Can big local projects effectively drive growth?

Editor's note:

As Premier Wen Jiabao has said repeatedly over the past few weeks, maintaining economic growth is a national priority. However, where will the much-needed new driving force for growth come from?

Talking about boosting growth, China business watchers know what the government did after the Wall Street meltdown in late 2008. For the next couple of years, it was the investment projects rolled out by the central government, initially worth 4 trillion yuan ($640 billion) in total, that helped China lead the world in GDP growth.

Capital investment by the government can generate immediate power for growth, as Chinese leaders have said. But this time around, it is local government projects - those decided by planning officials at the provincial or municipal level - that seem to dominate the list of newly announced projects, with the local investment plans amounting to 7 trillion or even 8 trillion yuan.

But how much can China really count on local projects to boost its growth? Are there alternatives to spending so much and inevitably incurring so much local debt? China Daily has invited several economists to give their comments.

Can big local projects effectively drive growth?

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Can big local projects effectively drive growth?Can big local projects effectively drive growth?
Local governments have recently announced many investment plans. It's understandable as economic growth continues to slow down. They want to get support from the central government and shore up the economy. But it's hard to say whether these plans will be implemented.

Local governments' financing potential has become very limited since the last round of expansion in 2008 and 2009. No matter whether they prefer to issue bonds or borrow from banks, it's no longer up to them any more. They need approval from the central bank and support from the banks. But after the credit expansion then, banks are no longer positive about lending money to them given the already deteriorating asset quality.

Compared to three years ago, the government faces tighter fiscal and financial policy constraints, with slowing tax revenues, falling land sales and sluggish bank lending.

Policymakers hoped that the corporate sector would also play a role through increasing investment in areas such as clean energy. But the corporate sector's investment response is not as fast as that from local governments, especially at a time of economic slowdown.

Can big local projects effectively drive growth?

Local governments' total investment plans must have far exceeded 7 trillion yuan ($1.1 trillion), based on recent media reports in some key regions. For instance,Tianjinannounced a 1.5 trillion yuan investment program to build 10 industrial chains by 2016.Chongqingunveiled a 1.5-trillion-yuan program through 2015. Guangzhou plans to invest 1 trillion yuan in large projects, while Changsha has set out plans with a price tag of 829 billion yuan. In addition,Guizhouhas announced a plan to invest 3 trillion yuan in infrastructure including transportation, water conservancy and information technology.

Although 7 trillion yuan sounds huge, these programs are just blueprints as local government officials have just taken office ahead of the leadership transition at the national level, and most of the programs will last for several years. That's quite different from the 4 trillion yuan stimulus package during the global financial crisis in 2008.

Most of the projects involve setting up industrial zones, especially for some emerging strategic industries. But the question is whether overinvestment will generate a new round of excessive production capacity and create more problems. It's better to let businesses and the market decide.

Can big local projects effectively drive growth?

Most importantly, none of these programs contains specific funding plans. Most local governments do not have their own financial resources to support these programs as tax revenues are slowing while land sales are falling. They have to either rely on the corporate sector, which is difficult in the near term, or borrow from the public or the financial system. The latter is conditional on macroeconomic policies decided by top leaders.

Can big local projects effectively drive growth?
It is quite likely that a recovery in growth could be delayed, alongside a downward shift in growth expectations, as downside risks remain. The economic slowdown may continue in the fourth quarter, and a rebound may remain out of reach in the years to come.

The government may increase direct spending, by using the Ministry of Finance's adjustment fund of up to 3 trillion yuan; it may lower tax burdens for Chinese businesses, possibly raising the export tax rebate by a maximum of 3 percentage points; and it may also subsidize consumer spending by providing cash subsidies, cheap consumer credit and tax discounts.

Reducing the tax burden on businesses would be a more practical way to spur the economy, although fiscal revenue growth showed some signs of declines.

