China goes back to old habits as government pumps up spending on infrastructure to boost economic growth
Local governments rush to spend on infrastructure after Beijing pulls out old stimulus playbook despite earlier pledge to change its ways
China has given the go-ahead to a series of major urban infrastructure projects after a 12-month pause in a return to the investment-driven policies for spurring growth that it had promised to leave on the shelf.
The government has been counting on stronger consumer spending to support growth as the government’s financial deleveraging plan and the trade war with the United States have begun to take their toll on the domestic economy.
However, with consumers restraining their spending because of rapidly rising personal debt, high housing costs and worries about future income growth, the government has dusted off its tried-and-tested playbook.
Whether greater infrastructure spending will help to shore up growth in the way Beijing hopes remains to be seen, and given the time lag between project approval and the increase in spending the effects may not be fully felt until early next year.
Following the release of new policy guidelines last month, the government was quick to approve a number of infrastructure projects, some of which had previously been mothballed because they were deemed an inefficient use of spending or risked driving up already high levels of local government debt.
On August 10, the authorities in Changchun, the provincial capital of the northeastern rustbelt province of Jilinm announced that the National Development and Reform Commission (NDRC) had given a green light to a 78.7 billion yuan (US$11.4 billion) urban rail project for Changchun, the provincial capital of the northeastern rustbelt province of Jilin. The project includes eight new rail lines with a total length of 135.4 kilometres.
This was the first approval of a major infrastructure project in more than a year. In August last year, in an unprecedented move, the government suspended a 30.5 billion yuan subway project for Batou in the Inner Mongolia autonomous region, fanning speculation that the infrastructure investment frenzy in the world’s second-largest economy had come to an end.
But the tide appears to have started to turn. In its announcement, the Jilin government said that the NDRC, China’s top economic planning agency, had restarted approval procedures for urban rail projects as of July 17.
Four days later, the NDRC cleared the path for a 95 billion yuan plan for Suzhou in southeastern Jiangsu province to extend its subway network, according to a statement by the service’s operator.
Other Chinese cities are following suit. Two weeks ago, Chengdu, the capital of Sichuan province, finalised a plan for building nine new metro lines that it will soon submit to the NDRC for approval, according to the Party-run Chengdu Daily.
Wuhan Metro Group, based in the capital of Hubei province, has also said it has submitted an application for a new rail project.
But the central government appears to want to keep expectations for new infrastructure spending under control to avoid funding inefficient projects or adding to high levels of local government debt. The Jilin press released that said the NDRC was ready to approve new infrastructure projects has since been deleted.
When questioned about this a local official said only that the province was “still revising and improving the content [of the press release] and will publish it when everything is ready”.
In recent years, China has struggled to transform its economic model from a credit-and-investment-driven one to a consumption-driven one, resulting in a sharp slowdown in spending on infrastructure.
A nationwide campaign to reduce off-balance-sheet credit growth and rein in rising debt has further reduced the ability and willingness of local governments to push for massive construction projects.
In the first seven months of this year, China’s infrastructure investment growth rate tumbled to 5.7 per cent compared with 20.9 per cent during the same time frame of last year, according to the National Bureau of Statistics.
“Infrastructure has become the biggest weight on the economy,” said Ding Shuang, chief China economist with Standard Chartered.
But because government priorities have changed, a resurgence of infrastructure investment can be expected in the second half of the year, he said.
The renewed subway spending spree still has its limits. On July 13, the State Council, China’s cabinet, released an updated policy that raised the bar on approvals for local transport projects.
The new guidelines stated that only cities with local economies of at least 300 billion yuan and fiscal revenues of at least 30 billion – three times the previous limit – would be approved.
But even with these higher thresholds, about two-thirds of the 43 cities with nationally approved metro design plans will qualify for new spending, including Changchun, Suzhou, Chengdu and Wuhan, according to calculations by Moody’s Investor Service.
For the cities that do not qualify under the new standards – such Urumqi, the capital of Xinjiang, and Hohhot, in Inner Mongolia – spending on existing projects does not seem to be affected.
At the end of July, the Politburo, China’s top decision-making body, called for greater emphasis on repairing the weak links in the country’s infrastructure. One week earlier, a meeting of the State Council vowed to ensure that “necessary projects” received sufficient funding.
Spurred on by Beijing, local governments have started or resumed a number of major projects, including:
● Hohhot, the capital of Inner Mongolia, has published a plan to speed up completion of its motorways and two metro lines;
● Tibet set out a plan to complete the Sichuan-Tibet railway within five years;
● The western province of Qinghai published a plan to start investing 853.5 billion yuan in 190 projects;
● Xinjiang region restarted a Public-Private Partnership project with LingNan Eco and Culture Tourism for a waterscape park;
● Guangdong released a 1.9 trillion yuan investment plan in July, in which transport projects made up 1.36 trillion yuan;
● The government of Jiangsu province announced it would ensure annual investment of more than 360 billion yuan on 200 major projects;
● Beijing city authorities said they planned to invest around 20 billion yuan in improving infrastructure in the northern portions of the capital;
● The government of Jinan, the capital of Shandong province, approved the resumption of a project to build a 518-metre (1,700ft) skyscraper, five years after scuttling the plan.
“Stabilising investment is now very important for the Chinese economy,” Ning Jizhe, head of the National Bureau of Statistics, told Xinhua news agency last Thursday.
“We need to launch the 165 major projects included in the 13th five-year plan as soon as possible,” he
The State Council said in July that it would speed up the issuance of local government “special purpose” bonds and accelerate the spending of the proceeds on infrastructure.
On Tuesday, the Ministry of Finance ordered local governments to issue all their special purpose bonds before the end of October, adding that the new debt service costs would not be included in their budget calculations.
“That could ease local governments’ financing worries and accelerate infrastructure investment,” Ding, from Standard Chartered, said.
“There is ample room for fiscal policy to be expansionary without a revision of the [national] budget,” he added. “Only 15 per cent of the 1.35 trillion yuan quota [for issuance of special purpose bonds] was used in the first half of the year.”
Some worry that the recent shift back to infrastructure stimulus means Beijing is resuming debt-fuelled growth after several years of painful deleveraging.
Others welcomed the targeted financing now being employed.
“Issuing special purpose bonds is a safer method, since we can see where the money goes to and how much the risk is,” Ding said. “As long as it guarantees the transparency of the debt, there is still room for higher debt levels.”
However, economists warned that opening the fiscal tap again entails risks.
With banks once again being encouraged to lend to local financing vehicles, local governments might “lose control” of their borrowing, Ding continued.
Cui Li, head of macro research with CCB International Securities, said Beijing must ensure that the infrastructure funding is being spent more wisely than it was in the past.
“It is reasonable to develop infrastructure when the economy is weakening,” she said, “but the projects should not merely aim to support economic growth in the short term, they need to produce long-term economic and social benefits.”
Li Xunlei, chief economist at Zhongtai Securities, worried that local government might apply a scattergun approach to stimulating the economy rather that making a targeted effort.
“When aiming to boost domestic demand, the government should reduce spending on infrastructure but spend more on public services such as education and health care,” he said.