Source Article in Chinese: 政府投资号急吹 “克强经济学”破产
This is a time when economic bubbles exist side by side with conceptual bubbles, a time in which concepts get invalidated quicker than they take shape. One such example is Likonomics, introduced by Barclays Capitals in June this year. Of the three main points of this concept, “no stimulus” and “deleveraging” have been nullified. As for the “structural reform”, under the influence of government investment, it would bring about no change but instead give way to the old methods.
New Approach of the Central government: let local governments off the leash
No sooner had Lou Jiwei delivered at the G20 Meeting of Finance Ministers a statement claiming the Chinese government would refrain from stimulating the economy that provinces and cities such as Jiangsu, Anhui, Chongqing, Sichuan, Guizhou, Shaanxi and others issued documents, made arrangement or held meetings to lower levels of government, urging them to speed up construction of railway, highway and airport that were mentioned in the twelve Five-year plan. Development and Reform department in about 36 cities approved local applications to commence construction of urban transport projects. Renovation of shantytowns in cities became investment hotspots of local governments.
Of the various investment projects, light rail construction took center stage. It is estimated that by 2020, China’s rail transportation mileage would reach approximately 6000 kilometers, and investment in rail transport would reach 4 trillion yuan. Various places develop light rail on the ground that improvement to infrastructure facilities could help boost effective investment and consumption, and at the same time enhance the overall carrying capacity of cities, improving the quality of human-centered new urbanization projects, as well as linking up major economic circles.
This has been confirmed by the Ministry of Transport of China. Minister of Transport Yang Chuantang made it clear at a recent work meeting that advancing the construction of urban rail transit would be one of the five top transport work priorities in the second half of this year.
Both the Premier and the Finance Minister stated that there would be no stimuli, would local governments dare defy the Central government and go their own way? Well, viewed from the procedural perspective, they didn’t.
When Barclays Capital introduced Likonomics in June, it had probably failed to take note of the leeway the Central government granted the local ones.
In “The State Council’s Decision on the Cancellation and Devolution of a Certain Number of Projects Pending Administrative Approval and Other Matters” (“Decision”), a total of 117 projects were cancelled or decentralized. Of these, as many as 25 projects were cancelled or decentralized by the NDRC. The reason for doing this was to “further deepen reform to the investment system, giving the market full play of its fundamental role in resource allocation and implementing effectively business investment autonomy.”
The Central government can therefore claim that it has honored its promise, and that new government-funded stimulus projects are the result of local governments exercising their autonomy in investment approval. Those who are familiar with the way the Chinese government works would know that this is but an act of deception, though. While it may be true that local governments could decide on their own when they approved urban rail projects in a frenzied fashion; when these projects enter the construction phase, however, local governments need policy support from the Central government to raise fund, or they won't be making any headway.
The central government's "Financial-oriented support"
Right when the international investment banking sector hailed “deleveraging” as a move that would enable marketization reform to China's financial system, the Chinese government decided that banks would fund on a massive scale investment by local governments.
In July this year, the State Council issued the “Guiding Opinions Pertaining to Economic Restructuring, Transition and Upgrade with Support from the Financial System”, urging continued increasing financial support to key areas and weak links. On August 12, the State Council issued the “Views on the Implementation of Financial Support for Development of Small and Micro Enterprises”, stipulating clearly that policy support for small and micro enterprises and financial services be increased.
Shanghai is the focal point of financial policy support. On August 6, the Agricultural Bank of China and the Shanghai Municipal Government signed an agreement to provide 250 billion yuan to Shanghai's credit, an amount equivalent to 12.5% of the city's GDP last year. The loan will be used in the Disneyland project and to support the urban renovation and upgrade work involved in the implementation of Shanghai FTA.
According to a report by the Daily Economic News, the above projects were just part of Agricultural Bank's financial support for the six major areas of Shanghai (economy). Loans on such a large scale cannot but arose speculation that the government will carry out “a new round of fiscal stimulus”.
In addition to major commercial banks, this round the China Development Bank (CDB), which specially serves to materialize national policies, has also joined in. And recently, the CDB signed memorandum of cooperation with provincial governments of Jiangsu, Hebei, Qinghai and other to increase efforts to support these provinces. At the same time, provincial branches of the CDB signed quite a number of agreements with a host of prefecture-level cities.
According to the remark CDB chairman Hu Huaibang made in a recent interview, the first of this year saw an increase of hundreds of billions of new loans, over 80% of which went into infrastructure, fundamental and supportive industries such as electricity, communications and others.
That the CDB got involved showed that the issuance of local debt would remain a major source of funding. As everyone knows, the CDB is a bond bank that uses bond issuance as the predominant channel to raise fund, the second largest bond issuing entity after the Ministry of Finance and is dubbed as the “second Ministry of Finance”.
If it is said commercial banks increasing local loans is a commercial action, then for the CDB, a “policy bank” that serves to materialize national strategy, to issue local loan would fully embody the attributes of fiscal stimulus.
How do local governments deal with debt?
The Vast majority of people in both domestic and international economic circles believe that the huge debt of Chinese government and the shadow banking are two risks that would likely cause an economic and a financial crisis in China. China’s government economists too are worried about this. In July this year, the Tsinghua University published a report on fiscal transparency of cities, showing that the overall transparency of the 289 cities nationwide was poor. Even Shanghai, the city that ranked the first, was far from getting a pass. Worse still, many local governments are suspected of concealing debt. Only 13 cities publicized debt information. Local debt has long become an issue of uncertainty.
To borrow on a massive scale when old debt remains outstanding is something difficult to carry out in a democracy. In the US, governments like this cannot but declare bankruptcy, as was the case for that of Orange County, Southern California and Detroit.
However, “nothing under the sun is insoluble for the Communist Party of China (CPC)”.
On August 13, weekly news magazine the Outlook ran an article that entitled “Officials prevaricate local debt: this government's not repaying loans the previous one borrowed to carry out projects”. In that article it was mentioned that reporters of the magazine discovered in their surveys and interviews in provinces and regions in eastern, western and central China that the tax structure of various local governments has been singular; all sorts of expenditure has been going up continuously; and urbanization has been understood simply as “ increased investment in infrastructure”. As a result, local government debt increased year by year.
The biggest problem, however, is not the growth in debt but its opacity. The local governments have no idea exactly how much debt they owe. Of particular concern is that government at grass-root levels have no debt consciousness. Instead, they have a prevarication mentality to defer debt, and are convinced that the current government has no need to repay debt owed by the previous one. An economy like this has no credit at all. An economy without credit as support would mean activities from investment to production are all short-term behaviors. All that matters is today. Tomorrow? who would care about that?
At this point, it can be determined that the long-awaited “economic reform” by Li Keqiang would be a continuation of the policy of his predecessor Wen Jiabao. That policy, effective since 2008, used government investment to stimulate economic development. It may actually be “old wine in old bottle”, except that a new label has been applied. That is, instead of “recognizing the real estate industry as the driving force”, “new urbanization” is used and supplemented by the "welfare policy" that farmers get urban household registration (hukou) once they move into the city.
Of course, this cannot be blamed on Li Keqiang. In my article “Likonomics: Can it work? Will it last?” (July 22), I pointed out already that “Likonomics” lacks institutional foundation and would, under pressure from all sides, quietly change its course after awhile. I just didn't expect this shift would take place in less than three months after the term was coined.