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Local Governments Bet Big on New Investment

They’re still hung over from a 4 trillion yuan spending spree initiated by the central government nearly four years ago, but local governments across China are pressing ahead anyway with huge new investment plans.

In late August, for example, the government of Guangdong province said it would expand ocean resource exploitation with 177 projects. The plan is to attract investments of more than 1 trillion yuan over the next five years.

The announcement came one month after the province started a campaign to enlist private investors for separate projects worth 235 billion yuan.

Vowing to put the brakes on declining investment in this hub of global manufacturing, Guangdong officials also put into place nineteen policy measures designed to support various businesses, including steelmakers, many of whom are struggling in a glutted market.

Guangdong is one of at least thirteen provinces and cities that since July have announced investment plans worth more than 10 trillion yuan combined.

Chongqing plans to spend 1.5 trillion yuan over the next five years to develop dozens of new industrial clusters, and Xi’an is slated to add nine subway routes to its existing six-line network.

The southwestern province of Guizhou is aiming higher, pledging to spend 3 trillion yuan over the next decade to develop and promote itself as a tourist haven.

A growing consensus among scholars and economists is that these newly planned investments, which sometimes seem to have been dreamed up by regional administrators seeking to outdo other administrators next door, will exacerbate local government debt left over from the central government’s stimulus push. In that campaign, local governments footed much of the bill with Beijing providing matching funds.

This year alone, local governments are scheduled to pay 1.8 trillion yuan toward what was a 10.7 trillion yuan debt load by the end of 2010, the most recent year from which data is available.

Zhao Xiao, an economics professor at Beijing University of Technology, said pursuing huge investment plans now would not only worsen the country’s problem with overstocked industrial and manufacturing inventories but also limit the growth potential tied to future investments.

Fuzzy Funding

Local government officials, however, have taken another view. Changsha, the capital of Hunan province, is going forward with an investment scheme worth more than 800 billion yuan, which is 200 billion yuan more than it spent in the last stimulus campaign.

This new investment strategy is, a city budget officer said, crucial to jump-starting the local economy and paying off the Changsha government’s looming debt.

The city’s fiscal revenue in the first six months of this year was 47.2 billion yuan, according to Changsha finance officials. However, at the end of last year the city owed creditors, mainly banks, 81.2 billion yuan.

Repayments are backed by government tax revenues, land sale profits, and operating incomes from state-owned enterprises, the city budget officer said. And he added that, “If there is still a shortfall, some financing platform companies can have their debts rolled over.”

But the government for now does not have the money it needs. In fact, despite government efforts, the officer said some Changsha projects have yet to be finalized as they are still being negotiated, which means investment plans remain uncertain.

Similar conditions apparently can be found across the nation. UBS chief economist Wang Tao says often important details attached to local government investment plans are fuzzy. For example, some don’t say where the investment money would come from, or who would oversee investments.

Occasional funding shortfalls are common among most local governments, Wang said, which puts them at risk of falling short of these investment goals.

Indeed, fiscal revenues in China grew more slowly in the first half of the year—just 12.2 percent year-on-year, compared with 31.2 percent in the same period 2011. Meanwhile, expenditures shot up 21.3 percent.

No doubt governments must act to challenge the latest economic slowdown but “it would be unnecessary and impractical to use another massive stimulus,” said Gao Zhanjun, managing director of CITIC Securities.

Still, local governments want to support GDP growth and help companies at the core of the economy, such as steelmakers. Yet to be determined is whether an expansionary investment strategy will help or hurt companies already stung by rising inventories and falling sales.

Niu Li, a researcher for the State Information Center, a central government think tank, said steel manufacturers have watched earnings plummet to less than 2 yuan per ton. And that’s just one industry saddled with excess capacity, he said, raising doubts about the value of new government stimulus programs.

Li Yuqian is a Caixin staff reporter.