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Local investment plans need extra funds to survive
By Citi Research |
September 7, 2012, Friday
|
Print Edition
Print Edition
AFTER the local government reshuffle in China, new leaders have tried to restart the local investment engine to stabilize economic growth. Most of these projects are within the 12th Five Year Plan, and receive no extra funding.
They are not real stimulus programs by the standard of the one introduced in November 2008. This suggests that stimulating consumption or rebalancing is not yet the focus of local leaders.
Over the past month, nine provinces and cities, including Changsha, Chongqing, Guizhou, Tianjin and Zhejiang, have highlighted their investment projects to support growth.
Total investment amount reaches 10.9 trillion yuan (US$1.7 trillion), mainly focusing on infrastructure, industry upgrading, manufacturing, marine economy, and green energy. Many of these plans will cover the whole 12th Five Year Plan period which ends in 2015, and some are for the next decade.
Amid the global financial crisis in November 2008, the Chinese central government launched a 4 trillion yuan stimulus package over two years. The actual stimulus size was much bigger based on our estimate.
Assuming a normal credit expansion at the average annual rate of 2003-07, extra loans made in 2009-2010 under the stimulus package were 9.8 trillion yuan. Adding 1.18 trillion yuan extra fiscal spending by the central government, the total size of stimulus was around 11 trillion yuan, or equivalent to 17.6 percent of GDP per year.
The current local governments' investment plans are not only small in size, but more importantly, most of them are not an extra amount of investment.
Extra funding is needed before these local plans can be called a stimulus. Sources of funding include fiscal revenue, land sales revenue, bank loans, bond issuance, and investment from state-owned enterprises and the private sector.
No significant amount of new funding is specified by the local governments.
Limited room
The leverage ratios of many local governments are already much higher than those in late 2008, which leaves them limited room for further significant borrowing.
Therefore, in the absence of adequate financing, not all of those announced plans will be fulfilled.
Apart from what we view as these unrealistic local initiatives, we expect the central government to react soon through proactive fiscal policy (extra spending from the central government) and accommodative monetary policy (cuts in reserve requirement ratios most likely) if the August data is weaker-than-expected.
The National Development and Reform Commission will likely accelerate its project approval process to launch all projects in the Five Year Plan.
It's estimated by the NDRC that less than one fourth of the planned 20-25 trillion yuan has been invested, and the rest will be done as soon as needed assuming no significant inflation pressure in the near term.
The article was a summary of an August 31 research note written by Shen Minggao, Ding Shuang and Serena Wang with Citigroup. The opinions expressed are their own.
They are not real stimulus programs by the standard of the one introduced in November 2008. This suggests that stimulating consumption or rebalancing is not yet the focus of local leaders.
Over the past month, nine provinces and cities, including Changsha, Chongqing, Guizhou, Tianjin and Zhejiang, have highlighted their investment projects to support growth.
Total investment amount reaches 10.9 trillion yuan (US$1.7 trillion), mainly focusing on infrastructure, industry upgrading, manufacturing, marine economy, and green energy. Many of these plans will cover the whole 12th Five Year Plan period which ends in 2015, and some are for the next decade.
Amid the global financial crisis in November 2008, the Chinese central government launched a 4 trillion yuan stimulus package over two years. The actual stimulus size was much bigger based on our estimate.
Assuming a normal credit expansion at the average annual rate of 2003-07, extra loans made in 2009-2010 under the stimulus package were 9.8 trillion yuan. Adding 1.18 trillion yuan extra fiscal spending by the central government, the total size of stimulus was around 11 trillion yuan, or equivalent to 17.6 percent of GDP per year.
The current local governments' investment plans are not only small in size, but more importantly, most of them are not an extra amount of investment.
Extra funding is needed before these local plans can be called a stimulus. Sources of funding include fiscal revenue, land sales revenue, bank loans, bond issuance, and investment from state-owned enterprises and the private sector.
No significant amount of new funding is specified by the local governments.
Limited room
The leverage ratios of many local governments are already much higher than those in late 2008, which leaves them limited room for further significant borrowing.
Therefore, in the absence of adequate financing, not all of those announced plans will be fulfilled.
Apart from what we view as these unrealistic local initiatives, we expect the central government to react soon through proactive fiscal policy (extra spending from the central government) and accommodative monetary policy (cuts in reserve requirement ratios most likely) if the August data is weaker-than-expected.
The National Development and Reform Commission will likely accelerate its project approval process to launch all projects in the Five Year Plan.
It's estimated by the NDRC that less than one fourth of the planned 20-25 trillion yuan has been invested, and the rest will be done as soon as needed assuming no significant inflation pressure in the near term.
The article was a summary of an August 31 research note written by Shen Minggao, Ding Shuang and Serena Wang with Citigroup. The opinions expressed are their own.
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