HONG KONG (Reuters Breakingviews) - Beijing’s latest infrastructure bump could come with a high price tag. Officials said they will tweak financing rules to allow local authorities to step up spending. It might add up to 4 percentage points to infrastructure investment growth this year. Stimulus is being steadily dialed up, at the cost of more debt risk.
According to an announcement last week, local governments will be allowed to use some proceeds from “special bonds” as equity capital in major projects. The government usually requires a minimum of 20% of total infrastructure financing be equity, and the rest can be debt. Special bonds could previously only be used for the latter. Moving some of the bonds into the capital column, as the new rules should, theoretically frees project financiers to borrow more from banks and private investors.
The move follows rash of soft economic data, and the possibility that U.S. President Donald Trump will levy even more tariffs on Chinese exports if talks with China’s President Xi Jinping fail at the upcoming G20 meeting in Japan. Yet for all Beijing’s big plans for targeted stimulus, realised spending has been tepid so far. Infrastructure fixed-asset investment rose just 3% year-on-year in the first four months of 2019, note economists at Bank of America Merrill Lynch. These new measures could boost it by around 3-4 percentage points for the rest of the year, taking the figure to 7%-8% growth, they reckon.
But a comparable program initiated during the last slowdown in 2015 was suspended in 2017 due to worries that excessive regional borrowing might increase systemic financial risk. This resumed push could similarly facilitate investments in bridges to nowhere, simply because most of the projects producing easy yields have already been built.
The central government is aware of this risk. An official question-and-answer sheet on the new measures began with a discussion of local governments’ $2.7 trillion debt pile. A consumption-focused stimulus package announced earlier this month also turned out to be more modest than some analysts had expected. But the fact that officials are now calling on localities for yet more support, using a playbook they have been trying to put down, suggests deepening pessimism.
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