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Local government stimulus to boost investment growth with more control
By Banny Lam and Rocky Zhang |
August 29, 2012, Wednesday
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Print Edition
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In a July report, we noticed the city of Changsha has started kicking off its stimulus measures and we looked for local governments to lead the charge implementing new rounds of stimulus, mainly toward local infrastructure and manufacturing projects.
This seems to be exactly what is happening now, to the tune of 7 trillion yuan (US$1.1 trillion) since last July, enough to support fix-asset investment and, possibly, generate stable economic growth in the second half of 2012.
After several inland provinces disclosed their investment plans, two municipalities, namely Chongqing and Tianjin, unveiled their own stimulus packages last week. Chongqing proposed 1.5 trillion yuan over three years toward the "seven strategic industries," among them electronics and information technology, automobiles, energy and advanced equipment.
A day later, Tianjin stepped up with a four-year 1.5 trillion yuan investment plan for ten industries with an emphasis on petrochemicals, port equipment and new materials.
Spending binge
Policymakers still remember the hangover from the last spending binge in 2008, a stimulus package amounting to 4 trillion yuan which resulted in rising inflation and severe overcapacity in several industries including steel and cement.
We think things will be different this time around because local governments have more control over how the money is spent.
From what we have seen so far, the investment plans in place are very specific with a focus on high tech, environment protection and services.
Monetary and fiscal stimulus measures seem to be kickstarting the investment cycle (if the acceleration in project approvals from the National Development and Reform Commission is anything to go by).
With each additional local stimulus package announced in the coming months, more fixed-asset investment will pour in. As a result, gross domestic product in the third quarter is likely to exhibit a slight 7.7 percent year-on-year recovery, in our view.
Massive public spending will boost growth in the short term. The question is whether local governments have deep enough pockets to fully fund their ambitious plans, keeping in mind the 10.7 trillion yuan of debt these same governments were saddled with after the last spending spree in 2009.
This year will be different insofar as local governments will not have to finance all the projects on their own. Bank loans and bonds are expected to help close the financing gap. Private capital will also play a bigger role this year than it did in 2009.
Banny Lam and Rocky Zhang are analysts with CCB International Securities Ltd. The article was based on a research note issued on August 23. The opinions are their own.
This seems to be exactly what is happening now, to the tune of 7 trillion yuan (US$1.1 trillion) since last July, enough to support fix-asset investment and, possibly, generate stable economic growth in the second half of 2012.
After several inland provinces disclosed their investment plans, two municipalities, namely Chongqing and Tianjin, unveiled their own stimulus packages last week. Chongqing proposed 1.5 trillion yuan over three years toward the "seven strategic industries," among them electronics and information technology, automobiles, energy and advanced equipment.
A day later, Tianjin stepped up with a four-year 1.5 trillion yuan investment plan for ten industries with an emphasis on petrochemicals, port equipment and new materials.
Spending binge
Policymakers still remember the hangover from the last spending binge in 2008, a stimulus package amounting to 4 trillion yuan which resulted in rising inflation and severe overcapacity in several industries including steel and cement.
We think things will be different this time around because local governments have more control over how the money is spent.
From what we have seen so far, the investment plans in place are very specific with a focus on high tech, environment protection and services.
Monetary and fiscal stimulus measures seem to be kickstarting the investment cycle (if the acceleration in project approvals from the National Development and Reform Commission is anything to go by).
With each additional local stimulus package announced in the coming months, more fixed-asset investment will pour in. As a result, gross domestic product in the third quarter is likely to exhibit a slight 7.7 percent year-on-year recovery, in our view.
Massive public spending will boost growth in the short term. The question is whether local governments have deep enough pockets to fully fund their ambitious plans, keeping in mind the 10.7 trillion yuan of debt these same governments were saddled with after the last spending spree in 2009.
This year will be different insofar as local governments will not have to finance all the projects on their own. Bank loans and bonds are expected to help close the financing gap. Private capital will also play a bigger role this year than it did in 2009.
Banny Lam and Rocky Zhang are analysts with CCB International Securities Ltd. The article was based on a research note issued on August 23. The opinions are their own.
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