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China curbs infrastructure spending as local debt climbs

Slowdown exacerbates the plight of depressed regions

Construction material for a subway in the Inner Mongolia Autonomous Region city of Baotou. Growth here is some of China's lowest due to weaker infrastructure spending.(Photo by Yusho Cho)

BEIJING -- China is slamming the brakes on infrastructure investment to reel in soaring local debt, but the move is certain to hurt regions reliant on public works projects, widening the country's already stark economic gaps. 

Infrastructure spending in the January-April period rose 12.4% on the year, 0.6 percentage point lower than the growth marked in the three months ended March, data from China's National Bureau of Statistics shows. The seemingly strong growth appears less impressive when put in context. The annual increase has been around 20% in recent years. In 2017, when the Communist Party held its twice-a-decade congress, the figure was 19%.

Overall fixed asset investment expanded just 7% in the January-April period, the slowest since 6.3% in 1999.

China boosted infrastructure investment to buoy its growth rate after exports dropped off following the 2008 financial crisis. But President Xi Jinping has become increasingly alarmed by the rapid rise in local debt, deciding to put the brakes on such spending.

In China, public-private partnerships have become a popular funding method for public works projects since two years ago. But the latest policy shift has suddenly robbed those projects of needed funds, with an estimated 5 trillion yuan ($784 billion) in projects having been suspended or seen their funding reduced. 

The original purpose of these partnerships was to reduce local government debt while promoting infrastructure investment. But the National Development and Reform Commission has said that there is not enough private-sector participation.

Private companies shied away from these projects due to weak returns on investment and the special treatment given to local state-owned enterprises. Some local governments even had to guarantee profitability to attract private funds.

Curbing financial risk is one of the three priorities Xi plans to accomplish by 2020, and reducing local debt will be an urgent task to that end.

Local governments are only allowed to procure funds by issuing bonds, but illegal methods are widespread. Xi views these private-public partnerships as one such way of raising money illicitly.

National Bureau of Statistics spokesperson Liu Aihua has said that cleaning up private-public partnerships will be useful for healthy development in the long term.

But the shock to China's provinces and cities has not been inconsequential. For the three months through March, gross domestic product growth slowed in many of China's 31 provinces, directly controlled municipalities and autonomous regions. Among the lowest were the city of Tianjin at 1.9%, Jilin Province at 2.2%, the Inner Mongolia Autonomous Region at 4.6% and the provinces of Liaoning and Hainan at 5.1% each. Heavily dependent on infrastructure investment, those regions have failed to develop new industries.

Corrections to inflated GDP figures are also having an impact. Tianjin and Inner Mongolia admitted to padding data in January and the Communist Party has also accused Jilin of similar offenses. These governments will have until 2019 to correct their statistics or face harsh penalties.

In total, only 18 regions surpassed the country's 6.8% growth rate -- the smallest number since 2008 -- while one region tied and 12 others were below. About 90% of regional growth figures were above that of the country in the past -- a statistically unrealistic scenario. The data correction seems to be bringing a picture of China's actual economy to the surface.

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