the party.