Demand driver

WANG XIAOYING/CHINA DAILY

More investment needed amid the volatile and complex global economic environment

The rise of trade protectionism has created a severe external environment for China, which will undoubtedly put Chinese exports under higher pressure. Thus, the domestic market plays an increasingly important role in stabilizing economic growth.

In this context, government investment and policy incentives have undoubtedly become a key point and an important strategic tool to boost domestic demand.

The recent Central Economic Work Conference called for more government investment to effectively drive private investment. Due to its public nature, government investment can accurately support key projects that represent the strategic direction of the country and industrial investment that has a key supporting role in economic transformation and upgrading. And by directing more resource input in economically backward regions through transfer payments, the government can promote more balanced and coordinated development of regional economies.

Meanwhile, government investment, with its demonstration effect and policy incentives, can effectively mobilize social capital and steer capital toward scientific and technological innovation and emerging industries, so as to optimize and upgrade the allocation of productive forces. It can also create new job opportunities, thus injecting strong impetus into a sustained recovery and expansion of China's consumer market.

In recent years, China's government investment has shown the marked features of a continued expansion in scale and gradual optimization of structure. Through more policy incentives, it has effectively stimulated the vitality of private investment, and played a critical role in boosting short-term growth and driving long-term economic structural transformation and upgrading.

China has earmarked 700 billion yuan ($95.9 billion) for investment in the central government budget of 2024, an increase of 2.94 percent over the figure of 2023. The funds will mainly be invested in public infrastructure, agriculture and rural areas, environmental protection and restoration, high-tech industry, social services and other key areas.

Moreover, the government is actively exploring multiple financing channels and innovation in investment models. It has issued 1 trillion yuan worth of ultra-long-term special government bonds, focusing on major infrastructure, livelihood improvement and new-type urbanization projects, which lays a solid foundation and expands room for long-term economic and social development.

The issuance of special bonds is also expanding rapidly. In 2024, China's local government special bond quota was 3.9 trillion yuan, which has been widely used in infrastructure construction, housing projects for low-income residents, social welfare programs and other fields, in an effort to accelerate economic growth. Meanwhile, local governments have set up guidance funds to give full play to the leverage effect of financial funds. China had set up a total of 2,126 government guidance funds, with a target size of 12.82 trillion yuan, in the first half of 2024.

But from the perspective of the implementation, the amplification effect of government investment has not been fully unleashed.

In 2024, driven by increasing exports and large-scale equipment renewal policies, China's private investment has shown some signs of recovery. However, the growth rate is still low. Private investment in capital markets has also shown a downward trend.

There are a number of reasons for this. First, the quality of government projects needs to be improved. The reserve of high-quality projects is insufficient, and most of the invested projects are public welfare projects with low investment returns. Some projects have insufficient project assessment and unreasonable project design, resulting in their weak attraction to private capital and low utilization rate of funds.

Second, under the pressure of hefty debts, local governments are more cautious about investing in projects. At the same time, when financial institutions offer financing support, their participation is limited based on considerations of debt risks and investment returns as well as relevant regulatory policy constraints. In addition, interventions by the government and government-run platform companies have a crowding-out effect on private capital.

Therefore, to effectively exert the amplification effect of government investment, the above-mentioned problems need to be solved.

First, the central government should strengthen overall planning and project planning. Through the requirement to improve the project planning year by year, a balance can be struck between the public welfare attributes and the value-added attributes of projects. At the same time, the government should provide effective support for the implementation of projects.

Second, the central government should strengthen policy coordination and beef up financial support. Monetary policy should be kept moderately loose to provide sufficient liquidity support for economic growth. At the same time, China should actively introduce more structural monetary policy instruments and special support tools to improve the accuracy of pro-growth policies.

In terms of fiscal policy, on the basis of continued promotion of more proactive counter-cyclical incremental fiscal policy measures, China should gradually shift the focus of government expenditure from traditional infrastructure investment to education, healthcare, elderly care and other areas of people's livelihood.

Third, by issuing government bonds and lending them to local governments, and adjusting the mechanism for determining and allocating special debt quotas, the central government can support local governments to carry out debt replacement, defuse debt risks, and reduce the hidden burden of government investment and financing pressure.

With the principle of "special funds for special purposes", China should accelerate the issuance of ultra-long-term special treasury bonds and special bonds, and reasonably expand the scope of special bond investments.

Last, China should improve market-based operation mechanisms and increase the inclusiveness of government-managed funds. A sound board of directors system, management mechanism and risk control mechanism need to be established to improve the professionalism and independence of investment decision-making.

The assessment requirements for government-managed funds should also be improved, with the fault tolerance and exemption mechanism enhanced, and the boundaries of fault tolerance and exemption clarified.

In particular, the tolerance for the failure of innovative investment projects should be raised. At the same time, policies of talent attraction, incentive and guarantee need to be enhanced.

The author is dean of the National Institute of Financial Research at Tsinghua University. The author contributed this article to China Watch, a think tank powered by China Daily.

Contact the editor at editor@chinawatch.cn.