China’s leadership has finally awakened to the fact that its economy needs more help. With less than great imagination, Beijing has turned to its default response: infrastructure spending.
At its recent central finance work conference, the Chinese regime announced that it had authorized 1 trillion yuan ($137 billion) in new bond issues to finance spending on projects, mainly to help flood-damaged regions. Though such spending has worked in the past to spur growth in China’s economy, it’s far from apparent that, in the present circumstances, this effort will do the job.
One critical reason to doubt the efficacy of Beijing’s policy is that, in more recent years, infrastructure spending has failed to have the desired economic effect. This failure to get a significant economic payoff from past spending is clearly evident in the precarious finances of provincial and local governments. In the past, Beijing’s infrastructure projects have largely burdened provincial and local finances.
Beijing has authorized borrowing to finance its infrastructure plans through what are called local government financing vehicles (LGFVs). Still, the provincial and local governments have assumed the financial obligations. Because recent such efforts have failed to create the desired economic payoff, these local governments now face huge debt overhangs that they are struggling to manage, so burdensome in some cases that these state entities are having trouble providing basic services for their populations. Indeed, some local governments have already resorted to using new LGFVs to pay off debts left from past infrastructure efforts.
Beijing has noted the financial plight of local governments and, for the first time in a long time, has decided to take the debt for this latest infrastructure effort onto its own balance sheet. This gesture may relieve the financial burdens on local governments or at least not worsen them. Still, the failure of past such efforts to win the needed economic payoff raises the question of whether this latest round of infrastructure spending will have any better results. Even if this new spending does create an economic payoff, it’s far from certain that it will be sufficient to get the Chinese economy moving. After all, the budgeted amount is less than 1 percent of China’s $18 trillion economy.
To have the desired effect, the new spending initiative will have to not only move a giant economy but also overcome the enormous economic drag imposed by China’s severe financial woes. As already mentioned, local governments are struggling. According to Li Daokui, former adviser to the People’s Bank of China and a professor at Tsinghua University, their accumulated debts have grown to 64 trillion yuan, mostly from past infrastructure financing. That is more than half the size of China’s gross domestic product. On top of this burden, China’s financial system must also deal with the enormous failures of residential property developers—Evergrande and Country Garden most prominently but far from alone.
Still more strain on China’s financial institutions has emerged from the refusal of Chinese households to pay off mortgage debts they incurred on apartments prebought from now-failed developers. All these financial strains could not help but have ill effects on China’s economy, but there is more. The decline in property values accompanying these collapses has so affected household wealth that the economy also suffers from the reluctance of Chinese households to consume.
In an oblique recognition of the dire nature of these financial strains, Beijing also announced at the central finance work conference that it aims to “optimize the debt structure for central and local governments.” Presumably, the decision to finance this latest infrastructure spending with central government treasury bonds is part of that “optimization.” But aside from this one step, Beijing offered little idea of what it means by this phrase. The lack of specificity inevitably leaves the sense that Beijing has no notion of what other steps it needs to take.
If, at this early stage, it’s impossible to tell whether this latest infrastructure initiative will create an economic payoff, it is nonetheless a good bet that the effort is too small to meet the needs of China’s heavily beleaguered economy. Even in the unlikely event that this effort has a huge payoff, the economy seems set to struggle into 2024.
