China continues small stimulus steps to boost infrastructure projects in face of economic slowdown

15-Nov-2019 Intellasia | South China Morning Post | 7:36 AM Print This Post

China has taken another small step to help prop up its flagging economy by relaxing the minimum capital ratio requirement for some local government infrastructure projects.

The requirement for ports and shipping infrastructure projects, which are mainly funded by local governments, will be cut to 20 per cent from 25 per cent, while capital requirements for railways, roads, environmental projects and logistics will be decreased by up to 5 percentage points, according to a statement released by the State Council on Wednesday.

Government-backed infrastructure projects will now be able to raise up to 50 per cent of registered capital for a project through debt and equity, it added. In the past, initial capital had to come from a government fund, state-owned enterprise or, more recently, proceeds from special purpose bonds.

The move is the latest in a series of small economic adjustments taken by the government to help arrest downward pressure on the economy resulting from the trade war with the United States as well as domestic headwinds, including a slowdown in industrial production and a sag in investment.

The current adjustment is more of a move to ease market worries, rather than start a strong stimulus

Larry Hu

China’s gross domestic product (GDP) expanded at 6.0 per cent in the third quarter, the slowest pace in nearly three decades and matching the floor of the government’s 2019 growth target range.

With GDP growth tipped to slow further in coming quarters, there is growing debate in China about what level of stimulus is appropriate to support the economy.

Larry Hu, chief China economist at Macquarie Capital, said recent policy support to boost infrastructure investment would not have a meaningful effect, especially as the country was trying to shift away from a debt-fuelled growth model.

“The current adjustment is more of a move to ease market worries, rather than start a strong stimulus,” he said. “There might be a chance [of strong stimulus], but now is not the right time the economy has not yet become that bad.”

While the central government wary of the country’s debt-fuelled recovery following the Global Financial Crisis in 2008 has so far rebuffed calls for strong stimulus, policymakers have made a number of small tweaks to help boost infrastructure growth.

Expectations of monetary easing were fuelled last week after the People’s Bank of China cut the interest rate on its medium-term lending facility (MLF) which it uses to provide low-cost liquidity to the banking system for the first time in three years. However, the rate cut was only 5 basis points, reinforcing the government stance against a major loosening of monetary policy.

The government also increased the limit for local government issuance of special purpose bonds to fund infrastructure projects, effectively borrowing from 2020 after this year’s quota ran out. It also allowed the proceeds from the special purchase bonds to be used to fund the initial investment in such projects, when previously local governments had to make the initial investment out of their own fiscal revenues.

Other small steps to support local government projects may be in the works. For instance, vice-minister for finance Zou Jiayi told a forum in late October that her ministry was exploring the possibility of bond proceeds being used in public-private partnership (PPP) to leverage private capital.

Even with additional support from Beijing, infrastructure investment growth remains subdued.

China’s fixed-asset investment rose by 5.2 per cent between January and October, slowing from 5.4 per cent in the first nine months of the year, government data released Thursday show. Growth in infrastructure investment decreased to 4.2 per cent in the first 10 months of this year, down from 4.5 per cent in the year to September, and well short of the double digit growth seen two years earlier.

Beijing is expected to continue its proactive, albeit small-scale, policy support next year. But a widening budget deficit, a result of wide-ranging business and personal tax cuts earlier this year, has raised concerns over how much expansionary room authorities have and whether the government should ease its tight restrictions on local government financing vehicles (LGFVs).

LGFVs, which were widely used by provincial and lower level governments during the massive post-financial crisis stimulus to fund local projects by working around central government restrictions on borrowing, are blamed for a large portion of the country’s “hidden debt” off balance sheet borrowing and loan guarantees.

A recent study of some 1,700 municipal or lower-tier LGFVs by S&P Global (China) Ratings found their credit quality varied significantly based on local fiscal capability and support.

It concluded that their strategic role would remain unchanged as they would continue to serve as an important platform for government-led infrastructure investment, but the rating agency warned the large number of external guarantees granted by LGFVs may present a future risk.

Houze Song, a research fellow of the Chicago-based Paulson Institute, said the government was unlikely to relax its restrictions on financing vehicles.

“Beijing now favours new stimulus tools and fiscal stimulus is increasingly on-budget rather than through LGFVs,” he said.

“Traditional stimulus tools, like fiscal stimulus, have been deployed only to the extent of preventing a hard landing. In case a more aggressive stimulus is needed, bank lending rate cuts will play a bigger role.”


Category: China

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