The Chinese Premier Li Keqiang has recently signed a State Council decree, promulgating the "Government Investment Regulation" (hereinafter referred to as the "regulation"), which will come into effect on July 1, 2019. The regulation stipulates the following contents: The first is to clearly define the scope of government investment. The second is to clarify the main principles and basic requirements of government investment. The third is to standardize and optimize the decision-making process of government investment. The fourth is to clarify the relevant requirements of the annual government investment plan. And finally, the fifth is to tighten up project implementation and supervision both during and after the implementation of relevant projects. After the release of this policy, many local governments have paid close attention to it.
Unlike other policies, this regulation will directly constrain and regulate the investment behavior of local governments. Before the regulation, local government investment has been restrained from stricter debt management and "five major tasks (cutting overcapacity, destocking, de-leveraging, lowering corporate costs, and strengthening areas of weakness)". At this time, the introduction of this regulation is expected to increase the constraints on local investment. In terms of its practical effect, local governments at the county and city level will be more constrained by the regulation. One prediction is that this regulation will affect trillions of yuan in government investment. Local governments should also monitor the specific effects brought about by this policy.
Researchers at Anbound believe that the regulation will have an impact on both local governments' and the investments of local platform companies. From the perspective of the impact on local governments, there are several key points to be grasped: (1) The qualitative ability of funding. The regulation regulates funds within the governmental budget. However, if local governments issue bonds for financing, such financing funds will also be counted as budgetary funds according to the revised budget law. (2) Capital investment. The main function of government investment is to invest in the non-operating sector and carrying out matters related to the public domain. The notion that operational projects can only be funded if "support is needed" actually leaves some room for interpretation. (3) Constraints on investment scale. Local government financing should take into consideration both the local economic and financial capacity in addition to not violating the regulation's guidelines. This requirement is consistent with that of controlling local debt. Some people worry that such a requirement may limit investment opportunities in poverty-stricken areas, and these poverty-stricken areas will therefore be caught in more difficult situations. Anbound's researchers believe there is such a possibility that this could happen, but it could be solved by methods such as issuing transfer payments and through public projects. (4) The compliance of decision making. This directly constrains the decision makers of local investments, especially local officials at the grassroots level who are often responsible for investment decisions. (5) Legal liability. The regulation clearly states the legal liability, and this is a strict requirement that local governments should pay close attention to. (6) The implementation date (July 1, 2019). Projects that are unable to meet the July 1 deadline will be subject to this restriction.
Researchers at Anbound would like to point out that when these new investments are put into place initially, various problems will arise in the implementation. The newly introduced regulation will certainly need to look at the implementation and policy trends in the future. On the macro side, one potential trouble is that since the regulation was formulated in a good economic context, will major problems arise if the challenging economic conditions occur? Will the regulations still continue to be strictly enforced? It is important for local governments to understand the difference between the background of the policy's formulation and the background of its implementation. If such policy is not executed well, it is likely to cause difficulties to those who are regulated by it. It should also be noted that the volatility of the Chinese economy is increasing by the day. In the past, the transition between the bears and bulls of economic growth took years; now it only takes a year or two, or even weeks.
The history of the formulation of the regulation also makes clear the differences between the different backgrounds. As early as 2001, the State Council began drafting the regulations. Moving forward in 2010, the Legislative Affairs Office of the State Council issued a notice to solicit the public's opinions on the regulations on government investment, but it has not been adopted and published. In 2018, the State Council's legislative work plan clarified that the National Development and Reform Commission formulated the regulation and submitted it to the Standing Committee of the National People's Congress for deliberation. Looking from a realistic perspective, the economic environment in which the policy decisions were formulated is considerably different from the present economic environment. In particular, China's domestic economy is clearly slowing down, the trade conflict between China and the United States remains unresolved, and the economies of Europe, Japan and the emerging market remain sluggish. The obvious contrast between the background of the policy's formulation and the background of its implementation may lead to more problems during the implementation of the regulation.
After the announcement of the regulations, it immediately raised a lot of reactions. In an exchange with Anbound, local officials said that each policy was designed with good intentions and at the very least it aims to resolve some known and even unknown problems. Yet, many problems will only present themselves in the implementation process. Therefore, problems at the grassroots level need to be specifically studied and resolved, the continuity of the policy is also important, otherwise the implementation effect will be unsatisfactory and may even involve accountability issues later. The effect of the policy needs to be discussed and verified in practice. This is like some central and provincial policies that upon going down to the grassroots level fail to achieve the desired results due to conditional constraints. For example, some policies have rigid rules or preconditions that are unable to be met at the grassroots level. Therefore, these seemingly rigorous policies are actually useless in practice. Some policies are too "macroscopic", and the grassroots are unable to easily to grasp the policy in practice and are afraid of being held accountable afterward. As a result, many of the policies have failed to yield anything upon implementation. The official believes that independent research is important to help the policy achieve the desired results, and only by going deep into the grassroots can the real situation be understood. The situation and views reflected by this official are somewhat representative to the situation in China.
The intention of the regulation is to regulate the government's investment behavior, and in the meantime separate the government from the market, allowing it to cooperate with local debt management. However, from the actual situation in China, the systemic effect of the policy's implementation could exceed expectations from the time of the policy formulation. The main reason is that the development of the grassroots may be excessively restrained. In the past, local governments' investment and local economic development had a certain flexibility, and local governments could make use of this flexibility to play a more marginal role. Yet, under the combined effect of "five major tasks", strict local debt management, the rectification of government platform companies and the introduction of regulations and its collective functions, the flexibility of local governments will be greatly reduced or even eliminated. This puts local governments in a highly transparent environment. In addition, coupled with the current tightening of supervisory conditions, some local governments may become timid in their development spending. With downward pressure on the present economy, excessive cuts in local governmental investment are not conducive to expanding the domestic market and may even hinder the process of macroeconomic recovery.
Final analysis conclusion:
The well-intentioned "Government Investment Regulation" will encounter differences between the background of its formulation and its subsequent implementation. At present, the domestic economic environment is not at its best, and the effects of implementing the regulation should be strictly monitored. Based on Anbound's public policy research and investigation experience, there might be many compromises between the central and local governments over this regulation in the coming future.
