By Michael Lelyveld
China’s government is mounting a push to revive investment in the country’s cooling economy, clearing the way for new loans while insisting it has not abandoned efforts to control rising debt.
Persistent declines in the growth of fixed asset investment (FAI) have belatedly set off alarm bells in Beijing as the traditional engine of the economy slows to a crawl.
In the first seven months of this year, investment in long-lasting assets like buildings, bridges, and machinery dropped to a 5.5 percent growth rate from 8.3 percent in the comparable 2017 period, the National Bureau of Statistics (NBS) said.
In releasing the lower numbers on Aug. 14, an NBS spokesman cited a “higher comparative base” last year, government efforts to regulate public-private partnership (PPP) projects and higher environmental standards, the official Xinhua news agency reported.
But the weakening trend has been steady over time, although gradual enough to escape the government’s attention as a top priority during its drive to promote a consumption-led economy.
Over the years, annual declines in FAI growth have become the norm.
In 2014, growth stood at 15.7 percent before fading to 10 percent in 2015 and 8.1 percent in 2016, according to previous NBS reports. During the runaway expansion of 2010, FAI growth soared to 23.8 percent.
Stunned by slump
Reports following a July 23 executive meeting of the cabinet-level State Council chaired by Premier Li Keqiang suggest that the government has been stunned by this year’s slump in infrastructure investment.
In seven-month figures, the growth rate plunged to 5.7 percent from 20.9 percent a year before.
A report in the official English-language China Daily blamed the infrastructure drop for the low FAI numbers, which the paper called “tepid.”
In past years, infrastructure investment backed by state bank loans and fiscal spending has been the government’s most reliable tool for boosting the economy, but analysts say returns have diminished.
China’s drive to control debt and contain financial risk has also taken a toll.
The government’s crackdown on “shadow” banking has narrowed local financing options, while its promotion of PPP projects has been hampered by regulatory suspicions that such deals amount to more debt in disguise.
Last week, China Daily reported that the central government is preparing “more stringent measures” to control the increase of “hidden” local government debt “to ward off financial risks.”
But the concern over FAI has also sparked worries that the campaign against financial risk has already gone too far at a time when external pressures from the looming trade war with the United States are piling up.
The result has been a decision to back a hybrid policy of “targeted” lending that threatens to balloon into a full-blown stimulus program that could undo the drive to curb debt.
In early August, the government threw its weight behind the targeted approach after a meeting of the Political Bureau of the Communist Party of China (CPC) Central Committee.
With the push from the Politburo and the People’s Bank of China (PBOC), some commercial banks instructed local branches to speed lending for infrastructure, transportation and home renovations, China Daily said.
But despite ample liquidity and low interbank rates, local lenders have been skittish after months of pressure to control risks and bad news on the external front.
“That money isn’t feeding into the wider economy, especially not to cash-strapped smaller firms, as lenders aren’t willing to make loans or buy risky bonds,” Bloomberg News said.
In a separate report, an unidentified official of the National Development and Reform Commission (NDRC) essentially admitted to China Daily that the problems were of the government’s own making.
“Investment willingness at local levels remained low in the first half. Some reasons include aggressive efforts in the first half to reduce government debt risks, strengthened efforts to monitor infrastructure project quality, and relatively tight liquidity. The government is aware of that,” the official of the top planning agency said.
No slowdown seen
Despite the local logjams, there are no clear signs that China’s giant credit machine is slowing down.
In July, new yuan-denominated loans in July reached 1.45 trillion yuan (U.S. $211 billion), soaring 76 percent from a year earlier. Lending declined 21 percent from June, but that was after a 60-percent jump from the month before, according to PBOC data.
Days after the announcement of the targeted approach, China’s financial regulatory agency called for a broader expansion of lending, reversing its previous stand.
On Aug. 11, the China Banking and Insurance Regulatory Commission (CBIRC) said in a statement that financial institutions should “increase funding to meet the financing demand of the real economy,” Xinhua reported.
The agency “instructed banking and insurance institutions to have an accurate understanding of the relations between promoting economic growth and containing risks,” Xinhua quoted the statement as saying.
The CBIRC urged lenders to “make full use of current favorable conditions including abundant liquidity and declining financing costs to raise their financing support for the real economy,” referring to production of goods and services.
The commission also called on banks to write off bad loans “to create more room for increasing lending,” Xinhua said.
China’s banks appear to have taken the commission’s advice to heart, declaring record levels of nonperforming loans (NPLs) in the second quarter, Bloomberg reported. NPLs reached 1.96 trillion yuan (U.S. $284.7 billion) by the end of June, hitting a ratio of 1.86 percent.
The new policies raised doubts about the government’s commitment to reducing debt growth and financial risk, which President Xi Jinping has designated as one of the “big battles” to be fought between now and 2020.
It is unclear whether the debt control measures have been terminated, downgraded, or only put on hold.
PBOC statements have ranged from noncommittal to evasive.
In a second-quarter report, the central bank said that its “prudent monetary policy will be kept neutral and be neither too tight nor too loose,” Xinhua reported.
But concerns are growing that deleveraging has taken a back seat.
“Interbank rates are at what seem to be record lows,” said Derek Scissors, an Asia economist and resident scholar at the American Enterprise Institute in Washington.
“Whatever they think they’re doing, what they’re actually doing is unraveling the very slow attempt at deleveraging in just a few weeks,” Scissors said.
Analysts and state media appeared to be taking mixed messages from planned NDRC guidelines “aimed at supervising all phases of fixed asset investment projects by local governments,” according to the China Daily report on July 27.
A senior official told the paper that the purpose was to “further contain risks from public-private partnership projects and foster economic growth through high-quality investment projects.”
Information on each project would be “collected and analyzed, with the main emphasis placed on regulating financing in each phase while implementing the projects,” the official said.
The process appeared to be a reversal of central government initiatives over the past several years to shift project authorization to provincial and local authorities.
The aim may be to avoid a buildup of back-door debt, but the terms made it unclear whether the result would be to slow down FAI projects or speed them up.
China Daily quoted a research note by Lianxun Securities analyst Zhang Deli that it will take a “rather long period of time” for the projects to produce a major recovery in FAI under the new supervision measures.
The paper cited an NDRC report of July 24, saying that the government would “improve regulation after it was found that some projects had not been implemented since being approved.”