China doubles down on tried, tested infrastructure spending, but is it still the right fit in a debt crisis?

The revision has also been seen as a signal that Beijing is opening doors to address fiscal constraints facing many local governments and to maintain growth for next year.

But Li Daokui, a professor of economics at Tsinghua University and a former adviser to the People’s Bank of China (PBOC), said that while the move would help local governments to meet their funding shortfall in the near term, it does not address the source of the problems.

“It isn’t the stepping up in taking on at least part of local government debt and a restructuring of outstanding debt that we’d like to see,” Li said at a Tsinghua University seminar last week.

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Local authorities’ over-reliance on infrastructure projects to pursue faster short-term growth has not wholly translated to long-term prospects for the economy, with high debt levels affecting the growth of investment in fixed assets and the manufacturing sector, Li said.

There are also rising concerns that local government financing vehicles (LGFVs) are only borrowing to repay outstanding debt, meaning that there is limited funding left for financing new projects.

An article in the Tsinghua Financial Review on Monday by Wang Chunfeng, chairman of the board of supervisors and deputy secretary of the party committee of Bohai Bank as well as academics from Tianjin University and Beijing Jiaotong University, warned that problems surrounding LGFV debt could “seriously affect the high-quality development of China’s economy and society”.

Infrastructure expenditure has been key to the success of the so-called China model, which relies on investment to drive growth.

Investment made up between 40 to 50 per cent of China’s gross domestic product (GDP) on average over the last two decades, compared to 20 to 25 per cent in the US and Europe.

“Infrastructure investment is an old way that China has used for decades to stimulate economic growth, but it is a tried and tested method,” said Yu Yongding, a prominent Chinese economist and a former adviser to the PBOC in a blog post published by the Economists 50 Forum on Monday.

“The United States may not want to copy it, it just cannot copy it.”

In 2018, Beijing launched a 4 trillion yuan (US$572 billion) stimulus package in a bid to minimise the impact from the global financial crisis.

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The plan has been viewed as a success, as it helped boost Beijing’s domestic and international political standing, as well as its GDP, which climbed to more than 9 per cent in the second half of 2009.

However, Beijing has since refrained from introducing large scale fiscal stimulus even as China is facing headwinds amid a prolonged property downturn.

Yu said that high levels of local government debt have prevented more fiscal expansion on a similar scale in China.

“The main reason for this problem was that the central government was unwilling to increase the fiscal deficit and encouraged local governments to establish financing platforms to raise funds from banks and capital markets,” Yu added.

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LGFVs are hybrid entities, that are both public and corporate, and were created to skirt restrictions on local government borrowing and have proliferated since the global financial crisis in 2008.

The International Monetary Fund estimated that China’s total LGFV debt had swollen to a record 66 trillion yuan (US$9 trillion) this year, more than double the 30.7 trillion yuan reported in 2017.

Local government revenues, meanwhile, have taken a hit from plunging land sales, as well as the coronavirus pandemic over the past three years.

Bai Chongen, dean of the School of Economics and Management at Tsinghua University, estimated that the deficits of local governments due to coronavirus outbreaks in the past three years totalled 4 trillion yuan.

“If the problem of such a large deficit is not resolved, the entire economy will shrink,” said Yao Yang, a professor and dean at the National School of Development and director of the China Centre for Economic Research at Peking University in an interview with the government-aligned news website Guancha on Friday.

“And a lot of it is actually money owed to the wider society.”

Li argued that local governments’ infrastructure borrowing should be restructured to long-term debt over 20 to 30 years from the typical five to 10 years.

“These constructions are for the benefit of future generations. Why should they be repaid in the short term right away?” Li said.