Can China shake its investment addiction?

As growth momentum slows, provinces and municipalities across China are turning to investment to prop up their economies. But Beijing will likely sit on its cash pile for some time yet.

China will release its second quarter GDP figure in eight days. Many analysts are predicting 7.4 per cent growth, just a touch below the official target of 7.5 per cent.  Recent data suggests Chinese exports and manufacturing are recovering on the back of Beijing’s targeted easing measures.

However, many policymakers and local officials are nervous about whether they can achieve the official growth of 7.5 per cent. Beijing has lost some of its cool in the face of increasing downward pressure on its economy, dispatching officials from the State Council, the Chinese cabinet, the National Development and Reform Commission (the key economic planning agency and think tank) on fact-finding missions around the country.

Chinese Premier Li Keqiang’s tone also changed from its earlier emphasis on structural adjustment to protecting the government’s bottom-line on growth: the 7.5 per cent official growth target. He told local officials that delivering economic growth was still “the unshakable key responsibility” for them.

Provinces that are reliant on heavy industries and resources were particularly bad hit. Helongjiang, Hebei and Shanxi provincial GDPs were halved in the first quarter. For example, the steel-producing province of Hebei had its economic growth reduced to 4.2 per cent in the first quarter due to Beijing’s aggressive action on curbing pollution and excess capacity.

In face of significant downward pressure, what can they do to resurrect growth momentum? Many are turning to the old trick they know the best -- investment -- which already accounts for about 50 per cent of the country’s GDP.

According to various incomplete surveys, local governments have unveiled nearly 10 trillion yuan or $1.7 trillion of stimulus packages since June.

Provinces and municipalities have announced a dazzling number of major projects. Guangdong, Hainan, Tianjin and two other provinces have unveiled 7 trillion yuan of investment projects alone. Helongjiang, which only grew 4.9 per cent last quarter, announced its 300bn yuan stimulus package recently.    

The head of the investment department at the National Reform and Development Commission Huang Ming said at a recent conference in Shanxi that “in order to maintain stable economic growth, we still need to be supported by investment,” according to a Chinese media report.  

Though investment into traditional areas such as manufacturing and real estate are slowing down, money is pouring into basic infrastructure and utilities to support Beijing’s urbanisation drive. Li Qiang, the governor of Zhejiang province, one of the most prosperous provinces in China, also said expanding investment was the most effective way to boost economic growth.

So is Beijing going back to its old habit of using investment to prop up its economy?

If you take these provincial and municipal announcements at face value, it seems the country is on the verge of unleashing another major round of stimulus packages. However, if look at these proposed projects closely, many of them have already been announced -- there are not too many new projects. 

Let’s use Shanxi, a resource-rich province, as an example. Despite the fact the provincial GDP was reduced by more than 50 per cent in the first quarter, the local government only announced 36 billion yuan or $6bn of new projects. The new spending is only 3.1 per cent more than planned spending at the beginning of the year.  You can hardly call that a major stimulus.

So what is holding back Beijing’s enthusiasm for building things? Beijing has not loosened its purse strings and local governments are already too heavily indebted to borrow more without risking falling off the fiscal cliff.

The head of macroeconomic research at Haitong Securities says the government is exercising tight control over shadow banking lending and is watching local debt growth carefully. “Money is the biggest restraint,” he says.

Unlike the 2008 stimulus package, there is only modest support from the cash-rich central government. State-owned banks are not in a hurry to shovel money out of the doors like last time.

Local governments are turning to private capitals for more money and PPP is one of the hottest buzzwords. The NDRC has announced 80 major infrastructure projects that are open to private capital. Provinces have followed suit, opening up 1.5 trillion yuan worth of projects to private businesses. 

Though there are signs that local officials are ready to press the investment button again, it is unlikely to happen on a large scale without fiscal and monetary support from Beijing. The central government is still sitting tight on its pile of cash and not ready to flood the market with money yet.