Sat, July 13

China Infrastructure: Trends and Implications in 2024

China Infrastructure Resumption Post-Festival

As of March 1st, which is the second week after the Spring Festival, the resumption rate of construction sites in China infrastructure sector was only 39%, and the labour resumption rate was also only 38.1%. These are the lowest levels since 2021 and the first time they have fallen below 40%.

Economic Drivers Behind China Infrastructure Development

Why is the resumption rate of China infrastructure construction low after the Spring Festival? Firstly, the resumption rate post-festival has historically been lower than usual. Comparing the construction industry PMI data from February over the past three years, it is evident that influenced by the Spring Festival and cold, snowy weather, the construction industry PMI is generally lower than normal.

Secondly, due to local governments facing targets to reduce debt, if we look at data from the past six years, there are years when the issuance of special-purpose bonds in January exceeded 10%, specifically in 2020, 2022, and 2023. Particularly in 2020, about 20% of special-purpose bonds were issued in January, while in 2023, less than 5% were issued in the same month. Therefore, the issuance in January and February of 2024 has been slower than usual. Looking at the scale of issuance, the total special-purpose bonds issued in January and February amounted to only 403.3 billion yuan, which is less than half of the amount in 2020 and 2023. In terms of issuance speed, only 10.3% of the annual quota was issued in the first two months, whereas in 2020, 2022, and 2023, the issuance speed in the first two months was over 20%. A direct reason for this is that the quota for special-purpose bonds has been reduced.

Policy Adjustments Impacting China Infrastructure

Two documents are highly relevant to China infrastructure adjustment:

The first document is No. 35, issued at the end of 2023, titled “State Council Guidance on Financial Support for Mitigating Financing Platform Debt Risks.” It mandates that, starting from January 1, 2024, twelve key provinces must control new investment projects until their local debt risks are reduced to a moderate or low level. The implication is clear: before resolving local debt risks, the initiation of new investment projects is strictly restricted.

The second document is No. 47, formulated by the State Council in January 2024, titled “Methods for Strengthening the Management of Government Investment Projects in Key Provinces (Trial).” It requires enhanced management of the same twelve key provinces, with the original text stating “to spare no effort in mitigating debt risks,” which colloquially translates to “sell the iron pot if necessary.” These provinces include Tianjin, Inner Mongolia, Liaoning, Jilin, Heilongjiang, Guangxi, Chongqing, Guizhou, Yunnan, Gansu, Qinghai, and Ningxia. Attentive readers will note that, aside from Tianjin in the eastern region and the northeastern trio of Liaoning, Jilin, and Heilongjiang, the remaining eight are all in the western region, with no provinces from the central and southeastern regions on the list.

Shifts in Infrastructure Investment Strategy

Why are there restrictions on issuing special-purpose bonds in these areas? Simply put, some regions have accumulated debt volumes that are too large. To repay these existing debts, some areas issue special refinancing bonds without hesitation. For example, by the end of 2023, Guizhou issued bonds exceeding 200 billion yuan, while Tianjin, Inner Mongolia, and Yunnan each issued more than 100 billion yuan in special refinancing bonds. It’s important to note that across all 29 provinces, the total issuance last year was only 1.39 trillion yuan. This special refinancing bond is essentially a method of borrowing new funds to pay off old debts, with one sole purpose: to convert local implicit debt into explicit debt, such as the familiar urban investment company debts, which are considered implicit.

To clarify, local government debt is generally divided into explicit and implicit debt. For example, Guizhou’s debt exceeding 1.2 trillion yuan is explicit debt, officially disclosed in government statistics. Implicit debt refers to obligations incurred in ways other than government bonds, with city investment company debts being a typical example. Issuing special refinancing bonds, although it appears to resolve impending debt maturities, the practice of converting implicit debt into explicit debt has its consequences. On one hand, it occupies the remaining limit of local government debt; on the other hand, borrowing new funds to pay old debts is ultimately a liability that needs to be repaid.

