Déjà vu With a Difference
in China’s Investment Drive
Infrastructure investment in China is an important indicator of demand and a key signal of Beijing’s ability to revive the economy. This week, a flurry of news suggested that the rebound in infrastructure investment is gathering momentum.
On Tuesday, the China Securities Journal reported that some commercial banks have asked local branches to provide loans to local government financing vehicles (LGFVs) at the provincial level and in the “top 100 counties”. These loans will focus on projects including highways, railways, gas, clean energy and welfare.
Local governments are competing to pitch mega investment programs. From Nanjing and Ningbo in the east to Guizhou in the south, cities and provinces have unveiled plans for major investment drives. Changsha, a city of 7 million, has launched a massive 830 billion renminbi ($130 billion) investment program, worth 2.5 times the municipality’s annual gross domestic product (GDP). And the Ministry of Railway (MOR) has also announced a 12% rise in investment spending, to 580 billion renminbi for 2012.
In 2009, MOR-led investment was the core of China’s fiscal package, and helped to reflate global demand, particularly in commodities.
China-watchers might be feeling déjà vu. Isn’t this the same investment-led reflation policy that we saw in 2009, which led to a damaging buildup in local government debt?
Not quite. Beijing has been much more cautious this time around. In early 2009, the surge in investment growth was driven by unbridled credit expansion, helping China to power the global recovery while also fueling domestic debt. This time, investment spurred by credit growth is boosting the economy at a more moderate pace.
As shown in the chart below, China’s fixed-asset investment and new project starts indicators have already picked up noticeably in the last two months. All of the recently announced projects are part of the government’s five-year plan, but timetables are being pushed forward and project sizes are being increased while the People’s Bank of China is providing more liquidity. Taken together, these steps aim to protect growth amid rising global uncertainty. We expect China’s GDP growth to stabilize in the third quarter of 2012 at about 7.8% year on year, before rebounding to 8.5% in the fourth quarter as the cumulative effect of fiscal support and monetary policy easing works its way through the economy.
I’m not too concerned about the risks of the investment-led policy, as long as some lessons on funding have been internalized. It would be bad news if local branches of commercial banks provide funds to LGFVs; this would echo the format used in 2009-10, when non-policy banks funded 40% of LGFVs’ investment and increased local government debt levels. Since 2009, many officials and local economists have proposed funding the next round of local investment projects with more private-sector money, corporate and local government bonds or direct fiscal transfers from the central government. If done this way, I think it could create some welcome checks and balances to China’s investment and reflation policy this time around.
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio-management teams.
Anthony Chan is Asian Sovereign Strategist—Global Economic Research at AllianceBernstein.