Friday 19 December 2008
Economic Stimulus Meets Provincial Shortage of Capital
The central government has released its series of stimulation plans and policies, but implementation of these policies has become a key point in whether China will be able to maintain 8% GDP growth next year. Local governments and banks are expected to shoulder a great bit of the capital needs but may be unable or unwilling to as the situation stands.
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Economic Stimulus Meets Provincial Shortage of Capital
CSC staff, Shanghai
18 December 2008
The central government has released its series of stimulation plans and policies, but implementation of these policies has become a key point in whether China will be able to maintain 8% GDP growth next year. Local governments and banks are expected to shoulder a great bit of the capital needs but may be unable or unwilling to as the situation stands.
During the latest internal meeting of the National Development and Reform Commission (NDRC), local governments responded differently to the central government’s actions. Some officials said the 4 trillion yuan investment was insufficient and that the central government meanwhile is asking local governments to provide too much of the money, and suggested that local governments be allowed to raised the money needed by issuing bonds.
Current Investment Not Enough
An official from the Development and Reform Commission (DRC) of Guangdong Province, China’s most developed province, believes now is the best time for fixed asset investment, especially in areas without sufficient investment in the past, such as water resource facilities. An official from the Henan DRC agreed.
Appeals for more investment stem from two considerations: first, the influence of the financial crisis is beyond earlier expectations; and second, central government investment may turn out to be lower than local governments require.
An official from the Shaanxi Province DRC said they had originally thought the influence of the crisis on China’s western areas might be smaller, but now they find the local economy is falling quickly, and pillar industries have been seriously affected.
Shaanxi’s eight pillar industries grew by 13% this year over the previous year, while in the past the year-on-year growth was usually over 20%. “Factory prices for agricultural and industrial products are falling. In the past, coal and oil supplies could not meet demand, but now suppliers have to sell these products on their own,” said this official.
According to one expert, besides 160 billion yuan of budgeted investment and 140 billion yuan for post-earthquake reconstruction, incremental investment of the central government next year may be about 100 billion yuan.
After the central government released its 4 trillion yuan investment plan, local governments raised their own investment plans, totalling 18 trillion yuan. However, the big problem is where their funds will come from. Local governments are strapped, and relevant departments of the State Council also lack money.
Premier Wen Jiabao said during his visit to Japan that the government might issue further stimulation policies. “I’m thinking every day whether these funds are enough and whether they can solve the problem. So we must consider more direct, more powerful, and more effective ways to promote economic growth,” said Wen Jiabao.
Local governments, banks may balk
As for the 4 trillion yuan package funding source, an NDRC official said at the press release of the State Council that in the following two years, the central government will invest 1.18 trillion yuan, and that other 2.82 trillion yuan will be raised by local governments and private business.
In the past, the central government, local governments, and banks have each put up 1/3 each of the investment needed for a project. But now both local governments and banks have fund problems.
“We hope the investment proportion of local governments, of and under county level, can be cancelled, especially for social public affair, for it is surprisingly high,” said an official from the Shaanxi Province DRC.
On one hand, proportion of fiscal income of local governments in nationwide fiscal income is dropping quickly, and liability ratios of local governments are growing higher.
After the 1994 tax reform, the local government proportion of total fiscal income dropped from about 60% to the current about 40%. Since then, local governments have had to borrow heavily to meet their responsibilities, lifting their liability ratios. Statistics show that total local government debt has reached at least 1 trillion yuan.
On the other, the economic stimulation plan may also face banks’ unwillingness to grant loans. “After the commercialization reform, banks’ risk control ability and independence in decision-making are much higher than they were 10 year ago,” said an expert.
Despite the China Banking Regulatory Commission’s recent loosening of the bad loan ratio requirement, and the 9 financial measures and 30 detailed measures released by the State Council to promote economic development, “This only allows banks to do so. And what if they refuse?” asked Chen Xingdong, Chief Economist at BNP Paribas Peregrine Securities.
Allowing Local Governments to Issue Bond?
At the NDRC internal meeting, officials appealed to expand raising funds methods and allow local governments to issue bonds.
An official from Xi’an suggested that funds needed could be raised by central national debt and local national debt, and that the central government can also grant a higher liability quota to local governments, while an official from Guangdong’s DRC suggested the central government allow local governments to issue infrastructure construction bonds.
The central government is, in fact, likely to loosen limits on local bond issuance. It is reported that a scheme for reinforcing local governments’ debt management has been submitted by the Ministry of Finance (MOF) to the State Council for approval. The MOF has also set up a special administration under the Budget Department to help manage their debt.
NDRC vice-director Mu Hong also said earlier that to relieve the funding difficulties of local governments, the central government was going to adopt two measures: first, by increasing their proportion of funds from the central government and properly reducing and exempting local governments’ investment; and secondly, the central government is considering transfer loans or allowing local governments to raise funds needed through proper approved channels.
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