Various local governments in China have announced some RMB20 trillion of investment plans over the past few months. Some see them as a stimulus programme, while we have been, on the whole, less than impressed.
The main reason, as many others have also pointed out already, is that it is very unclear how all these projects can get funding. Most local governments probably do not have enough tax revenue for the projects, and most local governments are already highly indebted after years of credit expansion. However, we think that it is not so much because these local governments are “bust”. Rather it is the unwillingness on the part of the central government to repeat the massive stimulus in 2008/09, such that Chinese banks have not been asked to open the “floodgates” of credit.
Changsha announced a bunch of projects two months ago which totaled RMB829.2 billion, or 147% of the city’s 2011 GDP. The mayor of the city, Zhang Jianfei, makes the point that we have been making very clear in an interview with Southern Weekly:
This is a vision, not a investment plan… most of these projects… will be funded by corporate investments. Whether these companies will or will not invest in these projects is determined by market. Only a small numbers of projects will be funded by government’s investment…
… We are only making a list of things we wish to achieve, so that companies and bankers can choose some of the projects from the list which they see opportunities. If we do not make such list public, companies will have no idea what the government wish to achieve, and people with money to invest will have no idea what to invest.
Is every investment “plan” being announced simply a “wish list”? Surely this fits with our conception that most of the investments being “planned” will not actually be executed. His emphasis that most will be funded by private investments (determined by the market) also fits with some of the comments we have heard previously about the government’s intention to encourage private investment, particularly into sectors which were previously monopolised by state-owned companies. However, we have already pointed out that private sectors are facing problems of overcapacity and high leverage, so its ability to fund these investment wish lists is low.
The bottom line is that while a lot of local governments are announcing a lot of plans for future investments, which sound like RMB4 trillion version 2.0, and we have already seen some pick up in infrastructure investment growth, only a very small number of items in the wish list will come true.