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China’s Xi calls for another infrastructure push as Covid drags on

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China had 37,900 kilometers (23,550 miles) of operational high-speed railways at the end of 2020, which the country says is more than two-thirds of the global total.

Zhang Bin | China Information Service | Getty Images

BEIJING — As Covid controls slow growth, China plans to boost its economy with more infrastructure investment.

It’s the same approach the government has used in the past, and which analysts say adds to the problems of long-term sustainable growth.

Chinese President Xi Jinping on Tuesday called for an “all-out” effort to build infrastructure. Proposed projects range from waterways and railways to cloud computing facilities.

Xi was speaking at a meeting of the Central Committee for Financial and Economic Affairs, a group he leads.

“The meeting suggests to us that Chinese policymakers are increasingly aware of the strong headwinds to growth from Covid restrictions and the continued slowdown in real estate, and are therefore becoming more determined to step up policy easing measures.” , Lisheng Wang and a team at Goldman Sachs said in a note Wednesday.

“We believe infrastructure investment should be a key policy lever to stabilize growth,” Goldman analysts said, noting expectations of slowing export growth, weak private investment and political zero-Covid remaining in place for a large part of the year and affecting consumption and services.

The problem is that the more the country’s growth relies on government-led infrastructure spending, the more vulnerable it is to a downturn.

Michael Pettis

Peking University, professor of finance

Since March, mainland China has been dealing with its worst Covid-19 outbreak since the initial shock of the pandemic in early 2020.

Although first-quarter GDP beat expectations with 4.8% year-on-year growth, several investment banks lowered their full-year growth forecasts as travel restrictions and stay-at-home orders are disrupting supply chains, especially in and around metropolitan Shanghai. at the busiest port in the world.

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Economists have pointed out how zero-Covid affects consumer spending far more than factories, which can sometimes keep production limited as part of the policy.

Retail sales fell 3.5% from a year ago in March, more than the 1.6% drop predicted by a Reuters poll.

Capital investment for the first quarter rose more than expected, with infrastructure investment up 8.5% from a year ago.

Can China reach its 5.5% GDP target?

“An even stronger infrastructure push would help ease some of the downward pressures on growth that are severely testing China’s ability to meet its 5.5% growth target,” said Louis Kuijs. , chief economist for APAC at S&P Global Ratings, in an email.

However, “currently China’s Covid policy is the major growth bottleneck.” he said. “It will be really difficult to approach 5.5% growth this year without some easing of the Covid stance.”

Xi’s call for more infrastructure investment comes as local stocks plunged on concerns about the growth of the world’s second-largest economy. Among nine financial companies tracked by CNBC, the median GDP forecast is 4.5%, a full percentage point below China’s official GDP target of around 5.5% announced in early March.

“The depth of the lockdown and the continued weakness in the real estate sector are making it increasingly difficult for China to meet the GDP growth target this year, but I expect it to make a major push to second and third quarters,” Michael Pettis, a finance professor at Peking University in Beijing, said in an email.

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Prior to the release of the official target, Pettis accurately predicted that the Chinese authorities would set a GDP target between 5% and 5.5%.

“The problem is that the more the country’s growth depends on government-led infrastructure spending, the more vulnerable it is to a downturn,” he said, noting how infrastructure investment fuels a downturn cycle. higher growth expectations, which in turn requires more investment.

Pettis said in a report in March that there are limits to the extent to which infrastructure investment can boost growth in developing countries. He said he believed China had passed that point more than a decade ago and now needed much more difficult institutional change.

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Real estate, manufacturing and infrastructure construction have contributed significantly to China’s economic growth over the past decades. The country has built an extensive network of high-speed trains and airports.

In recent years, the central government has tried to stimulate consumption as the main driver of growth.

But China still has a long way to go before consumers can drive its economy. The country’s official per capita disposable income of 35,128 yuan ($5,488) in 2021 remained a fraction of that of the United States, which stood at around $46,000 at the end of last year.

Xi and other Chinese leaders also called on Tuesday to upgrade infrastructure in rural areas and in agriculture, according to an official report of the meeting. They also stressed the need “to support national security infrastructure and improve the country’s ability to deal with extreme situations”.

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More debt for growth

Analysts expect more debt to be used to fund new infrastructure projects, reversing the government’s attempts in recent years to rein in its heavy reliance on debt for growth.

Net issuance of local government special bonds since the beginning of the year exceeded 35% of the target for the full year, much higher than the rate of 10% to 30% in the past three years, Monica Li , chief equity officer at Fidelity International, said in an email.

She said her team expects more bond issuance in the first half of the year compared to the second half in order to “get an early start” on infrastructure projects. “In addition to more active fiscal spending, multiple sources of finance will be tapped to finance infrastructure, including public-private partnerships.”

Goldman analysts also pointed out that the official statement on Tuesday’s economic and financial committee meeting did not mention measures to prevent an increase in hidden local government debt. These are mainly off-balance sheet bonds issued by local authorities.

In the short term, additional infrastructure investment projects could help boost morale. Mainland Chinese stocks rose on Wednesday in an attempt to stabilize after steep losses earlier in the week

“The turning point for real political stocks may have arrived, and the stimulus will likely be more evident from the end of the second quarter,” Citi analysts said in a report Wednesday. “We tend to think that the current overwhelming pessimism about growth may be overdone.”

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