As China's economy continues to slow down and the growth rate of fixed asset investment continues to fall, China's macro-policies are once again tilted towards infrastructure construction. The intensive launch of a large number of construction projects shows the "formula" that China tends to use infrastructure investment to drive the overall investment growth in promoting the growth of the overall economy.
On the one hand, we have seen that since September, the central government has increased the issuance of regional and local government (RLG) bonds, especially the RLG's project-linked bonds, to finance infrastructure projects. By the end of October, RLG debt had reached RMB 18.4043 trillion. Of this amount, general debt totaled RMB 10.9269 trillion and special debt RMB 7.4774 trillion; government bonds totaled RMB 18.1478 trillion and government debt in the form of non-government bonds totaled RMB 256.5 billion. The acceleration of the pace of issuance of bonds this year, especially the sudden completion of special local debt issuance, is necessary for China's economy stabilization this year.
On the other hand, in the fourth quarter of this year, the National Development and Reform Commission (NDRC) also intensively issued approvals for high-speed railway, highway, subway and other infrastructure projects with the total investment of RMB 132.409 billion. As a result, the domestic fixed asset investment shows a significant growth trend since the third quarter of this year. In the first three quarters of 2018, the NDRC examined and approved 147 fixed asset investment projects, of which 117 were examined and 30 were approved, with a total investment of RMB 697.7 billion. It is estimated that the approved investment in infrastructure projects will exceed RMB 800 billion for the whole year. Infrastructure investment (excluding production and supply of electricity) grew 6.7% in October, up sharply from -1.8%, -4.3% and -1.8% in the previous three months. Investment in infrastructure (including the production and supply of electricity, heat, gas and water) continued to accelerate in November, with a clear trend of recovery. Investment in infrastructure increased by 1.2% year-on-year in the January-November period, 0.3 percentage points higher than that in the January-October period, and increased 3.5% in November, continuing the trend of recovery after bottomed out.
As for the role of infrastructure investment in stabilizing the economy and employment, both past experience and reality must be recognized. In particular, infrastructure in the central and western regions is weak, but there is great potential for infrastructure investment. Infrastructure investment also plays an obvious role in driving fixed asset investment. From January to November, China's fixed asset investment grew by 5.9% year-on-year, 0.2 percentage points higher than the growth rate from January to October, and 7.8% year-on-year in November. This was mainly due to the acceleration of investment in manufacturing industry and the continuous recovery after the stabilization of infrastructure. The growth rate of real estate investment was the same as that from January to October.
But in terms of long-term development and economic restructuring, as Anbound has previously warned, the economic boost from the infrastructure investment is diminishing as the marginal benefit of infrastructure investment diminishes, and the launch of large-scale of infrastructure programs is not a panacea for economic growth. According to researchers from Anbound, the expansionary fiscal policy has become a consensus among policy makers and the market, whereas, investment in infrastructure construction is actually an important tool for government to inject money to the market in the future. However, the failure to change the conceptual of infrastructure policy implementation could create new risks.
Anbound's chief researcher Chan Kung stressed that the structural factors in the Chinese economy are very significant. China's resource often concentrated in a few sectors, which will bring a huge impact to the particular sectors to develop at an astonishing speed. Such is the case with infrastructure and real estate industries, which are very important to local government revenue, the development of industries tend to follow the demand in the country. Past experience has shown that the real estate industry is often indirect driven by large-scale infrastructure investment. However, the abnormal development of the real estate industry in China has increasingly become an obstacle to the development of the real economy, resulting in rising costs and the imbalance of social structure. This would lead to the return of haphazard development in the past, and it is not conducive to economic restructuring, industrial upgrading of the Chinese economy and the cultivation of long-term development in China.
In addition, infrastructure investment will undoubtedly increase the leverage ratio of government departments and bring new hidden dangers to the increasingly serious debt problem of RLG. Market predict that an increase in China's fiscal deficit rate in 2019 is a likely event, with RMB 1.05 trillion of local general debt, RMB 1.5 trillion to RMB 2 trillion of special local debt and RMB 3.9 trillion to RMB 4.4 trillion of local debt. Moreover, it is difficult for infrastructure projects to generate sufficient profits in the short term. In order to maintain the operation of related infrastructure projects, RLGs are bound to invest capital in maintenance, and thus further increase their financial burden.
Anbound has previously cited Japan's experience as evidence that to form a virtuous cycle of economic growth, it is necessary to get rid of a chronic over-reliance on infrastructure and back to the policies that stimulate private consumption and investment. According to the Haitong Securities' research on the effects of Japan's macroeconomic policies after a recession in the 1990s, Japan has long favored on infrastructure construction and results in a decreased in effectiveness of public investment, this is due to the over public investment had increased the demand of labor and capital, boosting folk indirect investment cost, and hence result the crowding out effect. In 2001-2006, Japan adopted structural reform to reduce government intervention, to cut public spending, adopted policies that encourage private sector engage in R&D and investment, promote market competition and social vitality. The Japanese government had reduced public investment on that period of time, yet private investment gradually rebounded, and the economy subsequently maintain a long boom.
Therefore, the content and concept of infrastructure investment need to be changed. Chan Kung once said that there is still a lot of room for China's infrastructure construction from the macro perspective, such as solving the problem of water resources, the improvement of land and resources, communication network upgrading (e.g., 5G network), and even the construction of a large number of football fields (There are very few football fields in China, even less than the rural areas of Latin America). Infrastructure investment in China is in great demand, but the focus of investment needs to be shifted. There is also the problem of shifting policy concepts.
Final analysis conclusion:
In the context of expanding macro-policy, the acceleration of infrastructure investment plays a certain role in promoting investment and stabilizing the economy in the short term, but the structural problems caused by it cannot be ignored. Anbound suggests that infrastructure investment should also change its haphazard practices in the past, and that industrial policies should be adjusted in time to promote economic restructuring and build a long-term driving force for economic development when large-scale of stimulus policies are introduced.
