Local spending raises concern

Lu Ming, an economics professor with Shanghai Jiao Tong University, said that as exports and consumption are hard to expand in the short term, scaling up infrastructure investment was indeed the most effective way to spur growth.

Lu and other experts said the key cause for concern was whether these cities' already-high liabilities would be increased — whether these new projects could recover their costs.

To address the financing problem, Shi said it is essential to develop China's capital markets and allow city governments to issue project-backed bonds directly. At present, local governments are banned from issuing bonds directly.

As a way around this restriction, many local governments in recent years turned to financing vehicles.

But the central government has moved to rein in these operations since 2010, pushing some local governments to turn to high-cost shadow-banking debt.

That has exacerbated doubts about their repayment abilities. Lu noted that urban rail systems rarely achieve an operating profit, and local governments should consider allowing operators to participate in their development projects.

Local governments also plan to invest in inter-city railways and highways, airports and urban renewal projects.

Since mid-year, the State Council, China's cabinet, has ceded more administrative approval power to provincial governments. This was seen as a major move to facilitate the project launch process.

Chongqing's urban rail system is the first infrastructure project to be approved by the municipal government.

Shi said he is worried about giving more approval power to local governments, not because the central government is wiser, but because giving provinces this power could make it easier for local administrators to interfere with the market.

Local governments "tend to be insensitive to the risks and price signals of the market".

Rather than delegating approval power to local governments, it would be better to just remove such power, Shi said.

"We cannot say all of the projects are unnecessary. But we also have to ask, how many of these projects have undergone rational examination?" Lu said. "Is there a more economical way to carry out these projects? For example, light rail and tram systems can also reduce congestion, but they are much cheaper than subways."

Apart from direct investment, some local governments have reportedly secured funding support that is essentially coming from the central government.

For example, Shanghai will receive a 250 billion yuan loan from Agricultural Bank of China Ltd to help fund the city's planned Disneyland park and free-trade zone, according to a South China Morning post report.

Lu said although he could not comment on the specific project, the measure could be necessary. "Shanghai, with its free-trade zone plan, is projected to be a growth hub for the next decade. Financial resources should go to where the growth is," he said.