Urbanization Rates and Real Estate Dynamics

There are three main reasons why local city investment company debts continue to expand and why infrastructure is so favoured by local governments. First, from a broader perspective, it was the process of urbanization that drove the rapid development of infrastructure. In 1998, China’s urbanization rate was only about 33%, but after two to three decades, it reached 65.2% by the end of 2022. Second, the promotion of local officials is based on GDP performance. The initiation of an infrastructure project can stimulate a host of industries, such as infrastructure approval personnel, construction firms, building materials merchants, earth and stone contractors, and foremen. Real estate development often accompanies infrastructure projects. Just look at the areas around light rails, high-speed trains, and subway lines; you will definitely find real estate developments. If you pay close attention, you can spot some puzzling planning decisions, like stations built on farmland, such as the Gaotangqiao station of Ningbo’s Line 3 Phase I, or those located far from urban centres, or those that see little foot traffic after completion. Third, it can cover up historical debts. For example, if a project is running at a loss, possibly due to decisions by previous officials who have since been transferred or promoted, the gap is often filled only by embarking on even larger investment projects to balance the books.

Infrastructure develops rapidly not only during the urbanization process, as mentioned earlier, but also during economic downturns when governments tend to launch a batch of infrastructure projects. For instance, during Roosevelt’s New Deal, there was massive construction of roads and bridges to provide employment. Generally, as long as the pace of urban development exceeds the rate of debt accumulation, no amount of debt is problematic. This principle also applies to real estate. Currently, our urbanization rate is 65%, which some experts believe is one reason for the potential rise in housing prices. Personally, I don’t quite agree. Sohu City conducted data analysis and found that by the end of 2021, the urbanization rates of some major cities had reached over 80%, with cities like Shenzhen, Urumqi, Foshan, Dongguan, and Xiamen exceeding 90%. Cities in the 80% to 90% range include Shanghai, Taiyuan, Beijing, Nanjing, Guangzhou, Shenyang, Tianjin, Wuhan, Hefei, and Hangzhou. Even in provinces with high levels of debt, such as Kunming in Yunnan, Yinchuan in Ningxia, and Guiyang in Guizhou, the urbanization rates are also above 80%.

Future Directions for Infrastructure and Public Welfare

Claiming a national urbanization rate of 65% as a reason for rising housing prices might be misleading, considering that many areas already exceed 80%. These cities are either first-tier, provincial capitals or uniquely developed cities that attract populations. Similarly, this rationale applies to infrastructure projects. Many places, especially smaller towns, have seen significant urban development over the past decade, suggesting that the era of massive infrastructure investment might be coming to an end. Historically, investment, foreign trade, and consumption—the three engines of economic growth—have primarily been driven by infrastructure investment. Moving forward, the proportion of investment is expected to decrease, while consumption is likely to rise. Given the global market’s uncertainty, foreign trade has already lost its past lustre. According to the National Bureau of Statistics, in 2023, the total retail sales of consumer goods reached 47 trillion, 1495 billion yuan, an increase of 7.2% from the previous year, contributing 82.5% to economic growth and boosting GDP growth by 4.3 percentage points. On the investment side, in 2023, total fixed asset investment was 50 trillion, 3036 billion yuan, growing by 3.0% from the previous year but contributing only 28.9% to economic growth—a drop of 17.9 percentage points from the previous year, pushing GDP growth by only 1.5 percentage points. As for foreign trade, it declined by 0.6 percentage points from the previous year, negatively impacting economic growth by 11.4%.

The end of the era of large-scale infrastructure signifies the closure of one era and the dawn of another. The United States and Japan have also experienced eras of extensive infrastructure development. However, ultimately, more investments are directed towards public welfare, such as education, healthcare, childbirth, and elderly care. Compared to luxurious government buildings and modern high-speed rail stations, what people really want to see are tangible social welfare projects. These include slight improvements in social benefits, more job opportunities, and practical baseline guarantees. Only with these in place can we progress further.