Chinese policymakers need to find new financing methods to lift infrastructure investment to an “ideal” growth rate of higher than 6 percent this year, but without a surge in local government debt, according to economists.
A possible option is that the central bank could continually inject liquidity to policy and commercial banks, through targeted monetary easing, and encourage their purchase of treasury bonds issued by the central government, said some policy advisors.
The central government could establish some new national equity funds to inject capital into infrastructure projects. As State-owned institutions would become shareholders, instead of creditors, the local governments’ debt level could be controlled, said Ming Ming, chief fixed-income analyst at CITIC Securities.
It is also possible that the central bank could directly purchase treasury bonds, as an efficient way to ensure an adequate base money and liquidity, said an expert close to the central bank, who declined to be named. But the monetary authority should evaluate cautiously “when will be the best time”, she added.
Infrastructure investment, which usually accounts for about 20 percent of the nation’s total fixed-asset investment (including manufacturing and property investment), is seen as an instant and direct driving force to prevent sharp economic cooling. The investment is usually led by local governments, through expanding debt.
But this time, “a credit-fuelled infrastructure-driven stimulus is unlikely as the authorities are still committed to containing financial risks,” said Becky Han, associate director of the corporates department at Fitch Ratings.
“This should avoid further significant increases in leverage and pressure on credit profiles at local government financing vehicles and State-owned enterprises”, said Han.
Ming from CITIC Securities said increasing the central government’s treasury bonds issuance or expanding the central bank’s assets was the most likely way to ease debt risks.
The country’s infrastructure investment growth dropped to 5.7 percent year-on-year in the first seven months of this year, the slowest rate since 2012. It was 20.9 percent during the same period last year.
To stabilize the overall economy, the rate is expected to bounce back close to the annual GDP rate at around 6.8 percent or achieve total investment of nearly 15 trillion yuan ($2.2 trillion) this year, said Zhang Bin, a researcher with the Chinese Academy of Social Sciences.
It means more than 7.4 trillion yuan needs to be invested from August to December, compared with 7.6 trillion yuan in the first seven months.
A meeting of the State Council Financial Stability and Development Commission, chaired by Vice-Premier Liu He on Aug 3, mentioned the better use of treasury bonds as a policy tool to achieve proactive fiscal policy.
The People’s Bank of China, the central bank, wrote in a column in its second quarter monetary policy report that its balance sheet had actually expanded, and liquidity is at a reasonable and adequate level. Some monetary policy operations have been taken, including cutting the reserve requirement ratio, the Medium-term Lending Facility, and open market operations.
The Ministry of Finance, with 20 financial institutions, jointly established the 66.1 billion yuan National Financing Guarantee Fund in July, to conduct the financing guarantee business in the form of equity investment and re-guarantee to mainly support micro and small-sized enterprises.