Economy

Markets

Industries

Insights

Reports

Events

Local govts competing for investment to prevent slowdown

By Cheng Yunjie, Wang Yaguang (Xinhua)
Updated: 2008-11-22 15:58

China is rich, at least when you look at its world's largest two-trillion-dollar foreign exchange reserve and its fiscal revenue that has maintained double-digit growth for years.

But many officials in the less-developed central interior felt that Beijing had been penny-pinching in financing local projects for most of the year until only recently when the focal task of macro-economic control shifted from curbing inflation to slowdown prevention.

"The situation reversed completely in less than two weeks. It used to be projects waiting for capital, now it's the other way around," said Qiu Yunyang, chief of the Development and Reform Bureau of Hubei's Zaoyang.

To seize the opportunity for a boost of local economy, Qiu and his colleagues have put in extra hours these days to screen out projects that were mostly needed locally and had a better chance of getting a portion of the 100-billion-yuan ($14.61 billion) investment newly endorsed by the State Council, or the Cabinet, for the fourth quarter.

Under a rare stimulus package, a total of four trillion yuan, equivalent to nearly 78 percent of last year's national fiscal revenue, would be invested in the next two years to boost domestic demand and improve the livelihood of Chinese.

"That means an upcoming investment boom. but it's not easy to secure central finance. Only those who have a good reserve of projects will have a better chance," Qiu said.

Amid Zaoyang's 100 projects expected to be started up over the next three years, a large proportion aims to improve people's livelihood ranging from infrastructure, sewage and waste disposal, new energy to water supply pipeline upgrading.

"Government-funded projects can hardly bring immediate profits, but they have long-lasting social effects, including raising people's life quality and bettering investment environment," Qiu said.

Earlier next year, the city with a population of one million would welcome its biggest project in history as a pipeline wind through. The project intending to send gas from northwestern Ningxia Hui Autonomous Region to Hong Kong upon its completion in 2011 has secured 93 billion yuan from the central fund. Zaoyang is the starting point of the Hubei section.

"We (local governments) have no right to touch the fund. All money will directly go to contractors. But still we can benefit, as it would create jobs, stimulate consumption, generate fiscal revenue and product value," Qiu told Xinhua.

That explains to some extent why many local authorities were so motivated to seek central funds for engineering and infrastructure construction.

Heavy dose for quick fix

Signs of trouble have been much clearer over the past two months, ranging from weakening power demand, dwindling steel sales, declining fiscal revenue, sluggish real estate, corporate cutback in some industries to reduced sales in supermarkets.

Some local officials feared that without effective stimulation, the economic slowdown may aggravate next year.

"The statistics are good so far, but the risk of a sharper-than-expected slowdown is not impossible. Global financial crisis has left us a bruise, we don't know yet if an internal injury is there," said Hu Jiuming, deputy director of Wuhan Commerce Bureau.

Economist Fan Gang, a member of the central bank's monetary policy committee, thought that the Chinese economy was facing "an unprecedented slowdown", with the economic growth of next year likely to fall below eight percent.

Given China has moved to slow itself down for a balanced growth that would rely on consumption more and fixed-assets investment less, many people fear that the deepening financial crisis might decelerate the economy more than wanted.

As consumption takes longer time to grow, China's government has resorted to the same old tool it had used in the 1997 Asia financial crisis:enhancing investment.

But this time, restrictions on investing polluting, energy- or resource-consuming industries were not lifted while people's livelihood gained more stress than ever, said Qu Qiwen, an official with Wuhan Commerce Bureau.

The National Development and Reform Commission, China's top economic planner, has made it clear that central funds would favor "capital-strained projects already under construction and new projects able to give a quick forceful boost to the economy".

Many officials agreed that the statement pointed to infrastructure and real estate which contributed 60 percent of national investment and thus have a strong leverage to the economy. The remaining 40 percent are corporate investment whose dynamic varies with industries and is affected by the overall economic situation.

According to a work report from Anhui Provincial Development and Reform Bureau, the ongoing competition involves only 80 billion yuan. The other 20 billion yuan have already been earmarked to finance specific projects such as the south-to-north water diversion program, railway construction, grain crops production in northeast region, settlement building for nomad and renovation of rural residence in Guizhou.

Composure Matters

In line with Premier Wen Jiabao's order of "acting fast, forcefully and effectively", many provinces have held emergency meetings to analyze economic situations and draw up stimulus plans based upon their local reality.

Anhui Provincial Development and Reform Bureau for instance had sent a special work team to Beijing for a better understanding of the policies before soliciting projects from lower branches. It has so far submitted 466 programs involving an aggregate investment of 34.7 billion yuan.

In Shanxi, provincial development and reform bureau chief Li Baoqing urged local branches to "seize every minute" to thoroughly inspect all available projects and submit them in time.

In Hunan, potential projects concentrate on public utility, urban construction, transportation and energy as well as farming and water conservancy.

Under current regulations, before the final endorsement in Beijing, each project must go through feasibility study, complete with environment impact evaluation report as well as land and capital use plans.

Qiu Yunyang, of Zaoyang City, said that resources-consuming and polluting projects had little chance of getting by because Beijing's scrutiny was very strict. "The Industrial Restructuring Guidelines have made it clear what to support and what to restrict," he said,

The other way to prevent the backlash of blind investment, as Chief banking supervisor of Hubei's Xiantao city Guo Kunming noted, are through credit control.

All banking institutions have been required to submit quarterly reports on their new loans for regulators to scrutinize. Banks could face penalty for lending money to polluters, he said.

In an effort to stabilize job markets and activate consumption, domestic banks have been inspired to lend more to smaller enterprises, rural infrastructure and technical innovations.

In response to the central government's massive stimulus, a slew of local authorities have lately announced their investment packages.

Shanxi, for instance, aimed to mobilize 600 billion yuan through local finance, bank loans, private and foreign capital in the next two years to accelerate rail and road building as well as power grid upgrading in cities and the countryside.

Guangdong hoped to invest 10 billion yuan to materialize 1000 technical innovations by 2010 to increase local economy's resilience amidst weakening external demand. Beijing injected an extra six billion yuan in the fourth quarter to finance subways, heating facility, renovation of risky residence and rural infrastructure.

"These are all good measures in right direction. But it's still necessary to beware investment in a rush. The task of industrial restructuring should not be ignored, otherwise we would have to pay more for such overdraft," said Xiao Bai, general manager of the WISDRI Engineering and Research Incorporation.