The “Fast” versus the “Slow” in China’s Infrastructure Investment
The State Council of China has lately issued certain measures to stabilize the economy. To accelerate investment and economic growth, it emphasized the issuance of special bonds, including expanding their use, so as to enlarge the investment in infrastructure. Some localities intend to continue large-scale poverty alleviation infrastructure construction.
As it stands, infrastructure investment has been the main fiscal tool for economic growth. Since the economic downturn in the second half of last year, China’s central government has reiterated the importance of infrastructure development to stimulate investment and growth. Researchers at ANBOUND have pointed out in the past that infrastructure investment should be treated rationally for two reasons: the role of infrastructure investment in economic development has weakened, and such an investment itself is facing structural changes. Local governments, therefore, should give full play to the role of infrastructure investment in economic development. This is not only to adjust the structure but also to adopt new ways of thinking.
As China’s economy bolsters, changes in economic structure have led to a weakening of traditional infrastructure investment. This explains that the current infrastructure investment policy has begun to emphasize improving quality and efficiency. As recently pointed out by Liu Yuachun, head of Shanghai University of Finance and Economics (SUFE), infrastructure investment should fundamentally rely on traditional special bonds. One of the reasons is that such large-scale projects are difficult to meet the economic benefits; the other is that the financial resources in many places are exhausted, and the leverage effect is difficult to magnify. Liu further stated that under the current COVID-19 situation, coupled with the current overall weak investment, insufficient consumption, and supply shocks, the effectiveness of infrastructure construction may be limited.
Although the scale of new special bonds has not decreased this year, infrastructure investment is facing high costs under the current high PPI and rising labor costs. Despite its size, the actual effect may be somewhat bounded. As one of the tools to deal with the impact of the pandemic, it is also facing constraints that affect its progress. Its growth rate in recent months has not been satisfactory, indicating that local governments shall not put high expectations for infrastructure investment to drive economic growth.
In recent years, with the rise of new infrastructure concepts, the structure of infrastructure investment is also changing. Infrastructure in developing localities is increasingly becoming prominent for economic restructuring and high-quality development. As economic development enters a new stage, ANBOUND has noticed that the rise of new infrastructure heralds a shift in the focus of local infrastructure investment, shifting from meeting the needs of rapid urbanization to facilitating internal economic cycles. In the current post-land economy period, under the trend of urbanization driven by infrastructure and real estate, such an investment should be restructured to improve the regional market and industrial ecology. This means that infrastructure investments have become more complex and longer cycled, coinciding with slowing industrial and market cycles. In advancing it, local governments should adopt new thinking for land economic development. Local governments should reposition and cultivate endogenous economic factors and consumer markets to avoid the vicious circle of debt traps due to large-scale demolition and construction. Therefore, new infrastructure investment should be “refined” and “slow”, rather than still focusing on “big” and “fast” as in the past.
The issue is how local governments can regain access to infrastructure investment. For ANBOUND, infrastructure projects need a new layout in terms of industrial ecological construction and consumer market cultivation. At present, many localities have begun to make corresponding investments along with industrial development. Special debt funds mainly flow to municipal and industrial park infrastructure, transportation infrastructure, social undertakings, affordable housing projects, agriculture, forestry and water conservancy, and other fields. These infrastructure investments will gradually cultivate local characteristic industries and form regional competitive advantages. On the other hand, local governments can improve regional consumer markets and urban consumption through urban renewal and new infrastructure investment. The construction of e-commerce platforms, education, medical facilities, or public utilities may have an impact on the local consumer market, which in turn affects the development of physical and digital consumer markets and enriches local service formats.
These new infrastructure investments have injected endogenous momentum into local economic development. Although the manifestation is long-term and indirect, the spillover effect is endogenous and powerful, not only improving the efficiency of such an investment but also creating new space for the local economic pattern.
Apart from relying solely on fiscal funds and special bonds, local governments can also count on diversified financing to cope with the fiscal challenges faced by local governments in funding infrastructure investment. Local governments can also consider policy orientation with financial institutions, open cooperation models, and social capital cooperation models including PPPs. More importantly, local governments may need to rethink the construction of investment capacity and investment platforms. This will not only drive industrial investment and industrial ecological construction but also reduce investment risks with investment efficiency.
Final analysis conclusion:
In response to the downward pressure on the economy brought about by measures to contain the spread of COVID-19, infrastructure investment in China is shifting from the traditional “big” and “fast” to the new “refined” and “slow”. To avoid falling into the debt trap, local governments should develop new thinking for seizing economic opportunities.
Writer by Wei Hongxu
A researcher at ANBOUND, graduated from the School of Mathematics at Peking University and has a PhD in economics from the University of Birmingham, UK
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