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The NDRC approves infrastructure wish list to stimulate growth
This week, Bloomberg reported that Xu Lin, head of the planning department at the National Development and Reform Commission (NDRC) said:
China needs more subways, highways and sewage plants, and construction of that infrastructure will help the economy
At a time when China is facing an export slump, ailing foreign investment, and a sluggish real estate sector, infrastructure projects appear once again to be the crutch for policy makers to stabilize growth. A flurry of new project approvals by the NDRC aim to breathe some life back into China’s manufacturing sector.
This month, the NDRC has green lit 20 new airports, 2,018 Km of roads and subways, sewage plants, port projects, steel plants, clean energy projects, and high-speed railway extensions. Nomura has estimated the total value of such projects to be around 1 trillion RMB, or roughly one-fourth of the 2009 infrastructure bonanza.
The Great Infrastructure rebound
August 2005 to August 2012 year on year growth in accumulated fixed asset investment in infrastructure* (excluding real estate) vs accumulated fixed asset investment in real estate 
Source: National Bureau of Statistics
*Fixed asset investment in infrastructure (excluding real estate) is the aggregate fixed investment in Transport, Storage & Postal Services, Information Transmission, Computer Services & Software, Water Conservation, Environment & Public Facility Management, Construction, and Electricity, Fuel Gas & Water Production & Supply
The new approvals already appear to be impacting fixed asset investment growth. At a time when fixed asset investment in real estate continues to struggle, falling to 20.9 percent year over year growth down in August 2012. This is quite a large drop considering real estate saw year on year growth rates of 35.3 percent and 34.8 percent during August of 2011 and 2010 respectively. In contrast, infrastructure investment excluding real estate has begun to pick up. As of August 2012, infrastructure investment growth rose to 12 percent up from a low of 3.6 percent in December 2011.
Avoiding the hype
However, there is room for skepticism. China analysts have been in debate as to whether the recent flurries of NDRC project approvals represent a 2009-style stimulus or simply measures timed to bring a positive spin to skeptical investors. Some have pointed out that many of these projects were already outlined in the 12th five year plan – such as expansion in urban transit – but approvals have simply been pushed together and better publicized to appear as stimulus.
The NDRC has been quick to point out that these projects were always part of the plan. According to Bloomberg, Xu Lin stated that “these projects are already in our plan; infrastructure is the backbone system for the national economy and society.” Indeed, many of the recent stimulus plans announced by local governments (such as Changsha or Sichuan) may be extensions of existing projects (i.e. more subway lines), or new projects to begin in the next 3-5 years (i.e. new airports); leaving some uncertainty as to the timing and multiplier effect they will have on the economy today.
Show me the money
Yet more important than the issue of timing, underlying the skeptics over this round of NDRC projects is the question as to how these projects will be financed. This week Xu Lin was also quick to warn that long term financing tools were needed to support infrastructure construction projects; otherwise a debt crisis could emerge. According to Caixin, Xu Lin said “it is a liquidity crisis because the debt term does not match the return period of the projects.”
In spite of moves to increase liquidity from the banking sector, including a reduction in reserve requirements and interest rates, bank loan growth – a major source of funding for the 2009 stimulus - remains well below the 10 year average.
Part of the problem is clean-up of the non-performing loans from the last round of stimulus. In June 2011, China’s National Audit Office showed that in the wake of the 2009 stimulus local government debt had reached Rmb 10.7 trillion in 2010, and Chinese banks could face at least 2-3 trillion yuan in bad loans as result of loans to local government financing vehicles in 2009. With much of this short-term loans set to mature this year and next, banks are still struggling to roll over pre-existing short-term loans to long term loans. At the same time, banks are facing a long-term issue of weakening deposit growth due to financial repression and eventually rising costs if financial repression is relaxed and the lending-deposit rate continue margin decreases. Such concern makes reliance on banks for long-term financing increasingly difficult.
Too much of a good thing
Even if local governments find a way to fund these infrastructure projects, a more important question is whether China in fact needs these projects. Skeptics argue that much of this infrastructure investment is the wrong sort of investment. Where in theory local governments should be pursuing more projects that benefit social welfare to support the rebalancing agenda, such as water treatment, hospitals, migrant schools, etc, they are instead turning to the typical “low-hanging fruit” for economic development, transportation and energy production.
In particular, many subway plans – perhaps restarted after the recent round of NDRC approvals – were in fact put on hold in 2010 due to feasibility issues. In the beginning of this year Caixin reported that between 2008 and 2009, the NDRC green lit subway projects in 28 cities worth Rmb 1 trillion, including 96 new rail lines to be completed by 2015. However, the economics of many of these new subway lines were questionable because they were in smaller cities, such as the provincial capitals of Shenyang and Taiyuan. In an interview with Caixin in January, Zhang Jiangyu, Vice Director for NDRC's Transit Technology Planning Office, said that final costs for many projects were often much higher than a local government's estimate. While “an original plan might be to build elevated lines to bring down costs and get NDRC's approval, but later, the plan could be changed to require digging tunnels."
Private investors are often skittish of such plans, subway lines usually do not make a profit without some degree of government subsidy– with Hong Kong as a notable exception – but more important for local governments is the economic benefit brought financing such projects. Although the productivity gains of extending subway lines in major cities like Shanghai and Beijing may be clear, less so for smaller provincial capitals where they may struggle to afford the extensive subsidies necessary to support their urban rail networks. For instance, according the China Daily the western city of Xi’An – capital of Shaanxi province - has plans to build a 201.4 km subway network with six lines at a cost of Rmb 800 million per km, something that will cost the equivalent of 52.1 percent of the cities’ 2011 GDP today. Such costs raise questions as to whether extensions of urban rail will improve productivity for smaller localities as much as local investments in other areas such as clean running water or sewage treatment.
These concerns may part of the reason we are not seeing the same kind of enthusiasm from the central government to push infrastructure growth as 2009, with a debate over the role of the state in managing the economy raging on as the new leadership begins to outline their own reform plans. The opinions of those questioning such state-led investment were outlined quite clearly in the “China 2020” report conducted jointly by the Development Research Center of the State Council and the World Bank, suggesting the state instead focus on “developing a market-based system with sound foundations in which the state focuses on providing key public goods and services,” meaning focus more on projects which improve general social welfare rather than a directly impacting production growth.
That being said, those on the other side of things suggest there may still be some room for infrastructure in certain areas, and it is often difficult to foresee the long-term returns on such infrastructure investment. As Arthur Kroeber of Dragonomics told NPR in an interview regarding China’s infrastructure investment, “At any point in the last 25 years you could walk around and say, 'they’re building all this stuff, and who will ever possible use it?' You come back five years later and it’s not nearly enough.”
It remains to be seen whether the current round of infrastructure approvals have solved some of the problems plaguing the 2009 plans, or whether the NDRC has simply temporarily turned a blind eye to these issues in favor of propping up growth for private investors but nonetheless China is unlikely to shift away from reliance on infrastructure investment to support growth in the near term.