At the height of the 2008 global financial crisis China rolled out a Rmb4 trillion ($572 billion) stimulus package to stop its economy from crashing. The short-term impact was obvious. The economy grew 9.8% on average from 2009 to 2011. Massive spending on infrastructure delivered the world’s longest high-speed railway network. Subsidies for car buyers saw China become the world’s biggest market for car sales the following year.
But the sudden surge in investment and government-driven consumption had less welcome consequences too. Ghost towns grew up in less developed areas as local governments built up a Rmb10.7 trillion debt mountain. The financial health of a number of the banks became more of a concern, as did evidence of rising overcapacity in many heavy industries. Even the spike in car ownership led to worsening air pollution and longer traffic jams in many cities.
Some of the side effects have been so painful that Chinese planners today even talk about ‘investment stimulus phobia’. So as the country’s leaders make plans to give their coronavirus-hit economy another shot in the arm, they have been keen to avoid making the same ‘Rmb4 trillion mistake’.
What steps have been taken so far?
The Covid-19 outbreak has claimed nearly 23,000 lives worldwide out of more than 520,000 confirmed cases of infection as of today. The Federal Reserve is now pulling out all the stops to rescue the American economy, cutting interest rates to zero and going limitless on its latest round of quantitative easing (QE). But the Chinese central bank has refrained from a similar commitment to monetary easing. Instead of cutting the loan prime rate (LPR), a new benchmark established late last year, the People’s Bank of China has been reducing the banks’ reserve requirement ratio (RRR) as a way of pumping new liquidity into the financial system.
The RRR currently stands at 10% (the Fed has cut a similar reserve ratio from 10% to zero). That compares with 20% in late 2011 when Beijing tapered off its Rmb4 trillion stimulus programme.
Shanghai Securities News says that each one-percentage point cut in RRRs frees up about Rmb2 trillion in capital from state lenders. One of the problems with relying on reserve ratio cuts is that much of the cash doesn’t find its way to the companies that need it in the real economy (especially smaller and medium- sized private sector firms). Nonetheless, the newspaper expects the PBoC to rely on the RRR as its main policy tool in the near future.
What else can the government do? Senior leaders have repeatedly given out directives to officials to fight the Covid-19 outbreak on two fronts – containing the outbreak but keeping economic growth targets on track (see WiC483). But most commentators don’t believe that policymakers will be able to make up the GDP lost in the first quarter without more radical action. On the other hand, because of the negative thinking on the impact of the stimulus package a decade ago, China’s leaders seem reluctant to revert to another massive spending spree on infrastructure and fixed investment – or at least to be seen as trying the same trick once more.
So as the calls for a stimulus grow, planners have been touting a concept they’ve termed as ‘new infrastructure’ as the way forward.
What is ‘new infrastructure’?
The terminology is deliberately phrased as a means of differentiating the new stimulus from spending on ‘old infrastructure’ like railways, airports and power plants. The term first popped up in late 2018 during the annual year-end meeting of economic regulators and was offered in reference to seven rather diverse technologies, including 5G, ultra high voltage (UHV) power lines, applications of artificial intelligence as well as charging facilities for electric vehicles.
But the coronavirus crisis has brought a more pressing focus to the term as Beijing looks for ways to sidestep the worst downturn in the economy since the year that Mao Zedong died (see WiC487).
In three gatherings of the country’s senior leaders this month, including the all-important Politburo Standing Committee, ‘new infrastructure’ was touted as a key driver for growth. China must accelerate the construction of “new infrastructure such as 5G networks and data centres”, Xi Jinping, the president told the Politburo meeting, on top of speeding up “key projects and major infrastructure construction already included in state plans”.
Why the focus on tech?
One of the lessons learned from the rescue mission after the global financial crisis a decade ago is that China missed a golden opportunity to spur development of its domestic tech sector, with much of the largesse being directed into older, less productive industries.
Back then Chinese firms were hunting for bargains around the world, with much of the state-backed financing on offer invested in foreign financial firms (such as CIC’s investment in Blackstone and Ping An’s takeover of Fortis), rather than in helping local champions to buy foreign tech companies on the cheap.
That error has looked more costly amid the recent round of tech and trade wars with the US, especially when policymakers came to realise that Washington’s embargo on the sale of American semiconductor chips could cripple China’s telecom equipment majors, including Huawei and ZTE (see WiC406).
Technologies have also played a crucial role in fighting the Covid-19 outbreak, the People’s Daily noted, and China is counting on its “new infrastructure” projects to provide the backbone for the country’s advance as a technology giant.
