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China’s “all-out” infrastructure push

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A new twist on an old playbook.

Can infrastructure spending rescue the economy? As China faces multiple economic headwinds, a new theme is rapidly emerging: the return of investment-driven growth.

Multiple high-level meetings in Beijing have called for an “all-out” infrastructure push. We believe this could help to drive a recovery, and we expect infrastructure investment to rise by around 5% this year – far faster than the past two years.

The old playbook is back, but will the old problems return too? Many wonder if there will be a replay of the construction boom post the Global Financial Crisis, which included a raft of new roads, airports and bridges and which was criticised by some for building up debt levels and crowding out more productive investment.

Infrastructure investment has long been a popular counter-cyclical macro stabilisation tool. It also has the potential to boost productivity and economic growth in the longer term, but only as long as there are quality projects to work on and there is sufficient funding.

Are there any infrastructure projects left to build? Yes. China ranks just 36th in overall infrastructure quality so there is still room for improvement, especially in terms of transportation services and water infrastructure. New infrastructure investment is even more urgently needed – both in the green and digital arenas.

Is there sufficient funding available and could that increase financial risk? We look at various funding sources and make three conclusions.

First, special bonds are the most promising funding source as they have the potential to have RMB4.2 trillion more funds to dispense than 2021 this year.

Second, although counter-intuitive, land-sale revenue, which is down this year and continues to slide, has the potential to be a source of funding for local governments; we provide a Land Finance 101 tutorial to show how local governments can tap into accumulated revenue for land-related expenditure, such as funding for shanty-town renovation.

Third, funding from local government financing vehicles is unlikely to provide a material lift as Beijing’s ‘red line’ on containing local government debt risk remains unchanged. New funding sources are being explored. On 1 June, the State Council told policy banks to establish additional infrastructure credit lines of RMB800 billion, and pilot infrastructure real estate investment trusts, a new equity financing channel, have the potential to expand substantially over time.

First published 2nd June 2022.
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