China relaxes infrastructure project finance rules, but analysts warn it will have limited economic impact
- Local governments can use bond proceeds to boost their ability to support major projects after tax cuts reduced their revenues
- Authorities can also borrow more from banks to fund infrastructure projects without fear of regulatory crackdown on excess debt
China’s latest stimulus move to bolster economic growth by relaxing restrictions on how the proceeds of local government bonds are used, paving the way for a new wave of infrastructure investment, will only have limited impact on the overall economy, analysts warned.
Local governments can now use the funds raised as equity capital for major infrastructure projects having previously needed to fund the minimum equity ratio requirement, usually 20 to 30 per cent of total investment in the project, themselves.
The move by the government comes amid signs that domestic economic momentum is weakening due to headwinds from the trade war with the United States.
Zhang Yu, chief macroeconomic analyst with Hua Chuang Securities, said that the new rule, announced by the General Office of the Communist Party of China and the State Council in a statement on Monday, could boost the growth rate of Chinese infrastructure investment by 3 to 5 percentage points.
But she also said the policy will only boost the overall growth rate by 0.2 to 0.4 percentage point this year.