China’s $2.3 trillion infrastructure plan puts the US to shame

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With coronavirus shutdowns, a housing downturn and soaring oil prices resulting from Russia’s invasion of Ukraine, Chinese President Xi Jinping is looking to reliable allies to maintain his ambitious growth target. at your fingertips: the country’s more than 50 million construction workers.

At Beijing’s request, local governments have drawn up lists of thousands of “big projects”, which they are under intense pressure to carry out. Planned investments this year amount to at least 14.8 trillion yuan ($2.3 trillion), according to an analysis by Bloomberg. That’s more than double the new spending of the infrastructure program approved by the US Congress last year, which totals $1.1 trillion over five years.

Much of the spending, like that of Washington’s plan, is for transportation, water, and digital infrastructure. But China already has more than twice as many high-speed railroads as the rest of the planet combined, as well as the world’s longest network of highways, changing the composition of the construction stimulus. Only around 30% of the projects are traditional infrastructure, such as roads and railways. More than half are intended to support manufacturing and service industries: factories, industrial parks, technology incubators and even theme parks. “Now that China has basic modern infrastructure, it makes sense to focus investment on manufacturing,” says Nancy Qian, a professor at Northwestern University’s Kellogg School of Management.

The shift in focus reflects Beijing’s commitment to ensuring China maintains its dominant share of global manufacturing, even as it shifts to more advanced areas such as electric vehicles and batteries, renewable energy and microchips. . One project that fits the bill is a 2.2 billion yuan expansion of Zhongguancun Dongsheng Science and Technology Park in Beijing to accommodate a new generation of tech startups.

At the construction site, cranes surround a huge pit where the foundations are being laid by workers wearing masks and helmets who started arriving a month ago. To avoid virus outbreaks, workers live in a bubble – shuttling between dorms and the job site – and are tested weekly.

“It’s not easy to find work these days. I just go where there is work to be done,” said Zhang Hongqiang, a 49-year-old construction crew member whose home is about 400 kilometers (250 miles) in Shandong Province. He earns 6,000 yuan a month, about a third of the average salary of all workers in Beijing.

In addition to keeping people like Zhang employed, the construction push aims to ensure the central government meets its 5.5 percent growth target set for the year. China’s stock market, which has been battered by a regulatory crackdown on internet platform companies and a shake-up in the massive real estate sector, could also see some upside. The main index is down 13.4% year-to-date, but a sub-index that tracks infrastructure-related companies is down just 4.7%.

Like previous stimulus rounds, this one also has the potential to boost the global economy, by boosting Chinese imports. Yet it could also worsen commodity inflation at a time when many countries face energy price shocks compounded by Russia’s invasion of Ukraine. Longer term – with this year’s major projects requiring three to five years to complete – the overall effect could actually be disinflationary, as Chinese factories ramp up production of goods such as microchips, where tight supplies have made raise prices.

There are also environmental implications, as major projects approved by Beijing are exempt from the country’s energy efficiency requirements. Whether China sticks to its model of boosting construction when the economy slows is the biggest factor determining the trajectory of its future emissions, says Lauri Myllyvirta of the Center for Energy and Energy Research. fresh air. A caveat is that some of the new investment will be channeled into renewable energy, which would help limit the production of greenhouse gases in the longer term.

The construction campaign represents a change of direction for the Chinese economy. The pace of infrastructure investment has gradually declined over the past decade, guided by policies adopted by Beijing to reduce high debt levels: growth last year was just 0.4%, compared to almost 20% per year ten years ago. “The trend will reverse,” says Justin Lin, a former World Bank chief economist who advised Xi. Goldman Sachs Group Inc. expects infrastructure investment to grow 8% in 2022.

With this year’s madness, China is betting projects won’t turn into white elephants burdening the financial system with loans that won’t be repaid. “If you take advantage of the opportunity to invest in infrastructure to reduce bottlenecks, it will increase productivity and can increase government revenue,” Lin said.

