Kevin Yao

BEIJING (Reuters). China hopes to revive infrastructure spending in support of its slowing economy. But, economic policy analysts and economists warn that controls on local debt risk and declining investment returns may hinder this renewed push.

After focusing on housing and debt reduction for the past year, Chinese leaders now look to infrastructure as a way to boost growth.

Prior to the key, once-in-five years Communist Party Congress later in this year with policymakers trying to prevent a slowerdown of the second largest economy on earth that might undermine job creation, stability is paramount.

In December, leaders gathered to map the path for 2022. They called for investment in front loading infrastructure to ease the slowdown. This looks likely to happen in the first half.

Yao Jingyuan (an adviser to the cabinet) stated to Reuters that “we need to increase infrastructure investment” and that the sector of property needs to be stabilized. “This year, the downward pressure on our economy and the job market are very strong.”

Premier Li Keqiang has pledged to invest more in key infrastructure projects this month. These include transportation, logistics, telecommunications, advanced manufacturing, and high-tech. This is in line with the country’s 14th Five-year Plan (2021-25).

Local governments, meanwhile, have unveiled their own infrastructure projects, including in Shanghai and the provinces of Sichuan, Jiangsu，Zhejiang, Anhui and Hebei.

However, there is a risk that such projects will be launched in a hurry, which could increase debt problems. Beijing, however, keeps a check on its local borrowings and demands sustainable investment returns.

The 2008-2009 spending package of 4 trillion yuan (or $629 billion) was largely responsible for protecting China’s economic from the global financial crises, while encumbering local governments with massive amounts of debt.

Yao said, “We must do everything we can to lessen the negative effects of economic stimuli policies.”

LOOKING TO NEW AREAS

China’s fixed asset investment increased 4.9% by 2021 compared to a year ago, which is the slowest rate since official data began in 1996. In COVID-ravaged 2020, growth was 2.9%.

Although infrastructure investment rose 0.4% in 2021 according to analysts at HSBC, it is expected that it will grow 5% in 2020 as Beijing tries to reduce financing bottlenecks while focusing on growth drivers and easing funding constraints.

China’s efforts to develop new infrastructure based on 5G and artificial intelligence and data has resulted in traditional projects, such as railways, highways, and airports, experiencing falling investment returns.

In its 2022 advance quote for local government special bonds (1.5 trillion Yuan), the finance ministry already has issued 1.46 trillion Yuan. This is in addition to 1.2 trillion in unspent bond funds in the fourth quarter 2021, which forms part of the 3.65 trillion yuan 2021 quota.

Vice Finance Minister Xu Hongcai said last month that the new quota will prioritise key projects and regions with lower debt burdens, while strictly controlling local governments’ hidden debt to fend off systemic risks.

New projects could offer less economic value after decades of slow-paced construction and credit-fueled investments.

A government advisor spoke under anonymity to say that “the problem right now is that we don’t have enough projects but have enough money.”

MOVING IN STABILIZATION OF PROPERTY SECTOR

In an effort to revitalize construction, the authorities tried to stabilize it by easing some of the financing constraints for developers and increasing mortgage issuances to home-buyers.

However, few analysts are expecting a significant turnaround of the sector anytime soon. HSBC predicts a 1% to 2% increase in property investments this year.

Another possibility is a rise in the number of public housing projects. This type of spending has been used in the past during economic downturns.

In order to cut borrowing costs, the central banks has begun cutting interest rates as well as pumping cash into the system. Additional easing measures are expected in the months ahead.

Li Yang, former vice-president of the Chinese Academy of Social Sciences and a major government think tank said that “we shouldn’t allow the property markets to sink for long because they are related to many industries,” during a press briefing last week.

China is likely to experience economic growth of about 5.5% in 2022 according to an advisor to the cabinet. That’s a better prediction than what markets are expecting.

This week, the IMF forecast China’s growth at 4.8%.

Ting Lu, Nomura’s chief China economist said that Beijing would likely accelerate investments in national infrastructure projects. But, this is unlikely to suffice to stabilize growth.

Lu suggested that China should increase household subsidies during the pandemic to encourage consumption.

($1 = 6.3206 renminbi)