Chinese provinces plan to boost spending on major construction projects by almost a fifth this year as Beijing continues to rely on infrastructure to spur an economy being hindered by consumers still bruised from years of pandemic restrictions.
About two-thirds of China’s regions have announced spending plans for major projects such as transport infrastructure, energy generation and industrial parks this year, adding up to more than 12.2 trillion yuan (S$2.4 trillion), according to a Bloomberg analysis of government statements and state media reports. This is an increase of 17 per cent compared with last year.
While a recovery in consumer spending following the end of Covid-19 restrictions is still expected to be the main driver of growth this year, economic scarring from the pandemic suggests the rebound in jobs and incomes could be gradual.
The provincial spending plans add to the case made by some economists that investment in manufacturing and infrastructure will continue to provide a significant boost to the economy. It underscores Beijing’s reliance on a tested strategy of using investment to drive employment and eventually household incomes, rather than directly subsidising households.
The analysis shows spending is being directed towards fields like high-tech manufacturing and energy, underlining Beijing’s focus on technological self-sufficiency and energy security in the face of growing competition and political tension with the United States. It also implies Chinese government and corporate debt are likely to increase, adding to investors’ concerns about financial stability.
Construction surge
Recent data shows that the infrastructure boom may already be taking off. An index measuring construction activity surged in March to its highest level in more than a decade.
As households are cautious about job and income prospects, investment in infrastructure and manufacturing remains “critical to the economy”, said Jeremy Stevens, chief China economist at Standard Bank Group. He sees fixed investment in infrastructure growing 5 per cent to 10 per cent for the year.
“At least in the first half of the year, there is going to be strong growth in fixed asset investment,” Stevens said. “The government’s hope is that drives the recovery and, at some point, it can hand over the baton to private business and consumption. I think that is the plan.”
The boost to infrastructure should also help lift demand for commodities. In a scenario where construction grows above 10 per cent this year, China’s oil demand would grow by 1.4 million barrels per day year on year, while coal demand would reach a new record and copper and aluminium demand would increase, according to a recent estimate from consultancy Wood Mackenzie.
In addition, even though China wants to cut steel production this year to meet environmental goals, infrastructure spending could still grow if it becomes less steel-dependent.
For example, building industrial parks accounted for about a third of China’s infrastructure spending last year and tended to be less steel-intensive than other kinds of infrastructure, Stevens said.
Borrowing plans
China’s provinces have been given a 3.8 trillion yuan quota in 2023 for selling special bonds used mainly to fund infrastructure, less than what they sold last year, meaning they will need to tap other sources of funding to reach their goals.
While regional governments are banned from bank borrowing, major projects can be funded by private and state-owned companies obtaining funding from banks and the corporate bond market.
Funding from Chinese policy banks, such as the China Development Bank, is likely to increase this year, according to analysts at China International Capital. China’s central bank is providing cheap funding to encourage commercial banks to provide loans for construction projects in the energy sector.
Financing vehicles owned by local governments are also expected to raise a net amount of about 1.2 trillion yuan through bond issuance this year, largely to fund infrastructure, according to Fitch Ratings.
Construction spending is likely to push up China’s government and corporate debt. This will add to fiscal strains on local governments, although the central government is taking an increasing share of that burden by issuing more debt.
The International Monetary Fund projects China’s total government debt, including debt of local government financing vehicles, to rise about 12 percentage points to 123 per cent of gross domestic product this year. Corporate debt will increase four percentage points to 117 per cent of GDP, it estimates.