-----Huang Yiping

Chief Economist for Emerging Asia at the investment banking devision of Barclays Bank Plc

Can big local projects effectively drive growth?

Can big local projects effectively drive growth?

The central issue is that investment is already unprecedentedly high at about 49 percent of China's GDP and the investment appears to be less productive than in other comparable large emerging market economies. This is the reality behind all the talk about China "rebalancing" toward a more consumption-led growth model.

The Chinese authorities are responding to the deterioration in the outlook for the global economy and China's exports with a smaller version of the 2009 stimulus. It is inevitable this will be investment-led because that is the easiest way to get growth quickly.

China has the fiscal and financial resources to ensure a so-called soft landing for the economy in 2012, but only at the cost of postponing the resolution of the economy's structural imbalance toward investment.

That imbalance is a structural weakness that contributes to the negative outlook on Fitch's AA- local currency rating for China. Meanwhile, the foreign currency rating of A+ remains well supported with a stable outlook by China's exceptionally strong foreign currency sovereign balance sheet, underpinned by $3.2 trillion offoreign exchange reserves.

Can big local projects effectively drive growth?

It is unlikely that there will be 7 trillion yuan ($1.1 trillion) of new projects as part of the current stimulus - this is about 13 percent of 2012 GDP, which is a vast sum. We speculate local authorities may be "re-labeling" spending that would have happened anyway.

The key issue for the authorities is likely to be maintaining employment, rather than the technical efficiency of the projects.

Headline urban unemployment remains modest at just 4.1 percent in the second quarter of 2012, and the Ministry of Labor and Human Resources continues to report a surplus of vacancies over job seekers, in stark contrast to 2009.

However, the real picture for the labor market is probably less good - higher-frequency data show a decline in employment growth and a fall in migrant labor movement through July, while there is anecdotal evidence of exporting firms in provinces likeGuangdonglaying off workers.

Can big local projects effectively drive growth?

Given the imperative to maintain employment levels, we think the bottom line is the financial resources will be found one way or another.

Still, we believe the authorities are already concerned about the buildup of local government indebtedness since the 2009 stimulus, and the prospects for some of that lending to turn bad, impacting the banking system.

National Audit Office data show local government debt rose to about 27 percent of GDP by the end of 2010 from 18 percent at the end of 2008. The prospect that bank asset quality will deteriorate, potentially leading to a requirement for support from the sovereign, is one of the issues contributing to the negative outlook on the local currency rating.

This means China's public finances are less strong than is often supposed - we think a debt measure comparable to other countries will be about 49 percent of GDP by the end of 2012, which is about equal to the median for China's peers in the "A" rating range - not a weakness, but not a strength either.

It may be more likely for financing for any new stimulus this year and next to be raised via local government financing vehicles with more or less informal local government guarantees.

Can big local projects effectively drive growth?

It is not for Fitch, as a ratings agency, to provide policy advice. But it is simple arithmetic that if investment is to grow less quickly than headline GDP, something else has to grow faster.

This is unlikely to be exports given the outlook for the global economy, so that leaves the government and households. Experience with some higher-income economies in the West shows that it is unsustainable for government spending - and so deficits - to grow faster than the economy, so that just leaves households.

This comes back to the point we started with about "rebalancing" toward consumption. One possibility is that financial liberalization may lead to higher interest rates for households on their deposits, which might make it possible for households to achieve their savings goals with less saving, leaving more over for consumption. However it is achieved, rebalancing implies deep and wide-ranging reform of China's economic structure - and it might be a bumpy process.

Still, it has to be faced at some point because investment cannot go on rising forever as a share of GDP. Uncertainty over when and how rebalancing occurs and what the costs might be is one factor that contributes to China's rating of A+ - still a high rating, but below some higher-income countries - despite the strength of the sovereign balance sheet.

-----Andrew Colquhoun

Head of Soverign Ratings, Fitch Ratings Asia-Pacific

Can big local projects effectively drive growth?

