Beijing is once again turning to public policy banks to help rescue a strained economy, ordering them to provide 800 billion yuan ($120 billion) in funding for infrastructure projects.
The stimulus, announced at a State Council meeting chaired by Premier Li Keqiang, could help fund a significant chunk of infrastructure costs this year and relieve local governments struggling with plummeting revenues. President Xi Jinping has called for an all-out effort to boost infrastructure this year, turning to an old playbook of boosting growth through public investment. Funding the extra spending has proved tricky, however, after a slump in land sales and widespread Covid outbreaks hurt government revenue.
“We believe the three key ingredients for investing – projects, financing and incentive – are all falling into place this year,” said Ding Shuang, chief economist for Greater China and North Asia at Standard Chartered Plc. . “Additional 800 billion yuan loans from political banks will help fill the financing gap.”
Standard Chartered expects infrastructure investment to rise 10-15% this year, although that may not be enough to offset headwinds to economic growth. Bloomberg Economics estimated China’s infrastructure spending at 23 trillion yuan in 2021.
Beijing’s calls for faster implementation of growth policies have intensified since official data showed economic activity contracted in April and unemployment rose sharply. High-frequency indicators suggest the decline continued into May, leading Li to warn last week of the risks of a possible year-on-year contraction in the second quarter.
Nomura Holdings Ltd. estimates the government has a funding gap of 6 trillion yuan this year, created in part by a sharp contraction in revenue from land sales, a key source of funding for infrastructure investment by local governments. The 800 billion yuan funding announced by the State Council accounts for nearly half of the 1.65 trillion yuan in new political bank loans in 2021, economists led by Lu Ting wrote in a note.
China’s political lenders include the China Development Bank, the Agricultural Development Bank of China and the Export-Import Bank of China. They are considered key stabilizers of the economy and are often called upon to provide financial support for major projects, including infrastructure.
The Council of State did not specify in its last announcement how the political banks would finance the loan. The main source of financing for development banks comes from the issuance of bonds or loans from the Chinese central bank. Banks may be able to raise cash by selling bonds — likely long-term bonds with five, 10 or 20-year tenors — to fund a credit expansion, according to economists at Nomura, NatWest Group Plc. and Australia & New Zealand Banking Group Ltd.