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Is this the road to an economic dead end?

China warned that excessive investment in infrastructure projects will not solve growth problems

September 12, 2018 5:10 PM (UTC+8)
China still needs to concentrate on debt problems. Illustration: iStock

Danger ahead. This is a road which will lead to an economic dead end. Excessive investment in infrastructure and property projects is not the long-term answer to China’s growth dilemma.

Liu Shijin, a member of the Monetary Policy Committee of the powerful People’s Bank of China, made that crystal clear at a conference last week.

In the wake of a cooling economy, funding has accelerated again for major road and rail developments, as well as housing schemes.

But Liu, who is also a deputy head of the China Development Research Foundation, a state-backed think tank, has warned that is just a short-term fix.

“Although investment in building roads, railways and housing can play a role in preventing a precipitous decline in growth, its potential to drive economic expansion over the long run has waned, Liu said,” Caixin, a media group based in Beijing, reported.

This, in turn, will only exacerbate China’s debt problems, despite the State Council’s determination to get to grips with local government deleveraging, including the off-the-books “hidden” risks, which have been accumulating for the best part of nearly two decades.

Unfortunately, for the army of accountants in Beijing that might be on the conservative side.

By the end of April, the debt mountain had topped 16.61 trillion yuan (US$2.6 trillion), data from the Ministry of Finance showed.

Unfortunately, for the army of accountants in Beijing that might be on the conservative side, according to Yin Zhongqing, the deputy director of the financial and economic affairs committee at the National People’s Congress.

While gauging the scale of China’s debt is frankly a mission impossible, Yin confirmed that it could be at least 20 trillion yuan. This would include local government bonds, debt amassed in the state-owned enterprise sector, and public and private investment schemes.

“Local government officials never worry about repaying debts, they only worry that no one is lending them money,” Yin said at last year’s NPC gathering. “Part of the reason was that all local governments are part of a centralized authority that will eventually be bailed out.”

Tighter regulations have been brought in during the past 12 months but the addiction remains, squeezing spending on health care, social security and welfare, as well as environmental issues.

To combat this, Liu has urged Beijing to lower growth targets and shift the focus on employment, risk control, corporate profitability and healthcare.

“These qualitative indicators will be affected when the growth rate is excessively high and causes problems such as difficulty in hiring workers, a spike in fiscal and financial risks, unstable corporate profitability, excess industrial capacity, overly low producer price index, mounting pollution … unstable household income, and insufficient government spending on social welfare,” he said.

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