China had 37,900 kilometers (23,550 miles) of high-speed trains in operation at the end of 2020, which the country says account for more than two-thirds of the world’s total.
Zhang trash can | China News Service | fake images
BEIJING – As Covid controls curb growth, China plans to boost its economy with more investment in infrastructure.
That’s the same approach the government has used in the past, and one that analysts say adds to the problems for long-term sustainable growth.
chinese president Xi Jinping on Tuesday he called for an “all-out” effort to build infrastructure. Proposed projects range from waterways and railways to cloud computing facilities.
Xi was speaking at a meeting of the Central Committee for Financial and Economic Affairs, a group he heads.
“The meeting suggests to us that Chinese policymakers have been increasingly aware of the strong headwinds to the growth of Covid restrictions and the continuing recession of property, and thus are more determined to step up security measures.” policy easing,” Lisheng Wang and a team at Goldman Sachs said in a note Wednesday.
“We believe infrastructure investment should be a key policy lever to stabilize growth,” the Goldman analysts said, noting expectations of slower export growth, weak private investment and a zero-Covid policy to come. held for much of the year and hurt consumption and the economy. services.
The problem is that the more the country’s growth relies on government-led infrastructure spending, the more vulnerable it is to a slowdown.
miguel pettis
Peking University, Professor of Finance
Since March, mainland China has faced its worst Covid-19 outbreak since the initial impact of the pandemic in early 2020.
Although the GDP for the first quarter exceeded expectations with a year-on-year growth of 4.8%, several investment banks have cut their growth forecasts for the full year as travel restrictions and stay-at-home orders disrupt supply chains, especially in and around the metropolis of Shanghai, home to the world’s busiest port.
Economists have pointed out how Covid-zero hits consumer spending much harder than factories, which are sometimes able to keep production limited under the policy.
Retail sales fell 3.5% from a year earlier in March, more than the 1.6% decline forecast by a Reuters poll.
Investment in fixed assets for the first quarter grew more than expected, with an increase of 8.5% in infrastructure compared to the previous year.
Can China meet its 5.5% of GDP target?
“An even stronger infrastructure push would help cushion some of the downward pressures on growth that are severely challenging China’s ability to meet its 5.5% growth target,” said Louis Kuijs, in an email. APAC Chief Economist at S&P Global Ratings.
However, “Currently, China’s Covid policy is the key bottleneck to growth.” he said. “It’s going to be really hard to get close to 5.5% growth this year without some easing of the Covid stance.”
Xi’s call for more infrastructure investment comes as local stocks have slumped on concerns about growth in the world’s second-largest economy. Among the nine financial firms tracked by CNBC, the median GDP forecast is 4.5%, a full percentage point below China’s official GDP target of around 5.5% announced in early March.
“The extent of the lockdown and continued weakness in the real estate sector make it increasingly difficult for China to hit the GDP growth target this year, but I expect them to make a strong push in the second and third quarters,” said Michael Pettis, a professor of finance at Peking University in Beijing, he said in an email.
Prior to the release of the official target, Pettis accurately predicted that Chinese officials would set a GDP target of between 5% and 5.5%.
“The problem is that the more the country’s growth relies on government-led infrastructure spending, the more vulnerable it is to a slowdown,” he said, noting how infrastructure investment fuels a cycle of higher growth expectations, which in turn time requires more investment.
Pettis said in a March report that there are limits to the extent to which infrastructure investment can boost growth in developing countries. He said he believes China passed that point more than a decade ago and what is needed now is much tougher institutional change.
Real estate, manufacturing and infrastructure construction have contributed significantly to China’s economic growth in recent decades. The country has built an extensive network of high-speed trains and airports.
In recent years, the central government has tried to boost consumption as a major engine of growth.
But China still has a long way to go before consumers can boost its economy. The country’s official per capita disposable income of 35,128 yuan ($5,488) in 2021 remained a fraction of that of the US. about $46,000 at the end of last year.
Xi and other Chinese leaders also called on Tuesday to modernize infrastructure in rural areas and agriculture, according to an official reading of the meeting. They also highlighted the need to “support the national security infrastructure and improve the country’s ability to deal with extreme situations.”
More debt for growth
Analysts expect more debt to be used to finance new infrastructure projects, reversing the government’s attempts in recent years to rein in heavy reliance on debt for growth.
The net issuance of special local government bonds so far this year has exceeded 35% of the full-year target, well above the 10%-30% rate of the past three years, Monica Li, director of Fidelity International shares, he said in an email.
He said his team expects more bond issuance in the first half of the year relative to the second half for an “early start” of infrastructure projects. “In addition to more active fiscal spending, multiple funding sources will be leveraged to fund infrastructure, including public-private partnerships.”
Goldman analysts also noted that the official statement on Tuesday’s economic and financial committee meeting does not mention measures to prevent a rise in hidden local government debt. That mainly refers to off-balance sheet bonds issued by local governments.
In the short term, plans for more infrastructure investment may help improve confidence. Mainland Chinese stocks rose on Wednesday in an attempt to stabilize after heavy losses earlier in the week.
“The tipping point for real political actions may have arrived, with stimulus likely to come more obviously from late in the second quarter,” Citi analysts said in a report on Wednesday. “We tend to think that the current overwhelming pessimism about growth may be overdone.”