It is a bet that plays on the economic assets of the country. Chinese factories can produce more than a billion tons of steel and 1.5 billion tons of cement a year while its legions of construction workers are still poorly paid. State-owned construction companies, among the largest in the world, have overseen thousands of projects from Beijing to Budapest.

The policy is also working in favor of Xi. Local communist cadres vying for promotion at this fall’s party congress, an event that takes place every five years, will be motivated to ensure projects stay on track.

Western economists have long argued that the Chinese economy is too dependent on heavy public works. Those criticisms became more muted after the country’s ports and roads exceeded their capacity to meet unprecedented export demand during the pandemic, leading to supply chain issues that helped drive up inflation in other countries.

Chinese policymakers say the country still has huge infrastructure needs. It has 60 cities with more than 3 million inhabitants but no metro.

Beijing is trying to avoid the debt explosions that have accompanied previous rounds of investment stimulus. To do this, Xi turned to a trusted lieutenant. He Lifeng, 67, was Xi’s economic adviser when he was governor of Fujian province two decades ago. Today, he heads the planning agency responsible for approving all major construction projects and carrying them out: the National Development and Reform Commission.

For He, the professional stakes have never been higher as he is up for a major promotion at this year’s convention. Some analysts expect him to replace China’s top economic policymaker, Liu He, who could retire soon. “His prospects could be damaged if he mishandles Beijing’s public investment surge,” said Neil Thomas, China analyst at Eurasia Group.

He outlined his priorities at a press conference in March. The investment “provides momentum for the future”, he said, ordering officials to “accelerate” construction.

To get an idea of ​​how the building dynamic is taking shape, look at the Chinese capital. A list of 300 major projects in Beijing requiring 280 billion yuan in investment this year includes a panda breeding center, a Legoland theme park and an electric vehicle factory operated by tech company Xiaomi Corp.

The list gives a clue as to how local authorities want to finance projects without increasing their indebtedness: by asking private companies to increase investments from their own profits. China’s manufacturing sector has emerged strongly from the pandemic and, fueled by huge government tax cuts, manufacturing investment is expected to grow 10% this year, according to Morgan Stanley. Although Xiaomi is privately owned, having a new factory designated as a major project brings benefits such as easier access to land and sometimes permission to build at night.

Beijing is also engaging in creative accounting, transferring trillions in savings from rainy-day funds, as well as assets held by the central bank and state-owned enterprises, to local governments, which are technically responsible for paying the majority. of the project invoice.

Provincial governments issued a record 1.25 trillion yuan of “special” bonds in the first quarter to fund investment. The bonds sold in February had an average maturity of more than 16 years, according to China’s finance ministry, making them less taxing on cash flow than bank loans. “The problem in the past was that investment vehicles borrowed short-term from banks to support long-term investments, and there was a maturity mismatch,” Lin said. “We can increase the special bonds.”

There is still a significant gap between sales of local government bonds and planned investment amounts. The gap will likely be filled by China’s state-owned banks, which are able to tap into the country’s huge pool of household savings at low cost.

China’s top banking regulator has asked banks to speed up lending to manufacturing companies and infrastructure projects. Local governments have organized “matchmaking” meetings bringing together bank officials with companies tasked with carrying out major projects.

Beijing is transforming the area around its new Daxing International Airport into a huge logistics center for e-commerce and aeronautical research. The project is part of a broader drive to develop the capital’s suburbs, funded by a 400 billion yuan loan from the China Development Bank.

For Su Lijun, a food delivery driver who works near the airport, the impact on the local economy is obvious. “Six months ago there were only about ten of us here,” he says. “Now we are over 100 people. We are delivering 50-60 orders a day now, about double the number of orders we received six months ago.”

With Yujing Liu and Nicolas Bock

Warning: This article first appeared on Bloomberg and is published by special syndication agreement.

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