China’s Xi calls for another infrastructure push as Covid drags on
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China claimed that 37,900 kilometers (223,550 miles), of its high-speed rail network was operational as of 2020.
China News Service | China News Service | Getty Images
BEIJING — As Covid controls drag down growth, China plans to boost its economy with more infrastructure investment.
This is the same strategy the government used in the past and it’s one analysts believe will lead to long-term problems in sustainable growth.
Chinese President Xi JinpingTuesday’s call for infrastructure construction was “all-out”. The projects proposed include waterways, railways, and facilities for cloud computing.
Xi addressed a Central Committee for Financial and Economic Affairs (a group he chairs).
Lisheng Zhang and Goldman Sachs’ team wrote Wednesday, “The meeting suggests that Chinese policymakers were increasingly aware of strong growth headwinds due to Covid restrictions. Property downturn continues.
The Goldman analysts stated that infrastructure investment is one of the key policy levers to stabilize growth. They noted the expectations for slower growth in exports and weak private investments, as well as the fact that the Zero-Covid policy will remain in effect for most of the year, which could impact consumption.
Problem is, the greater the dependence of the growth on infrastructure spending by the government, the more it’s vulnerable to slowdown.
Michael Pettis
Finance professor at Peking University
The worst Covid-19 outbreak in mainland China since early 2020 has occurred March.
Although the first quarter GDP was 4.8% higher than expected, several investment banks have cut their full-year growth forecastsSupply chains are disrupted by travel restrictions, stay-at-home orders, and especially around Shanghai, which is home to the most crowded port in the world.
Economists point out that zero-Covid has a greater impact on consumer spending than factories which, although they can occasionally maintain limited production within the policy’s parameters.
Retail sales fell by 3.5% from a year ago in March — more than the 1.6% decline forecast by a Reuters poll.
The quarter’s first quarter fixed asset investments grew faster than predicted, with the infrastructure sector seeing an 8.5% increase compared to last year.
Is China able to meet its GDP goal of 5.5%?
“An even more forceful infrastructure push would help dampen some of the downward pressures on growth that are severely challenging China’s ability to meet its 5.5% growth target,” Louis Kuijs, APAC chief economist at S&P Global Ratings, said in an email.
“Currently, China’s Covid Policy is the main bottleneck to growth.” He stated that. Without a change in the Covid’s stance, it will be difficult to achieve 5.5% growth.
Xi calls for infrastructure investments as stocks in China have plummeted due to concerns about the country’s growth. CNBC tracks nine financial companies. The median forecast for GDP is 4.5%. This is a whole percentage point lower than China’s GDP target of 5.5%.
In an email, Michael Pettis (a Peking University finance professor) stated that China is having difficulty meeting its GDP growth targets this year due to the “extensive lockdown” and the continuing weakness of the property sector.
Pettis correctly predicted that Chinese officials would establish a target for GDP between 5% to 5.5% before the official release.
He said that “the problem is that the greater the country’s dependence on government-led infrastructure spending, the more it is vulnerable to a slowdown.” He also noted how infrastructure investment leads to higher growth expectations which, in turn, requires more investment.
Pettis stated in a March report that there is a limit to how much infrastructure investment can help develop countries grow. Pettis stated that China has passed this point more than 10 years ago, and now it is time for much greater institutional reform.
China has seen significant economic growth in recent decades due to its infrastructure, manufacturing, and real estate. China has a vast network of airports and high-speed trains.
The central government tried over the years to increase consumption, which has been a greater driver of growth.
China has a long way to go before its consumers are able to drive the economy. In 2021, China’s disposable per-capita income was 35,128yuan (5,488). This is still a small fraction of what it earned in the U.S. around $46,000At the end of 2013.
According to official meetings readouts, Xi and the other Chinese leaders also demanded modernization of infrastructure in rural and agricultural areas. They stressed the importance of supporting national security infrastructure as well as improving the country’s ability to handle extreme circumstances.
More debt for growth
Analysts believe that the government will use more debt to pay for new infrastructure projects. This reverses recent attempts by the government to reduce debt growth.
Monica Li (director of Equities, Fidelity International) stated in an email that the net issuances of local government bonds for the year has exceeded 35% of their full-year target. This is much more than the 10%-30% rate over the three previous years.
In order to ensure that infrastructure projects are “early started”, she said that her team anticipates increased issuance in the first half of this year. To fund infrastructure projects, there will be multiple funding sources, not just more fiscal spending.
Goldman analysts pointed out that Tuesday’s official announcement about the meeting of the economic and financial committee did not include measures to prevent an increase in local government debt. It refers in particular to local government off-balancesheet bonds.
Plans for infrastructure investment could help boost sentiment. Wednesday’s rise in mainland Chinese stock prices was an effort to stabilise after the sharp declines that began the week.
Citi analysts stated Wednesday that the turning point in real policy action may be here, and that stimulus might come more clearly from Q2″, according to a report. “We think that the present overwhelming growth pessimism might be too extreme.”
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