China Increases Infrastructure Investment in Response to Trade War Tension
(30 July 2018 - China) China plans to ease borrowing curbs on local governments and invest greater capital into infrastructure projects to help absorb the impact to the economy from the US-China trade war.
China’s trade war with the US has clouded the outlook for the world’s second-largest economy and driven greater financial markets volatility. A sharper slowdown in the Chinese economy could increase unemployment, a concern that Beijing has raised. But Chinese leaders have ruled out another round of strong fiscal stimulus, wary of inflaming debt risks. A $590 billion spending package in 2008-09 shielded China’s economy from the global crisis but saddled local governments and state firms with high debt levels. The amount of infrastructure spending this time will depend on how the trade war evolves as the economy has arguably already felt the pinch from Beijing’s multi-year deleveraging drive that has driven up corporate borrowing costs and delayed government projects. Economic growth slowed slightly to 6.7 percent in Q2 2018, notably above the official 2018 growth target of 6.5 percent.
The US imposed tariffs on $34 billion of Chinese imports and in response China applied taxes on the same value of US products, leading US President Donald Trump to threaten tariffs on all $500 billion of goods imported from China. China’s infrastructure investment growth fell to 7.3 percent in H1 2018 from 21.1 percent in H1 2017, pushing fixed-asset investment growth to a record low due to stricter checks on investment projects to curb debt risks. Fiscal policy will become “more proactive”, China’s cabinet said, pledging to deliver more tax cuts and quicken the issuance of local governments’ special bonds to support infrastructure investment. The PBOC has cut banks' reserve requirements three times in 2018, with further cuts forecast.
Chinese banks are to ensure funding to existing projects and meet reasonable funding needs of local government financing vehicles (LGFVs), which have been subjected to tight official scrutiny. Government spending surpassed revenues by 726 billion yuan in the first half, which was only about a third of the budgeted deficit of 2.38 trillion yuan for 2018. The cabinet’s policy move signaled a victory for the PBOC following debate among researchers from the PBOC and finance ministry on whether fiscal policy should do more to spur growth. State banks remain reluctant to lend to small firms, which are considered riskier than state-controlled firms.
Subscribe