Across China, local governments are pushing ambitious spending projects that add to concerns about wasteful capital investment and rising debts

June 11, 2013, 1:30 p.m. ET

Across China, the Itch to Spend Is Strong


BEIJING—As leaders in Beijing remain cautious about stimulating China’s economy out of a slowdown, local governments are taking no chances, pushing ambitious spending projects that add to concerns about wasteful capital investment and rising debts.

It isn’t clear how many of these undertakings—which include everything from highways to subways—will end up with funding. But the push illustrates Beijing’s challenge as it attempts to rebalance the world’s No. 2 economy to make it less dependent on such massive investment plans.

A total of 16 provinces and two municipalities representing more than 60% of China’s gross domestic product have issued statements since the start of the second quarter proclaiming the importance of investment projects in driving growth and urging lower levels of government to use all means to accelerate plans in the months ahead.That comes as concerns mount about a prolonged slowdown in China’s growth. Data for May, released over the weekend, showed exports, investment and industrial output all slowing.

Weak industrial output, along with new leaders’ apparent tolerance for lower growth, prompted Jian Chang, China economist at Barclays,BARC.LN -1.33% to lower the growth forecast for the year to 7.4%, down from 7.9%, and below the government’s 7.5% target.

“Expanding investment is still the fastest and most effective way to ensure economic growth,” Li Qiang, governor of China’s eastern Zhejiang province, said in April at a project-promotion gathering, according to a statement posted on the government website.

Investment typically accelerates in leadership-transition years in China, as new chiefs kick off projects they hope will drive growth, and buoy their promotion prospects, in the years ahead. In 2003, the last transition year, fixed-asset investment accelerated to 27.7% growth, up from 16.9% the previous year, according to data from the National Bureau of Statistics.

Zhejiang aims for 1,000 large-scale investment projects over the next five years including infrastructure, water conservancy and auto manufacturing. The provincial government says these projects could drive over 10 trillion yuan ($1.6 trillion) in total investment spending over the period if they all get under way. Zhejiang’s total fixed-asset investment in 2012 was 1.7 trillion yuan, according to the provincial government.

In the southern province of Guangxi, the government said in a report from an economic study meeting in May, “We have to seize the opportunities to make sure at least half of the investment task is finished in the first half of the year, which means we should carry out a series of big projects.” The province promised to immediately press ahead with projects worth at least 120 billion yuan.

There is no guarantee that the projects proposed by local governments will get off the ground. For many, financing remains a major problem, with many state-controlled banks less willing to lend amid worries about bad debt from a post-2008 lending spree.

“A plan is just a plan, and I still don’t think local governments can easily get the money,” said Citigroup C -3.81%economist Ding Shuang.

At the same time, total loans and other credit in the Chinese economy have been on the rise as the economy has slowed. Total social financing—a broad measure of credit in the economy that includes financing such as corporate bonds and informal lending—jumped 51% to 9.1 trillion yuan in the January-May period compared with a year ago.

Governments are looking for ways to get their projects funded. In April, the government of Yunnan was one of several to meet with local banks to drum up funds. Yunnan plans to invest about 166.8 billion yuan this year in key projects ranging from railway to city construction, with more than three-quarters of the funding coming from bank loans, the government said in a report on its website.

For now, the Chinese leaders who assumed government office in March appear willing to tolerate slower growth in part to rectify imbalances created during the boom times. A return to aggressive investment as a way to get China’s economy out of a slump would come at a cost.

Borrowing would add further to local government’s burgeoning debt, raising fears about repayment capacity and the potential for a buildup of bad loans in the banking system. On Monday, China’s auditor warned that a subset of 36 local governments, including Shanghai, Tianjin, and Chongqing, had racked up a total of 3.85 trillion yuan in debt by the end of 2012, up 12.9% from the end of 2010.

Plans for higher investment spending by the government also comes at a time of growing concern about wasteful capital allocation, and cuts against the aim of giving a greater role to the private sector in driving growth.

Some provinces were attempting to kill two birds with one stone by bringing private funds into the investment push. “We will allow private capital into all sectors where it is not clearly barred by the central government,” said Guangdong province in a statement posted on its official website.

Though the overall picture on growth remains weak, there are tentative signs that heavier investment from local governments is starting to pass through into stronger demand. Growth in sales of excavators returned to positive territory in April, for the first time since March 2012, according to data provider CEIC.

Some firms tied to the local-government construction cycle have reported signs of increased activity. “We are seeing the strongest demand from affordable housing and municipal construction,” said an official with a state-owned construction-design company in Anhui province. “It looks like urbanization is moving ahead everywhere.”

Urbanization has been one of the key themes of the new government. While urbanization remains a long-term objective, and few details of near-term goals have been released, it has already created market expectations of stepped-up demand for housing and infrastructure.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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