As of the end of 2020, China had 37,900 km (23,550 miles) of high-speed rail in operation, which the country claims accounts for more than two-thirds of the world’s total.
Zhang Bin | China News Service | beautiful pictures
BEIJING – As Covid takes hold, slowing growth, China plans to boost its economy by investing more in infrastructure.
It’s the same approach the government has used in the past and one that analysts say will add to the problems for sustainable growth in the long run.
President of China Xi Jinping on Tuesday called for an “all-out” effort to build infrastructure. Proposed projects range from waterways and railways to facilities for cloud computing.
Mr. Xi was speaking at a meeting of the Central Economic and Financial Commission, a group he heads.
“The meeting suggests to us that Chinese policymakers have become increasingly aware of the strong growth headwinds from the Covid restrictions and continued asset downturn, and are therefore more determined to strengthen policy easing measures,” Lisheng Wang and a team at Goldman Sachs said in a note Wednesday.
“We believe that investment in infrastructure must be an important policy lever to stabilize growth,” Goldman analysts said, noting the periods Expectations of slowing export growth, weak private investment and a zero-Covid policy remain in place for years and hurt consumption and services.
The problem is that the more the country’s growth depends on government spending on infrastructure, the more vulnerable it is to decline.
Michael Pettis
Peking University, professor of finance
Since March, mainland China has faced its worst Covid-19 outbreak since the first shock of the pandemic in early 2020.
Although first-quarter GDP topped expectations with 4.8% year-on-year growth, Several investment banks have cut their full-year growth forecasts as travel restrictions and stay-at-home orders disrupted supply chains, especially in and around the capital Shanghai, home to the world’s busiest port.
Economists have shown how zero-Covid affects consumer spending much more than factories, which can sometimes maintain limited output under this policy.
Retail sales fell 3.5% from a year ago in March – more than the 1.6% drop forecast by a Reuters poll.
Investment in fixed assets in the first quarter grew more than expected, with investment in infrastructure up 8.5% from a year ago.
Can China hit the target of 5.5% GDP?
“An even stronger infrastructure push should help alleviate some of the downward pressures on growth that are severely challenging capacity,” said Louis Kuijs, chief APAC economist at S&P Global Ratings. achieve China’s 5.5% growth target.
However, “for now, China’s Covid policy is an important bottleneck to growth.” he say. “It’s going to be really hard to hit 5.5% growth this year without some easing of the Covid stance.”
Xi’s call for more investment in infrastructure comes as local stocks plunge on worries about growth in the world’s second-largest economy. Among the nine financial companies 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 level of closures and continued weakness in the real estate sector are making it increasingly difficult for China to meet its GDP growth target for this year, but I expect them to make a big effort in Q2 and Q3. “, Michael Pettis, a finance professor at Peking University in Beijing, said in an email.
Before announcing the official target, Pettis correctly 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 depends on government spending on infrastructure, the more vulnerable it is to the slowdown,” he said, noting how investment in infrastructure infrastructure generates higher expected growth cycles, thus requiring more investment.
Pettis said in a report in March that there are limits to the extent to which infrastructure investments can boost growth in developing countries. He said he believes China passed that point more than a decade ago and that what is needed now is much harder institutional change.
Real estate, manufacturing and infrastructure construction have contributed significantly to China’s economic growth over the past decades. The country has built an extensive network of high-speed trains and airports.
Over the past few years, the central government has attempted to promote consumption as a larger driver of growth.
But China still has some 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 is still a fraction of what it is in the US, about $46,000 by the end of last year.
Xi and other Chinese leaders on Tuesday also called for infrastructure modernization in rural and agricultural areas, according to the announcement of an official meeting. They also stressed the need to “support the national security infrastructure and improve the country’s ability to respond to extreme situations.”
More debt for growth
Analysts expect more debt to be used to finance new infrastructure projects, reversing government efforts in recent years to curb a heavy reliance on debt to grow chief.
The year-to-date special local government bond net issuance has surpassed 35 percent of the full-year target, much higher than the 10 percent to 30 percent rate over the past three years, said Monica Li, director of equities. at Fidelity International, said in an email.
She said her team hopes to issue more bonds in the first half of the year than in the second half for an “early launch” of infrastructure projects. “In addition to more aggressive fiscal spending, more funding will be used to fund infrastructure, including public-private partnerships.”
Goldman analysts also pointed out that the official statement on Tuesday’s economic and financial committee meeting did not mention measures to prevent a hidden increase in local government debt. That mainly refers to off-balance sheet bonds issued by local governments.
In the short term, plans to invest more in infrastructure could help improve sentiment. Mainland China stocks edged higher on Wednesday in an attempt to stabilize after a sharp drop earlier in the week
“The turning point for policy action may indeed have arrived, and stimulus measures are likely to emerge more clearly from the end of the quarter,” Citi analysts said in a note on Wednesday. 2″. “We tend to think that the current growth pessimism is probably overdone.”
