Why you should care
A lack of infrastructural investment is hurting Chinese provinces that have relied on this cash influx to grow.
In one of China’s poorest provinces, mountainous Guizhou, millions of lives have been transformed by an unprecedented infrastructure spending spree. At Evergrande Happiness No. 33 Village — named after the now highly indebted real estate company that built it — several hundred farmers were persuaded two years ago to leave the cornfields and mud-floored homes of their ancestral hamlets and move to the newly constructed settlement.
Along with the change of housing came the promise of jobs in a booming construction sector. Infrastructure investment in Guizhou has grown 20 percent annually over the past five years with the state adding high-speed railways, nearly half of the world’s 100 tallest bridges and a freeway network to rival France’s. “The houses are good, but there is no work to do in the village,” says Yan Hengfu, a resident of the Evergrande settlement. “So the men have to find part-time jobs in construction.”
Today, however, the surge in government infrastructure investment that brought this new prosperity is under threat. After being an important driver of Chinese economic growth and jobs over the past decade, national infrastructure investment growth has fallen to historic lows. It grew 2.8 percent year over year in July compared with 17 percent the same month just two years earlier, according to official statistics. The drop in infrastructure investment is part of the reason China’s gross domestic product growth is slowing. The economy expanded 6.2 percent year over year in the second quarter, its slowest pace in nearly 30 years. That has ramifications for the global economy — especially for commodities used in construction.
Slower growth may become the new norm of China’s infrastructure investment in the future.
Betty Wang, China economist, ANZ
While the U.S. deepening trade war with China has weighed on exports and consumer sentiment, most economists agree that the bulk of the slowdown is a result of Beijing’s battle to keep debt levels under control.
“Slower growth may become the new norm of China’s infrastructure investment in the future,” says Betty Wang, a China economist at Australian bank ANZ.
Infrastructure spending is generally funded by the issuance of local government bonds that are mostly bought by state banks, helping push China’s government debt up to 73 percent of GDP last year, according to the International Monetary Fund.
Beijing has responded by clamping down on debt issuance. The downside has been slowing infrastructure spending. Last year, fixed asset investment growth slowed to 0.7 percent year over year from 5.7 percent in 2017. The change was “largely due to weaker infrastructure investment amid the tightening of local government investment vehicles,” according to Louis Kuijs, head of Asia economics at consultancy Oxford Economics. He adds that Beijing managed to stabilize total debts in the economy last year. The ratio of total government debt to GDP in Guizhou was the highest in China last year at 170 percent, according to Houze Song, a research fellow at the Paulson Institute, a U.S. think tank.
But many of the investments are loss-making as the revenue they generate is less than their cost of borrowing. Losses last year were equivalent to more than 12 percent of Guizhou’s GDP, Song estimates. “Guizhou’s investment has been way ahead of its needs. There is a large gap between the supply of infrastructure and the demand,” says Song. While few expect Beijing to allow a province such as Guizhou to go bankrupt — it can increase fiscal transfers to regional governments and encourage state banks to roll over debt — the central government has sent a clear message to slow the issuance of new debt at a local level throughout the country. As a result, infrastructure investment this year has contracted in some regions. In the central province of Hunan, one of the worst hit in China, officials say infrastructure spending fell 5 percent year over year in the first half. In contrast, infrastructure investment in Guizhou still grew by 12 percent year over year in June — but that was down from 17 percent a year before, according to government data.
In the face of the trade war, Beijing has announced a measure of greater fiscal support for the economy, increasing the quota for local governments to issue “special” bonds for infrastructure projects by 800 billion yuan ($113.2 billion) earlier this year, while the central government has vowed more investment in rail, road and water projects. But the central government has signaled there will be no further bond quota increases and has introduced tax cuts reducing local government revenues. ANZ’s Wang says there is a shrinking number of projects with good returns for officials to choose from, while Beijing remains concerned about local government debt. “These factors provide little incentive to local governments to actively promote infrastructure projects as officials fear they could be putting their political careers at risk,” Wang explains. For the moment in Guizhou, there are still plenty of construction jobs to be found. But former farmers such as Yan, who lost their land when they moved to the new housing, may be wishing they had not abandoned their plows so quickly.
OZY partners with the U.K.'s Financial Times to bring you premium analysis and features. © The Financial Times Limited 2019.