How much will be spent on ‘new infrastructure’?
It’s unlikely the government will come up with the Rmb4 trillion lump sum it promised in 2008. A number of projects have already been fast-tracked, however. The merits of the State Grid’s ultra-high voltage network, which allows electricity to be transmitted across vast distances, have been questioned in the past (see WiC45 for our earliest article on the topic). Yet having been included as a category for new investment, spending on UHV has been stepped up again.
State Grid announced last month that it has started work on one Rmb18.5 billion project that will deliver electricity from Shaanxi to Hubei, the province worst hit by the coronavirus. The grid is expected to create more than 40,000 jobs and drive Rmb70 billion of investment in related industries.
According to 21CN Business Herald, State Grid had already upped spending targets on its UHV projects a couple of times this year. The company’s chairman Mao Weiming said earlier this month that Rmb110 billion had been earmarked for 2020. Yet in a separate announcement published a few days later, the budget was raised to Rmb181 billion.
Telecom’s infrastructure that underpins China’s 5G buildout is another boom sector. By adding up the figures from the latest financial reports from the three major state-controlled telecom carriers, as well as their infrastructure joint venture China Tower, Beijing News reckons that the quartet is going to invest up to Rmb197 billion collectively in 5G base stations this year. Citing research from local brokerages, it also said that 5G-related infrastructure investment is likely to top Rmb300 billion in the same period.
Isn’t this old wine in new bottles?
Despite the focus on a new list of candidates in the investment plan, the railway sector is going to be the major recipient. High-speed rail, intercity lines and intracity subways have also been declared one of the seven pillars of the ‘new infrastructure’ concept. So far 59 such projects have obtained approval. These add up to Rmb970 billion in investment, with roughly half of the amount set to be spent in 2020.
Critics of spending like this say that China is over-invested in roads and railways, although HSBC’s economics team disagrees, saying that investment growth has slowed markedly since 2017 and is currently too low, given the overall urbanisation rate (at 60%) and regional differences in the economy.
Interestingly, the HSBC analysts have their own take on ‘new infrastructure’ too, classing spending on projects like waste treatment, industrial parks, environmental protection and the provision of social services in the same category.
The central government also wants to do things differently in this new incarnation of its stimulus plans by encouraging public-private-partnerships (PPP). Ming Pao, a Hong Kong newspaper, says investment commitments for existing PPPs in China totalled Rmb17.6 trillion as of the end of 2019. But less than 15%, or Rmb2.6 trillion, were related to so-called ‘new infrastructure’ deals.
This gives investors a glimpse of the size of the potential pie. But with China’s GDP now topping Rmb100 trillion, Ming Pao also questions whether spending on ‘new infrastructure’ alone will be enough to pull the economy back towards a growth rate of around 6%.
China’s media thinks something similar, which is why news articles about the government readying a Rmb50 trillion stimulus have been making the rounds since last week. Most of them focus on local government investment plans: by March 10, 25 provinces and big cities had outlined commitments to backing 220,000 infrastructure projects with Rmb49.6 trillion in investment required. Tech projects such as 5G base stations and AI parks featured heavily, but so did roads, railways and coal plants.
As HSBC points out, the fuller list of projects is more of a ‘wish list’ that spans almost every sector of the economy over a multi-year horizon. A much smaller portion will come this year – though about Rmb1 trillion of special municipal bond issuance could be fast-tracked into the spending in the months ahead. As Reuters reported this month, that also implies that the State Council is prepared to let the budget deficit ratio climb to record levels.
How has the outbreak changed China’s plans?
2020 is the concluding year of the 13th Five-Year Plan, which required the economy to grow around 6.5% every year from 2016. If achieved, China will double its GDP from a decade earlier (by the end of December) and the Communist Party will be able to claim it has accomplished its mission of building a ‘moderately prosperous society’.
But many analysts are now expecting the economy to dip into recession for the first time since 1976. The government’s ability to shore up growth is further complicated by the way that Covid-19 has gone global, torpedoing demand for China’s exports.
So what happens next? Beijing was expected to show its hand during the Two Sessions, a parliamentary gathering normally held in March. It was postponed but is expected to convene after April 8 – the day the lockdown on Wuhan, in place since January 23, is lifted. The plan for getting China back into growth will then become clearer.
© ChinTell Ltd. All rights reserved.
Exclusively sponsored by HSBC.
The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.