China Wants Private Cash in Infrastructure Spending

Infrastructure spending in China is heating up again. But this time, the government wants help.

Beijing entered the year with a tough stance on debt, tightening its purse strings to head off the risk of a Minsky moment. The ministry of finance lowered its fiscal deficit target to 2.6% of gross domestic product, the first cut since 2013, and went so far as to halt all government-funded work in Xinjiang, an area bigger than France. As a result, infrastructure growth ground to a halt, dragging on the economy’s expansion, Bloomberg reported.

The unwished-for trade war with the US has caused Beijing to change its calculations. The economy has turned out to be less resilient than many thought. With consumer confidence and manufacturing growth slipping, infrastructure spending can serve as a quick dose of antibiotics to kill the bacteria.

Public private partnerships, or PPP, in which private firms co-invest with local governments to build and operate public facilities, are making a comeback. Until recently, Beijing had been cracking down on these partnerships, shelving projects worth about 2.4 trillion yuan ($363 billion) since November. The downward trend stopped in June.

If anyone doubts the ministry's intention to turn on the PPP tap again, just look at its quarterly reports. The theme in the first three months centered on canceling local projects. By the time the second-quarter report was released, there was no such mention.

There were good reasons for the clampdown. PPP started to boom in 2014 as Beijing sought to control off-budget borrowing by local governments. Some municipalities used them as a tool to hide liabilities. For instance, the private partner could be promised a fixed return at regular intervals from government land sales, and a guaranteed equity buyback.

In addition, the projects often drew little in the way of private money: More than 60% of the “private” partners in PPP projects are state-owned enterprises.

PPP Projects

By the first half of 2018, debt associated with PPP projects constituted about 14% of local government borrowings, Bank of America Merrill Lynch estimates. The actual proportion is probably higher, with much debt held on the balance sheets of the government’s partners.

However, torn between the unenviable dual task of curtailing debt and sustaining GDP growth, the finance ministry has few other options. Local governments are responsible for 90% of China’s infrastructure projects but lack reliable sources of income. To finance spending, they depend on land sales, local government financing vehicles, municipal bond sales, and PPP.

Land sales are slowing, as developers grapple with refinancing issues. Municipal bond sales are so anemic that the finance ministry is asking banks to give them the same risk weighting as its own debt — a desperate measure that the banking regulator is likely to reject. As for local government financing vehicles, they are seen as a potential trigger for a Minsky moment—a sudden collapse of asset values after a long period of debt-fueled growth.

Of course, the finance ministry could abandon its fiscal deficit target and transfer cash to local governments, but the loss of face that would entail might be seen as politically unacceptable. Hence the revival of PPP. Whether investors and private-sector partners will bite is another matter.

Boost in Private Investment

The Chinese government will step up reform and roll out a series of new incentives to better remove hurdles hampering private investment and businesses and boost economic vitality, the State Council's executive meeting chaired by Premier Li Keqiang decided last week.

The meeting decided on a host of measures to further facilitate private investment and boost the sound development of the private sector.

Li stressed that further measures should be taken to unleash market vitality and boost private investment. A number of favorable projects should be identified as potential targets for attracting private investment.

"Our economy is showing a stable performance with good momentum for growth. Facing new circumstances and new challenges, we should step up reform, pay attention to emerging problems, plan ahead, and fine-tune policies as necessary to make sure that the economy performs within a proper range," Li said.