China makes massive infrastructure investment to help in COVID-19 recovery – Daily Commercial News

The Chinese economy was showing signs of a slowdown even before the COVID-19 contagion spread around the country and internationally. The World Bank, in its October 2019 global economic growth forecast, projected that China’s GDP increase would moderate to 5.9 per cent this year from 6.1 per cent in 2019. A 5.9 per cent gain would be the lowest rate of increase in the last 29 years, since Q1 of 1992.

Expectations for the country’s 2020 GDP growth decreased dramatically in February as the negative impacts from the coronavirus became clearer. According to Bloomberg: “Economists have repeatedly marked down their growth forecasts on the slow resumption of business. The median forecast for year-on-year growth in the first quarter is 4.0 per cent, the weakest in 30 years,…according to a February survey”.

Major reasons for China’s economic weakness in the first quarter, tied to the coronavirus, included contraction of industrial production and the slowdown in retail sales, as well as a significant decrease in construction and infrastructure investment. The damage to construction activities came to a large extent from the strict quarantine measures introduced by the Chinese government that restricted the movement of migrant workers and limited the progress of construction projects.

In addition, the overall decrease in domestic consumption, as well as in industrial production, are likely to result in a future contraction in capital expenditures by many companies, leading to pressure on ongoing and future demand for construction.

Historically, the Chinese government has reacted to economic problems by providing stimulus through monetary policy easing as well as an increase in infrastructure investment. During the Asian financial crisis, every year from 1998 until 2002 the Chinese government issued RMB 100 billions of special treasury bonds in order to support investments in roads, railways, telecommunications facilities, power generation projects, etc.

During the 2008 global financial crisis, the government of China took a similar, but even more vigorous, approach and introduced an economic stimulus of RMB 4 trillion, with the biggest share of the funding (RMB 1.5 trillion) directed towards irrigation, airport, railway, road and other infrastructure developments.

History seems to be repeating itself today as, in the first two months of this year, local Chinese governments, have already issued projects-related special infrastructure bonds for RMB 950 billion. The 2020 annual limit for new infrastructure bonds amounts to RMB 3 trillion.

The Asia Times news portal reports that as of the beginning of March: “13 major cities and provinces, including Beijing, Shanghai and Fujian province, released investment plans and “major infrastructure” projects for 2020. Eight cities and provinces announced their investment budgets, which in total amount to 33.83 trillion yuan (US$4.8 trillion). Another eight provinces said they would invest up to 2.79 trillion yuan in total, although they have yet to announce their plans.

The strategic allocation of the new infrastructure investment this time will be noticeably different from the previous economic crises, as most of it will be channelled towards the high-tech industry. Out of 25 regions that are indicating new infrastructure projects, 21 are planning to develop 5G networks, according to the Xinhua news agency.

These new investments and development plans come on top of the 26 infrastructure projects approved last year for construction in 2020 and beyond, with the top 10 projects costing over RMB 40 billion each. The overall investment in the approved projects amounts to approximately RMB 982 billion.

China’s government has also identified the need for a more selective approach towards the new infrastructure investment, with higher return requirements due to weakening exports and dipping real estate investments. The need for higher returns on government-approved infrastructure investment also explains the recent switch towards high-tech projects that are likely to be more profitable than the traditional bricks and mortar investments.

The outbreak of COVID-19 also has the potential to increase pressure on investment in China’s international projects developed under the Belt and Road initiative. During these times of economic difficulty, the country is more likely to direct its resources towards improvement of its domestic economy, rather than investing in international projects.

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