China accelerates €950 billion worth of infrastructure projects to shore up growth

It’s often breathtaking to see the range of tools the Chinese government has to steer its economy in the direction in which it wants it to go.

Take infrastructure spending. This has been one area where China has managed to invest in projects that have contributed to the country's development while also keeping growth on track.

This worked in 2008 after the economic slowdown. Now the National Development and Reform Commission, under the guidance of Chinese premier Li Keqiang, is about to do it again by fast-tracking seven trillion yuan (€950 billion) worth of projects this year to keep economic growth above 7 per cent, a crucial marker.

China’s GDP expanded at 7.3 per cent year on year in the third quarter of 2014, the weakest quarterly figure since 2009, so clearly something needs to be done.

Investment

Bloomberg

reports that the investments will be in seven industries including oil and gas pipelines, health, clean energy, transportation and mining and that they will be bankrolled by investment from central and local governments, state-owned firms, loans and the private sector.

Last month, NDRC spokesman Li Pumin said China was examining investment in these sectors.

Driving the investment is a belief that domestic consumption in China is not taking off fast enough.

The broader backdrop to this is the belief that China is no longer the star performer of the world economy, although the broader Asian region, excluding Japan, is widely expected to be the fastest growing economy of next year.

According to the Economist Intelligence Unit, the global economy will grow by 2.9 per cent next year, with the US leading the charge with expansion forecast at 3.3 per cent.

Again the euro area and Japan will hold things back, and China’s expansion will slow to 7 per cent in 2015.

Macau, which at various times has been the world's richest economy because of gambling revenues, will be the second worst performer because of a slowdown in gaming.

Property downturn

Wang Tao

at

UBS

expects even lower GDP growth in China of 6.8 per cent, as the ongoing property downturn leads to further weakness in construction and industrial production and related investment.

“For 2015, we expect a slow grind with further policy easing, stable financial conditions, improving corporate margins and intensified reform effort. However, there could be some big surprises as well,” she wrote in a research note.

Among the surprises she sees this year are the end of the property downturn, a negative surprise for the market in the shape of serious financial stress and above-expectation outcomes in local government financial reform.

She is also predicting a 5 per cent depreciation in the yuan and rapid progress in reform of state-owned enterprises.

So while infrastructure spending provides short-term fixes, this kind of investment needs sustainable reform.

Li asserted China's commitment to reforming the economy during a recent three-day tour of Guangdong province. He said China should count on reform, opening up and structural adjustment to "steadfastly" maintain economic growth within a proper range, as the country is confronted with new challenges in an economic "new normal".