Can big local projects effectively drive growth?

Many investment projects have been selected in each region and local area. Some of them are already on the way and need additional financing. For example, it is said that inHunanprovince alone, it has been decided to invest the equivalent of $130 billion over five years in 195 projects. The numbers are astronomical. Due to the centralized Chinese system, local decisions require central government agreement. It has therefore been decided to let the regions launch a stimulus package, which should help in this period of economic uncertainty.

Can big local projects effectively drive growth?

Apparently this figure is true. Whether the local governments spend the whole amount or not is open to question.

As far as the type of projects are concerned, as an example, Hunan province has indicated that it will invest in or build 10 core townships, 10 infrastructure projects including transport systems, 10 film-production districts, and 10 industrial development projects. Local governments should obviously continue to improve the local infrastructure - airports, roads, water treatment and energy plants, which is what they seem to be doing - and select with great care the industry sectors in which they will invest. Needless to say, I always believe that partnerships with independent companies are always best for governments when they invest in industrial sectors.

Can big local projects effectively drive growth?

Obviously the question is where the money comes from, and whether local governments will be able to repay, with their own resources - mostly fiscal revenues. Whether it will work is unclear, but an initial impression is that the amounts involved are so high that it will be difficult or impossible, and that the central government will need to bail them out, as it did in the past.

Can big local projects effectively drive growth?

There is no doubt that it is a good idea to invest locally. However the projects should be chosen with great care. In addition, I do believe in international cooperation, and this should be strengthened with China entering into more long-term cooperation agreements with other countries.

A real effort should be made by China to explain what China is today, to help people better understand that there is plenty of room for partnership with China.

-----Daniel Kahn

Founding partner of French law firm Kahn & Associes in Paris

Can big local projects effectively drive growth?

Can big local projects effectively drive growth?

The current wave of investment is mainly led by local governments. In the first seven months of the year, the central government has invested 938.7 billion yuan ($149 billion), a decrease of 3 percent
year-on-year. But investment by local governments in the same period jumped by 22 percent to 17.49 trillion yuan. Obviously, the local governments are the main force behind the new round of investment, although some projects are supported by private capital.

The investment surge can help stabilize economic growth. It is not important to discuss whether to expand or limit the investment from the central or local level, but avoiding inefficient projects and preventing excess production capacity are the key. The new round of investment boosting should be in line with economic restructuring.

Can big local projects effectively drive growth?

It is very difficult to get the precise statistical data about the total value of local government investments. The money should be injected into "right" projects - for example, affordable-housing construction, resource and environmental protection, basic education, the medical sector and public health, water conservancy, and strategic emerging industries. The investment into high-pollution and high-energy consuming manufacturing projects should be limited.

Can big local projects effectively drive growth?

Most of the money is raised by local governments. In the first seven months, such fund accounted for 68.2 percent of the total invested amount, which increased by 22 percent year-on-year.

Meanwhile, the national budget fund was increasing fast, and was 30.5 percent more than a year earlier. But the budget fund was only 4.5 percent of the investment.

Because the central bank has loosened monetary policy, the liquidity of domestic capital markets is easing and the amount of new loans during the January-to-July period was 6.7 percent more than last year, accounting for 13.1 percent of the total investment fund.

The fund structure is healthy now. However, we cannot loosen supervision on local financing platforms, especially when the property sector - one of the most important economic pillars of local government - has been seriously controlled.

The local fiscal resources are decreasing fast, so much more attention should be paid to risk control.

Can big local projects effectively drive growth?

To stabilize economic growth, the government should accelerate economic reform and restructuring, promote the growth-pattern transition, and stop depending too much on investment for growth. The reform of the income distribution system needs to speed up, while the social security system needs to be improved.

It is also important to boost the modern service industry, which can help facilitate the fast growth of consumption.

-----Pan Jiancheng

Deputy director-general of China Economic Monitoring and Analysis Center, National bureau of Statistics