China may have turned to its old playbook of infrastructure spending to drive economic growth, but with many local governments facing financial constraints due to the worst coronavirus outbreak in two years, such expenditure may not be as effective as in the past, analysts said. Beijing’s hardline zero-Covid policy is putting pressure on cash-strapped local authorities, who have responded to Omicron outbreaks with costly lockdowns, travel bans and mass testing. “There are limitations as to what [local governments] can do right now,” said Xia Le, chief economist for Asia at BBVA Research. “They have to tackle the outbreaks on the one hand, and expand investment on the other hand. Even though there are expectations from the central government to push for infrastructure spending, at local government levels, it’s difficult.” China’s policymakers have pledged to step up support for the economy, which is under growing pressure from a resurgence of Covid-19 outbreaks. China’s zero-Covid strategy pushes local government finances to the brink Vice-finance minister Xu Hongcai said on Tuesday that China would speed up issuance of local government special purpose bonds to help spur investment and stabilise the economy. By the end of March, local governments had already issued 1.25 trillion yuan (US$19.6 trillion) in special purpose bonds – which are mainly used for infrastructure spending – accounting for 86 per cent of its advance 2022 quota, according to Xu. China plans to issue a total of 3.65 trillion yuan worth of special purpose bonds for local governments this year. An estimated 75 per cent of projects funded with the bonds have begun construction despite outbreaks, he said. “If the policy stays the same, it is expected the growth rate of infrastructure investment in 2022 may be fast initially then it may slow down … and it will be difficult to rebound significantly as a whole,” Yuekai Securities said in a note this week. The central government has set an economic growth target of “ around 5.5 per cent ” this year and debt-fuelled infrastructure investment – especially for transport, water communications and energy projects – has once again emerged as an integral part of the country’s growth plan. The growth of China’s annual infrastructure investment has fallen from double digits more than a decade ago to just 0.2 per cent last year. Li Xunlei, chief economist at Zhongtai Securities, said in the short term increasing infrastructure investment can play a role in stabilising growth, but debt will also rise. “There are fewer and fewer good projects in infrastructure and not many that can bring cash flow,” Li said on Wednesday. ‘Rigid, crude’ lockdowns only choice for China’s poor regions under zero-Covid But given the downturn in the real estate market, the investment-driven growth model that has worked for China previously will not be sustainable because a high growth rate of fixed asset spending is unlikely to provide a return, Li said. The Ministry of Finance has been promoting special purpose bonds for infrastructure borrowing since 2015, but the quota is often deemed too small and so-called local government financial vehicles (LGFVs) continue to be the go-to platforms for regional financing. Total local government revenue, primarily drawn from land sales, is budgeted to grow just 0.4 per cent this year compared with 4.5 per cent in 2021, according to a report published Thursday by Moody’s rating agency. As a result, the regional government funding gap is likely to widen, it said. In the first quarter of this year, LGFVs raised a total of 1.41 trillion yuan, of which 814.6 billion was for the repayment of existing debt, according to data compiled by Huatai Securities. However, net financing for current projects amounted to 598.6 billion yuan, a plunge of 16.1 per cent compared to the same period last year. LGFVs are seeing a decline in funding in the second quarter due to Beijing’s tight grip of local government debt growth and a lack of incentive from financial institutions and investors to put money in infrastructure projects, analysts said. Xia said disruptions from ongoing Covid-19 outbreaks will have a large impact on regional economies even with expanded investment in infrastructure. It will not be easy to meet the national growth target for this year unless there are stronger fiscal measures from the central government, he said. The Yangtze River Delta region, which includes the commercial hub Shanghai that has been battling a virus outbreak, accounts for 24 per cent of gross domestic product (GDP) and 37 per cent of China’s export output, according to estimates from French bank Natixis. If they can get the outbreaks under control, then they can boost infrastructure or other types of investment Xia Le Mobility has declined by 92 per cent in Shanghai and 74 per cent in neighbouring Jiangsu province in the first half of April 2021, Natixis said. “I think there is some flexibility with these growth targets,” said Xia, adding that China did not set a target in 2020 as a result of the coronavirus pandemic. “If there is great uncertainty from the outbreaks, I believe they may be able to tolerate the kind of growth like they did in 2020, when the GDP growth was 2.3 per cent. “If they can get the outbreaks under control, then they can boost infrastructure or other types of investment, it may help to achieve the target growth rate.”