Chinese President Xi calls for another boost to infrastructure as COVID continues

China had 37,900 kilometers (23,550 mi) of high-speed rail in operation as of the end of 2020, which the country claims accounts for more than two-thirds of the global total.

Chang Bin | China News Service | Getty Images

BEIJING – As Covid controls dampen growth, China plans to boost its economy with more infrastructure investment.

This is the same approach the government has used in the past, and one that analysts say adds to the problems of long-term sustainable growth.

Chinese President Xi Jinping On Tuesday, he called for “all-out” efforts to build infrastructure. The proposed projects range from waterways and railways to cloud computing facilities.

Xi was speaking at a meeting of the Central Committee on Financial and Economic Affairs, a group he chairs.

“The meeting indicates to us that Chinese policy makers have been increasingly aware of the strong growth headwinds from Covid restrictions and the ongoing decline in real estate, and are therefore more determined to step up easing policy measures,” said Lisheng Wang and a team at Goldman Sachs. Note wed.

“We believe infrastructure investment should be one of the key policy tools to stabilize growth,” Goldman analysts said, citing expectations of slower export growth, weak private investment and a zero-Covid policy that remains in place for most of the year and hurts consumption and services.

The problem is that the more a country’s growth depends on government-led spending on infrastructure, the more vulnerable it becomes to a slowdown.

Michael Pettis

Peking University, Professor of Finance

Since March, mainland China has faced the worst spread of Covid-19 since the initial shock of the epidemic in early 2020.

Although first-quarter GDP beat expectations by 4.8% year over year, Many investment banks have lowered their full-year growth forecasts As travel restrictions and stay-at-home orders disrupt supply chains, especially in and around Shanghai, home to the world’s busiest port.

Economists have pointed out how Zero-Covid affects consumer spending much more than factories, which can sometimes maintain limited production under policy.

Retail sales were down 3.5% from a year ago in March — more than the 1.6% decline predicted by a Reuters poll.

Investment in fixed assets for the first quarter grew more than expected, with infrastructure growth 8.5% from a year ago.

Can China achieve its 5.5% GDP target?

“Pushing in stronger infrastructure may help mitigate some of the downward pressures on growth that severely challenge China’s ability to meet its 5.5% growth target,” Louis Kuijs, chief Asia Pacific economist at S&P Global Ratings, said in an email.

However, “Currently, China’s Covid policy is the main bottleneck for growth.” He said. “It’s going to be really hard to get close to 5.5% growth this year without some softening of the Covid situation.”

Xi’s call for more infrastructure investment comes as domestic stocks plunged amid concerns about growth in the world’s second-largest economy. Of the nine financial firms tracked by CNBC, the average GDP forecast is 4.5%, a full percentage point below China’s official GDP target of about 5.5% announced in early March.

“The extent of the shutdown and continued weakness in the real estate sector is making it increasingly difficult for China to meet its GDP growth target this year, but I expect them to put in a significant effort in the second and third quarters,” Michael Pettis, a finance professor at Peking University in Beijing said in an email. mail.

Before the official target was released, Pettis accurately predicted that Chinese officials would set the GDP target between 5% and 5.5%.

“The problem is that the more a country’s growth depends on government-led spending on infrastructure, the more likely it is to slow,” he said, noting that infrastructure investment is fueled in a cycle of higher growth expectations, which in turn requires more investment.

In a report in March, Pettis said there are limits to how much infrastructure investment can boost growth in developing countries. He said he believed China crossed that point more than a decade ago and what we need now is a much more difficult institutional change.

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More debt for growth

Analysts expect more debt to be used to fund new infrastructure projects, reflecting the government’s attempts in recent years to curb heavy reliance on debt for growth.

The year-to-date net issuance of private local government bonds has exceeded 35% of the full-year target, well above the 10% to 30% average for the past three years, Monica Lee, equities director at Fidelity International, said in an email.

She said her team expects to increase bond issuance in the first half of the year compared to the second half for “early initiation” of infrastructure projects. “Apart from more active fiscal spending, multiple sources of financing will be tapped to finance infrastructure, including public-private partnerships.”

Goldman analysts also noted that the official statement on Tuesday’s Economic and Financial Committee meeting did not mention measures to prevent an increase in hidden local government debt. This primarily refers to off-balance sheet bonds issued by local governments.

In the near term, plans to increase investment in infrastructure may help lift sentiment. Stocks on the Chinese mainland turned higher on Wednesday in a bid to stabilize after sharp losses at the start of the week

“The tipping point in real policy actions may have arrived, and stimulus is likely to come more pronounced from late in the second quarter,” Citi analysts said in a report on Wednesday. “We tend to think that the current pessimism about explosive growth may be exaggerated.”