infrastructure investment is securing the economy, but reliance on it will require new thinking

Infrastructure yielded an official turnaround in growth in Q2, up to 3 percent from nearly -7 in Q1. Unveiled at this year’s Two Sessions, the framework guiding investment bears the jargon label ‘two new, one critical’. This denotes investment in

  • new infrastructure
  • new urbanisation
  • critical traditional infrastructure

At stake is angst over the error made in the 2008 GFC: explosive stimulus leaving localities heavily indebted. This time, infrastructure goes for quality, cherry-picking projects and their funding models with an eye to balancing stimulus and sustainability. Gaps are, however, appearing.

‘two new, one critical’

‘New infrastructure’ dominates debate and headlines. Creating short-term demand, it immediately props up the economy. Proposed when the economy slowed end 2018, it referred to investment in 5G, UHV grids, intercity rail, NEV charging stations, big data centres, AI and industrial internet of things. It then expanded to R&D facilities and upgrading conventional infrastructure. City clusters will benefit most: linkages and intercity trains will yield efficiency. Local governments, led by Beijing, have floated plans and project databases of this order, as well as measures to cut red tape, and in some cases offer special credit lines through policy banks.

The permanent urban population went over 60 percent in 2019. Funding new urbanisation addresses issues with large-scale population shifts by expanding public utilities in small cities and renovating. ‘Old community renovation’ is a core: a novel stimulus first aired June 2019 and expanded in the 2020 government work report, it pledges to upgrade 39,000 communities. What qualifies for it varies: Beijing deems ‘old’ those communities built before 2000; Fujian includes housing built up to 2010. Renovation can range from basic utility upgrades to new amenities like elevators or services like daycare. Demand is created for construction materials (without overheating the real estate market, still on Beijing’s black list), while incentivising residents to buy more appliances, furnishings and support; it also creates positive press for Beijing. Work plans and documents detailing projects have been issued by provinces and State Council.

Despite fanfare about these novelties, traditional variants (transport and water conservancy, etc.) remain dominant. According to GF Securities ‘conventional’ projects absorbed over 60 percent of special bond investments January–April.


SPBs (special-purpose bonds), which must finance projects with stable cash flow, are preferred funding instruments. Local government SPBs were bumped up to 3.75 tn in 2020, up by 1.6 tn from 2019. Most were front-loaded; localities will issue the remaining 1.26 tn August–September. Dealing with 2019’s issues by channelling SPBs into investment principal is a favoured option, reports GF Securities. MoF (Ministry of Finance) began issuing 1 tn in special sovereign bonds in June, 70 percent of which will go towards infrastructure. Funding more conventional infrastructure, the national railway construction fund was increased by 100 bn.

To avoid crowding-out and to alleviate local government debt, coaxing private investment into infrastructure is a major theme in 2020. Private sector incentives vary with each of the ‘two new, one critical’. New infrastructure is more market-dependent, says Premier Li, and led by private funding. The knowhow needed and the increased risk of redundancy make private sector expertise crucial.

Private involvement can be boosted in several ways, including

The latter, explains Wang Zecai 王泽彩 Academy of Financial Sciences, allows private actors to hedge against public-side risks.

Funding projects via infrastructure REITs (real estate investment trusts) is being piloted. Critical projects, e.g. new warehouses, toll roads and waste treatment plants, will be eligible to draw on REIT funding, as will any new infrastructure. PPPs are also eligible. Private and foreign firms get the same red carpet, assures Wang Bufang 王步芳 NDRC (National Development and Reform Commission) Infrastructure REITs Research Group, provided ownership status is clear and project income unquestioned. Much hope is placed in infrastructure REITs not only solving short-term financing, but directing investment away from real estate.

Hoping to break bottlenecks in rapid expansion of transport facilities, NDRC calls for fair treatment for private firms in the industry. Private investment is also invited in old community renovation through a graded payment system: the state handles basic necessities and splits amenity costs with residents; the private sector invests in improved services.

devil in the detail

Sustainability is the theme of this round of expansion, but not everyone is sold. New infrastructure is deemed by its proponents to lay foundations for growth, others warn institutional reform rather than new tech alone is needed. Still others note that infrastructure fails to address the main problem of the economy—jobs: funding may be better used for other public goods, not least supporting migrant workers.

Overinvesting in new infrastructure is another risk, above all for less developed provinces. Localities must ensure their conventional infrastructure needs, insists Liu Xuezhi 刘学智 Bank of Communications Financial Research Centre. Inflating the meaning of ‘two new, one critical’, especially in relation to new urbanisation, is another trap. While allowing localities this flexibility, it may negate the original aim.

After years of massive outlays, localities struggle to find viable projects to support SPBs. Hence a switch of fund allocation from provinces and cities with low debt risk, to places with projects ready. Officials’ concerns over debt, reports Xinhua, inhibit spending in some areas. Increased fiscal deficit and extolling private actors signal awareness of the issues, but dissolving barriers to level the public/private playing field is the task ahead.


Zhao Jian 赵建 | Atlantis Research Institute dean

Economic development is no simple matter of ‘new infrastructure’ investment, argues Zhao. Reforming ‘soft’ infrastructure (institutions like ‘rule of law’) that promote long-term economic growth is also required. ‘New infrastructure’, he insists, differs from old, both technically and in scalability: it makes little sense to build data centres in every city. Localities should, via tax cuts or subsidies, allow private firms to take the lead.

Ren Zeping 任泽平 | Evergrande Research Institute chief economist

Champion of ‘new infrastructure’ Ren hails it for linking short-term demand stimulus with long-term effective supply, key to ‘high-quality’ development. Deeming it a continuation of previous policies, he reminds that moderately forward-looking infrastructure planning has been key to successful economic policy over the past four decades. Absent advanced logistics networks and sound internet, the internet economy would not exist. He dismisses fears over fiscal stability; imposing fiscal balance on an economy under pressure makes it worse. State-led investment is obsolete; ‘new infrastructure’ projects will be up to the market and private capital.

Liu Xiangdong 刘向东 | China Centre for International Economic Exchanges research deputy director general

Beyond municipal infrastructure and public service amenities, contends Liu, new urbanisation entails building smart and green cities. This makes them more livable and suitable for businesses via upgrading urban transport, housing and medical services. Cities must address their unique needs: renovating old communities, embracing smart technology and upgrading sewage, etc. Cities in the eastern littoral and centre have most to gain; county-level cities should not be overlooked.


22 Jul 2020: details on old community renovation implementation released by State Council

17 Jul 2020: NDRC asks localities to submit information on infrastructure REITs projects

9 Jul 2020: MoF distributes last batch of SPBs to localities

9 Jul 2020: private participation in transport infrastructure stressed by NDRC

17 Jun 2020: MoF begins offering special sovereign bonds

2 Jun 2020: record number of local government bonds offered in May

23 May 2020: stimulus and ‘two new, one critical’ outlined at Two Sessions

13 May 2020: local governments release ‘new infrastructure’ plans

7 May 2020: NDRC announces infrastructure REITs will be piloted

29 Apr 2020: State Council executive meeting highlights ‘new infrastructure’

21 Apr 2020: NDRC clarifies ‘new infrastructure’ scope

31 Mar 2020: SPB capital ratio increased

31 Mar 2020: public–private partnership pay-as-you-go system clarified

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