China’s infrastructure plans aim to shore up economy, but experts say Beijing may first need to ease up on local debt

As China’s fiscal policy turns from contraction to expansion next year, infrastructure investment is expected to accelerate, but the risk of a rapid increase in debt remains

Financially strapped local governments have been reluctant to take advantage of special-purpose bonds, as these primarily go to infrastructure spending

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Beijing vowed this month to accelerate fiscal spending, which includes allowing for the construction of new infrastructure, but local government debt still poses an economic challenge. Photo: Xinhua

Published: 2:30pm, 22 Dec 2021Updated: 3:08pm, 22 Dec 2021

Beijing’s pledge to “front-load” policies that include infrastructure spending to shore up the economy next year will not be effective unless it also loosens its grip on local government debt, according to analysts.

At the tone-setting annual central economic work conference that concluded on December 10, China’s leaders emphasised the need to stabilise growth and promised to accelerate fiscal spending, allow the construction of new infrastructure and implement new tax and fee-reduction policies. Concerns have been mounting that Beijing’s firm stance on deleveraging the property sector could trigger a hard landing, dragging down China’s overall growth throughout next year.

Last week, China’s finance ministry said it had offered local governments an early allocation of 1.46 trillion yuan (US$229 billion) in quotas for 2022 special-purpose bonds to help spur investment and support the economy.

Larry Hu, chief China economist at Macquarie Capital, said that infrastructure investment would accelerate in the first half of next year as fiscal policy turns from contraction to expansion.

“But the pace will be modest unless policymakers loosen the controls on local government debt,” Hu said in a note on Thursday.

Beijing has kept its fiscal policy relatively tight this year, but Yu Yongding, a prominent Chinese economist and former central bank adviser, argued that China’s economy will benefit only if economic policy is significantly loosened. A tapering of stimulus policies to combat the effects of the coronavirus pandemic is “premature”, he said.