context: Beijing has signalled growing concern over the economy. So far in 2022, monetary easing has been minor with more expectations placed on fiscal spending to boost the economy. With the COVID resurgence, weaker than hoped for Q1 growth will put added pressure for the rest of the year on meeting the aggressive growth target of ‘around 5.5 percent’.

With greater downward pressure on the economy in Q1 2022, calls for increased stimulus are growing. However, Zhang Yangai 章言该 macroeconomic researcher argued in Jiemian that the space for infrastructure spending is limited. He noted

  • from 2013 to 2017, the growth rate of infrastructure investment, including power investment, fell from 21.2 percent to 14.9 percent, but from 2018 to 2021, the growth rate was only 1.8, 3.3, 3.4 and 0.2 percent respectively
  • the main reason for the continued downturn in infrastructure investment after 2018 was the increase in local debt supervision
    • 80 percent of real estate financing comes from LGFVs (local government financing vehicles) or other types of urban project companies
    • in 2017 local debt regulations began to tighten which suppressed infrastructure investment
  • in 2022 local debt supervision has not been relaxed and worthwhile projects are scarce
    • Central Economic Work Conference held in December 2021 called for ‘resolutely curbing new hidden debts of localities’ and the Ministry of Finance has repeatedly emphasised the need to strengthen local debt supervision
    • in Q1 2022 net financing of LGFV investment bonds decreased 15.8 percent y-o-y
    • as the two major growth drivers of real estate and exports are slowing, the pressure on stabilising employment will increase, as will the need for related expenditure, which will inevitably crowd out general public finance for infrastructure investment spending