China’s slowing railway investment contributing to signs that economic growth is losing steam, analysts say

Investment in China’s unprofitable rail sector has slowed as Beijing clamps down on excess debt, contributing to signs that growth of the world’s second-largest economy has begun to lose steam, according to analysts.

But despite Beijing’s debt concerns, it is likely to expand fiscal stimulus in the second half of the year to ensure that growth does not slow too much, they said.

China’s railway investment between January and May dipped to 203.6 billion yuan (US$31.5 billion) – 8 per cent below the same period a year earlier, according to data released last week by the National Railway Administration. For the whole of 2020, China spent 781.9 billion yuan on railway investments, down from 803.9 billion yuan in 2019 and 802.8 billion yuan in 2018.

The fall in railway spending, combined with a slowdown in overall fixed-asset investment and weaker growth in consumer spending are all signalling that China’s economic recovery has begun to slow, investment bank Natixis said in a note last week.

Fixed-asset investment grew 15.4 per cent in the first five months of this year compared with the same period in 2020, slowing from a gain of 19.9 per cent in the January-to-April period. While property investment remained resilient, posting an 18.3 per cent year-on-year gain in the January-to-May period, infrastructure investment decelerated further, with its two-year compound annual growth rate falling to 3.4 per cent in May from 3.8 per cent in April, according to Macquarie Group.

Larry Hu, chief China economist at Macquarie, believes the slowdown in overall credit growth is a key reason for the deceleration in fixed-asset investments, but he said it is unlikely to slow much further, let alone contract.

“The [policy] direction is a turn, but not a U-turn,” said Hu, meaning that Beijing is fine-tuning its policies to ensure sufficient growth without restoring the massive economic stimulus seen in early 2020 in response to the coronavirus pandemic.

The Chinese government remains deeply concerned with rising debt in many state sectors, including the state-owned national railway company, and has taken steps to curb its growth. Local governments, which typically borrow to fund high-speed railway projects and urban subway construction, have also scaled back their borrowings since the start of the year.

Natixis said that local governments were issuing new bonds used to finance such projects at a much slower pace compared with the last several years, reaching 44.2 per cent of this year’s limit for bonds whose proceeds are used for general purposes and only 16 per cent of the target for special purpose bonds, which are used largely for infrastructure spending.

“Similarly, the People’s Bank of China has also taken a prudent tone in manoeuvring market liquidity and interest [rate] adjustments since last year. As such, both fiscal and monetary [policymaking] bullets have been largely reserved in China’s policymaking,” Natixis said.

Natixis estimated that the year-over-year investment growth rate for state-owned companies in general, and for infrastructure in particular, might have already fallen into negative territory, adding that Beijing was not pushing hard to boost growth through state firms and infrastructure projects.

To better regulate high-speed rail construction, the State Council issued guidelines to local governments in March stating that such development must take into account the potential passenger traffic on the new route, pledging to control the construction of additional lines on existing routes, particularly those with a utilisation rate of less than 80 per cent.

China Railway Group said that it had outstanding debts of 5.76 trillion yuan (US$891 billion) at the end of the first quarter this year, after posting a loss of 55.5 billion yuan in 2020 as the economy was ravaged by the pandemic.

Infrastructure construction played an important role in stabilising the economy after the coronavirus outbreak caused record economic contraction of 6.8 per cent in the first quarter last year, but Beijing’s stimulus measures have also contributed to the rapid rise of public debt.

While railway-development projects have contributed to overall economic growth overall in China, Nigel Cory, associate director at the Information Technology and Innovation Foundation, a US-based think tank, said that Chinese subsidies for industrial rail development have become more wasteful as the sector and its network have expanded, leading to a large build-up of debt.

“This has become clearer in terms of industrial overcapacity and network development to markets (Chinese cities), whereby high-speed rail will likely never be profitable,” Cory said.

Natixis said a rise in fiscal support in the second half of 2021 will further increase public debt.

“But taking into consideration such a trade-off, we think China may still speed up its fiscal expansion to moderate the economic slowdown,” Natixis said.

Banny Lam, head of research at CEB International Investment, said China might need to revert to infrastructure spending if exports slow in the coming months, while local governments are likely to speed up borrowings again to fund infrastructure spending.

“It’s still difficult for consumption [to grow rapidly], and there is a concern that exports might slow in the second half, depending on the extent,” Lam said. “That leaves infrastructure, which is important to steady the economy.”