Infrastructure investment has a vital role in stabilizing growth
Infrastructure investment is an important means for China to achieve steady growth this year. In 2021, real estate, infrastructure and manufacturing investment accounted for 24 percent, 25 percent and 32 percent of fixed asset investment, respectively.
Though pickups were seen last year, investment in manufacturing may not be a stable driving factor as it could be easily disturbed by external demand variables. Also, it will take time for consumption to recover due to COVID-19 uncertainties and the resulting slow recovery of employment and incomes. Therefore, being more easily controllable, infrastructure investment has become an ideal tool to stabilize economic growth and boost market confidence.
In fact, there are several areas in need of infrastructure investment in the country. The per capita infrastructure capital stock is only 20-30 percent that of developed countries, and the urban-rural and regional development gap is still large, indicating the potential to further tap infrastructure construction. Also, with the issuance in advance of local government special bonds and other sources of funds such as fiscal surplus funds from previous years, government guiding funds and urban investment bonds, funds for infrastructure investment are abundant. The Central Economic Work Conference held in December clearly stated that infrastructure investment should be carried out moderately ahead of schedule.
Despite being key to a sound 2022 economy, infrastructure investment should be seen in the right light to better serve the economy. It should be made clear that such investment should be in line with the general direction of the nation's economic transformation and development. The integration of new and traditional infrastructure is important to stabilize economic fundamentals, and there are major projects for both categories of infrastructure outlined in China's 14th Five-Year Plan (2021-25).
As for benefits, there should surely always be a weighing of advantages and disadvantages before carrying out infrastructure construction, but with a focus keeping on long-term and overall benefits.
A key pillar
China may have to achieve a 5 percent growth in infrastructure investment this year to better support its economic performance. Most provincial governments, according to their work reports released recently, set growth targets between 5.5 percent and 7 percent, with the minimum goal 0.4 percentage point higher than the average growth rate of 2021. Exports and consumption, however, can hardly maintain their momentum as shown over the last two years, hence leaving a gap for investment to fill. According to our calculations, to achieve that minimum goal, infrastructure investment should at least grow by 5.4 percent－an increase of 828 billion yuan ($130.72 billion)－or even higher to fend off the risk of an economic downturn.
Abundant project reserves
According to the National Development and Reform Commission, which requires special debt projects be declared in advance, as of Feb 12, a total of 1,831 PPP (public-private partnership) projects in China have entered construction phases or were launched, with investment standing at 2.72 trillion yuan. Reserve projects with a total investment of 8.33 trillion yuan are yet to be put into construction and operation.
Meanwhile, on Jan 10, an executive meeting of the State Council－China's Cabinet－called for accelerated efforts in boosting key major projects identified in the 14th Five-Year Plan, including new infrastructure construction, new urbanization construction, transportation, water conservancy and other major projects.
In 2020, China saw an investment of 1 trillion yuan in key areas of new infrastructure. Compared to traditional infrastructure, new infrastructure can better integrate and develop with both upstream and downstream firms in terms of industrial chains. Construction of 5G networks, for instance, can create new momentum by boosting both the digital economy and information economy. According to local government reports, 21 regions will act to boost 5G construction and layouts this year, among which eight have planned for a total of some 276,000 5G base stations. With mounting investments, new infrastructure could funnel more capital into new manufacturing and service industries by connecting upstream with downstream firms.
The new urbanization has advanced rapidly in recent years. As outlined in the 14th Five-Year Plan period, the urbanization rate nationwide will rise to 65 percent. Issues of unbalanced and insufficient development are still prominent; the development gap between urban and rural areas as well as among different regions is still large; there are also many weak links in the fields of infrastructure and people's livelihoods … all these indicate a broad space for investment. According to the NDRC, as of Feb 12, among PPP project investments, there were as many as 3,031 urban infrastructure projects, with an investment of 4.54 trillion yuan.
There are sufficient reserves of traffic and transportation projects in China as well. Projects such as urban and intercity railways and old-road upgrades for self-driving pilot zones are calling for investment. The latest five-year plan also calls for newly-built intercity railways and urban (suburban) railways with a total length of 3,000 kilometers, urban rail transit of 3,000 km, and refurbished expressways of 25,000 km. More than 30 new civil aviation airports will be built to promote the construction of some 120 national logistics hubs.
According to the plan, the country will also propel key construction projects for water supply and transfer, irrigation and flood control. Last July, the State Council said it sped up efforts in 150 major projects of water conservancy for 2020-22, with five main functions and 1 trillion yuan of investment. Still, more efforts are needed to promote the infrastructure construction of water conservancy in rural areas.
Plentiful funds
China has reported a surplus in its fiscal balance for two consecutive years. According to some estimates, there are currently more than 5 trillion yuan in funds that can be reserved for use in future years. The Ministry of Finance has issued a quota of 1.46 trillion yuan for special debt this year in advance, and it has made clear that the special debt will be used in nine major fields, including transportation infrastructure, energy, agriculture, forestry and water conservancy, and ecological and environmental protection. In January, a total of 698.9 billion yuan of local government bonds was issued, an increase of about 93 percent over the same period of the previous year. Unlike previous years, most of them were newly added bonds (583.7 billion yuan), and the new funds will be invested in major projects. Special bonds are valued at 484.4 billion yuan among the newly issued bonds in January, accounting for one-third of the quota issued by the Ministry of Finance in advance and 69 percent of the total bond issuance during the month.
In addition, the government guiding fund ushered in a new round of development. The scale of government guiding funds has been rising in recent years. According to Zero2IPO, a Hong Kong-listed consultancy, since 2021, a total of 163 government guiding funds have been established, with a total size of 980.6 billion yuan.
Therefore, we hereby suggest appropriately increasing transfer payments from the central government to local governments impacted by COVID-19, or those having financial constraints, to help them develop local infrastructure projects in accordance with their actual needs, and accelerate the allocation of financial transfer payment funds. Efforts can also be made by institutions such as the China Development Bank and the Agricultural Development Bank of China to boost infrastructure investment.
There is still ample room for infrastructure construction in China. Under the premise of scientific planning, rational layout and emphasis on efficiency, infrastructure investment is promising. Infrastructure investment can promote stabilization of the economy in a relatively short period of time, help improve market expectations and stimulate enthusiasm of market players, which is of significance for steady economic growth this year.
Sheng is professor with the Shanghai-based CEIBS and former head of the PBOC's statistics and analysis department. Long is a researcher with CEIBS Lujiazui Institute of International Finance and Wang is a doctoral candidate at Shanghai University of Finance and Economics.
The views don't necessarily reflect those of China Daily.
