Here we go again…

Local governments unveil massive new plans to spend on infrastructure

Here we go again…

Which way next? A bridge disappears into thick fog in Harbin; another bridge collapsed in the city last week

Last week, three people died when one of the longest bridges in northern China suddenly collapsed beneath them.

Liu Guodong was one of the lucky ones, surviving with only minor injuries. He was dozing in his truck when it plunged 100 feet to the ground below. “It was a nightmare,” he told Xinhua, in one of those rare instances when the phrase doesn’t sound like hyperbole.

The collapse of the Yanmingtan bridge in the northern city of Harbin provoked uproar among netizens. Many blamed corruption for the disaster, shocked that a bridge costing Rmb1.88 billion ($295 million) fell apart less than a year after it was first built. Others saw an opportunity to decry sloppy engineering, invoking the metaphor of the non-too-rigid bean curd: “Tofu engineering work leads to a tofu bridge,” was one take on weibo, according to the New York Times.

The Harbin bridge was a product of the Rmb4 trillion stimulus package launched in late 2008, which ushered in a huge wave of infrastructure spending to protect the economy from the effects of the global financial crisis.

But its subsequent collapse raises a number of related issues – corruption, shoddy construction and excessive spending on infrastructure – at a time when another round of economic stimulus looks set for launch. Again, infrastructure spending is expected to be at its core. And although the central government has not announced a headline figure for how much will be spent this time around, local governments have been jostling to reveal their own startling spending plans.

Hence officials in the capital city of Hunan province, Changsha, recently announced a plan to invest more than Rmb800 billion ($125.9 billion) over the next five years on a wide range of projects. The infrastructure spend will include an airport expansion, new roads, and improved waste treatment.

Some of this has the feel of a small town football chairman, announcing crazily expensive signings designed to get his club into the Champions League. Changsha’s targeted spending is extraordinarily ambitious, for example, since it would account for 150% of the city’s 2011 GDP. To put this into perspective, the official stimulus package launched during the financial crisis represented 5% of China’s national GDP, says the Financial Times.

Other cities are also announcing major investment plans. Last week, Chongqing said that it planned to invest Rmb1.5 trillion in seven major industries over the next three years, reports Reuters. Guizhou, one of the poorest provinces in China, has also published plans to direct an outlandish Rmb3 trillion on hundreds of local projects, says International Finance News. And as we pointed out last week (see WiC161), Kaifeng wants to spend Rmb100 billion rebuilding the country’s 12th century capital, thinking it can pull in millions of new tourists.

That so many cities and regions should pursue such supercharged investment sounds unrealistic, especially when the suspicion is that many are not being fully forthcoming about their current levels of debt.

But as the FT points out, the headline numbers are probably not an accurate account of how much officials actually expect to spend themselves but rather “very ambitious projections of the investment they hope to attract from foreign, state and private enterprises, as well as the central government.”

Inflated or not, the figures being mentioned point to something important: “The numbers are very significant – the rollout of the projects will be a significant contributor to aggregate demand in China in the coming months,” one economist told CNBC. “While the marketing of the packages hasn’t been done in a way that would excite investors, like back in 2008, the impact will be similar,” he added.

Even if officials are only able to secure a fraction of these bloated sums, it looks as though local governments intend to use slowing growth as an excuse to start on another frenzied bout of spending. But how will it be funded? Here, the answers aren’t clear. “Where will the money come from? Right now, it’s all in a disorderly state,” asks Li Yang, from the Chinese Academy of Social Sciences, according to the FT.

But Changsha officials have an answer – it’ll come from banks and local governments, suggests Xinhua.

Really? Tax revenues do not seem like a feasible option. Fiscal income in Changsha in 2011 was just Rmb66.8 billion, reports International Finance News, compared to a spending plan that now exceeds Rmb800 billion. Nor are revenues from increased land sales much of a fallback, as developer demand for fresh plots has diminished on the greater uncertainty for prospects in the property market.

So that seems to suggest that private capital will be needed to fund many of the infrastructure projects. Again, that looks ambitious. Private investors will wonder about returns on projects like toll roads. Local governments haven’t been seeing much of a return on the last round of spending, for instance, with debt deadlines rolled over on talk that the commitments will have to be met over the longer-term. Foreign investors will be even more cautious, when some projects have proved vulnerable to sudden local policy changes (for an example in Guangdong, see WiC154).

Nor is it clear that banks would be willing (or able) to dole out trillions of renminbi more to local governments. Lenders dished out more than Rmb10 trillion worth of loans to government-backed investment vehicles during the last round of stimulus. Now anxiety about bad debt is a persistent theme in the financial sector.

That may mean that the local spending plans are dependent on the central government’s generosity. But this triggers the broader debate about China’s dependence on fixed asset investment to spark growth. For instance, economist Lang Xianping has argued on his Sina Weibo that excessive investment “is like giving a stimulant to a seriously ill patient. After a short period of stimulation, he will sink into a deeper crisis.”

Another economist, Sun Lijian, told International Finance News that government intervention is the wrong approach. Instead he recommended cutting corporate taxes and promoting wider competition. “Only in this way can the economy gain continuous market vitality,” Sun suggested.

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