Infrastructure spending down in China


According to Yao, the government’s crackdown on infrastructure investment — which has been growing by 5.3% so far this year, down from 18.5% in 2017 — is the main factor in China’s economic slowdown, just as it was a huge factor in its upswing.

“Infrastructure funding has suffered severely due to two lines of laudable deleveraging efforts — a clean-up of shadow government borrowing and a deleveraging campaign targeted at shadow banking activities. We estimate that the combined impact is responsible for half of the year-to-date slowdown, and the rest could be explained by slower issuance of special local government bonds (LGBs), which also had a lot to do with tightening liquidity conditions in the bond market caused by financial deleveraging measures.”

Until around May, this wasn’t a problem. China’s economy was looking stable in 2018. For the first time since 2014, it rolled into the new year without incident. There was no stock-market crash, no currency issue — nothing. The world thought that the bubble was being deflated and that, as China’s leaders have always said, things were under control.

But as the year wore on, that stability wore out. Now the Chinese yuan is falling, and China’s stock markets are convulsing. Company earnings are hurting thanks in part to a lack of easy credit. The entire world expected any tightening of credit to bring some instability.

But the other edge of that sword is that China’s “national team” of economists, officials, and technocrats are also expected to step up when things get too weird. And so they have. That is why the Ministry of Finance is advocating another go at infrastructure spending, this time with private funds involved.

Yao has noted a “dramatic” speed-up in the issuance of local government bonds that fund infrastructure projects in recent weeks — one that could push infrastructure investment growth up to 10% in the second half of the year. However, this won’t be enough to stabilize the economy if the housing market slows, as she expects it will, in 2019.

That’s when the government may be tempted to bring back the shadow financing of infrastructure investment to keep growth near its 6.5% target.

“All in all, we think that the Chinese government will have to make a most difficult decision in 2019: to deleverage or not?” she wrote. “If it makes what we think is the right decision for the long term — to deleverage — then a sharper slowdown is almost certain next year. Based on the signs so far, this scenario looks increasingly likely.”

Stay tuned. Bonus unfun: could Einstein teach at UCLA?

One Response to “Infrastructure spending down in China”

  1. feeblemind Says:

    China Is Getting Less Bang for Its R&D Buck Than Peers

Leave a Reply