china's economy

Paying for China's investment-driven growth

China's approach to fixed-asset investment has been to build first and ask questions later. But there's now no avoiding the big question: where will the money come from?
Jiaozhou Bay's bridge to nowhere. Can China afford more such follies?

Fixed-asset investment has been a key driver of China’s economic growth and will remain so in 2013, but the government will find it increasingly hard to sustain its ambitious building projects.

Investment in fixed assets will grow by 19% in 2013, according to CLSA, a Hong Kong-based brokerage. Although that is a slowdown from the 22% rise in 2012, it is still a big increase. “Our worry is where the money comes from?” said Francis Cheung, head of China and Hong Kong strategy at the firm.

Bank lending is no longer an ideal option as investors tend to frown on banks issuing loans to questionable infrastructure projects. The bond market, which has in recent months become a popular source of funding for many companies in China, isn’t big enough to provide sufficient financing, Cheung added.

Borrowers have raised a total of Rmb3 trillion ($481 billion) in the bond market during 2012 — far short of the Rmb12 trillion that will be needed for infrastructure investment during 2013.

Moreover, the debts within China’s financial system are much higher than officially recognised. CLSA estimated China’s government debt-to-GDP ratio was about 65% in 2011, compared to the official statistic of 39%.

Although the government debt-to-GDP ratio is not at an alarming level and is much lower than most countries, China’s government debt-to-revenue ratio is high at 175%, similar to countries with higher debt levels such as the UK (179%) and France (185%).

A lack of funding for the massive construction projects is not necessarily a bad thing, because CLSA reckons China is over-invested by 10% of GDP, hence the growing concerns about overcapacity and building roads to nowhere.

Many of the new infrastructure projects are in less-developed central and western provinces, which are also less populated and will be slower to generate returns.

The most controversial project — the $1.6 billion Jiaozhou Bay bridge in east China’s Shandong province, which won the crown for the world’s longest bridge over water — is known as the bridge to nowhere because of the extremely light traffic on the bridge since it opened in 2011.

In another high-profile example, the Shanghai government spent $1.2 billion for a 30-kilometre magnetic levitation train in 2004, while one section of Beijing airport’s billion-dollar Terminal 3, which was opened before the games in 2008, closed after the athletes left.

Other observers suggest liquidity is the real problem. “China’s reserve ratio is still very high and there is lots of scope to reduce the reserve ratio,” said Adrian Foster, Asia-Pacific head of financial markets research at Rabobank.

Despite the lending frenzy in 2009, which increased bad loans at the banks, China’s overall bank lending has gone back to the 2004 to 2005 level, and is again rising along the old trend, according to Rabobank.

“Banks just need to write off the bad loans slowly,” said Foster. “From a long-term, macro perspective this is not going to be an issue.”

He noted that China has attracted a lot of foreign investment in the past and that it can’t be the most attractive investment destination forever. He forecasts that China will maintain 8% GDP growth in 2013, but added that it needs a lot of stimulus to make that happen.

¬ Haymarket Media Limited. All rights reserved.