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The writer is a political economist at the University of California, Berkeley
At the start of 2024, 14 provinces and cities in China launched a series of “substantial” projects, indicating a sustained, though evolving, investment-driven economic strategy. Despite the calls from many economists, including myself, for a shift towards a consumption-driven growth model over the past 13 years, local governments’ vigorous promotion of such projects suggests that the country continues to rely on investment to support economic growth.
This strategy, though not without flaws, is somewhat rational in current circumstances. Internally, a pervasive lack of confidence among Chinese residents has stifled consumer spending, with Peking University’s recent survey indicating a modest 4.11 per cent increase in consumer confidence over the past six months. Externally, geopolitical competition, the US-China trade war and a possible recession in the eurozone have all presented challenges for the country’s foreign trade.
For Beijing’s leadership, maintaining growth is of the utmost importance both economically and politically. In their eyes, the most viable way to keep the gross domestic product growth rate in the 4-5 per cent range in 2024 is to vigorously promote investment.
But this year’s local investment programme, in contrast to previous initiatives, shows a notable shift in objectives. First, the 2024 projects have a distinctly scientific flavour, focusing on new-generation information technology, biopharmaceuticals, artificial intelligence and low-carbon energies. This suggests an ambition to ascend the value chain and develop new growth engines. Second, there is an emphasis on investing in public welfare. Third, there is a noticeable decrease in real estate investment projects. And last, there is an increased emphasis on private investment.
In the realm of public welfare, local investments are primarily targeting affordable housing, education, hospitals and environmental projects. According to the Chinese economist Yu Yongding, the country still has a significant gap in these areas compared with developed nations. Such investment will also boost consumption and the country’s economic growth.
In the housing sector, inventory in 2023 reached a peak not seen since 2017, making the reduction in real estate projects beneficial. However, investing in technology projects and increasing private investment is challenging. In theory, investment in high-tech projects has an immediate positive impact on GDP and may enhance overall productivity in the long term. Amid increasing great power rivalry, it is also advantageous for China to achieve self-reliance in core technologies.
But high-tech projects generally have longer cycles, lower input-output ratios and non-guaranteed returns. Prolonged investment on a massive scale also creates significant overcapacity in sectors such as solar energy, which diminishes productivity improvements.
Escalating private investment brings difficulties, too: where will the investment funds for private companies come from? Liquidity is a big problem for many such companies in China and Chinese banks are traditionally hesitant to lend to private enterprises.
Worse yet, many major projects are going to be funded by local government bonds. The new special local bonds for 2024 are expected to reach about Rmb4tn ($560bn). But in the context of reduced tax revenues, declining land concession fees and already high local debt levels in China, increasing special bond issuance by the local governments to support major project investments is unsustainable.
Beijing is at a critical juncture. As it seeks to direct the nation’s economic trajectory, the central government should strictly control the increase in local government bond issuance. It should provide large-scale funds, for example in the form of special national debt, to support broad-based infrastructure investments as well as those in high-tech. It is not just about spending more; it is about spending smarter. If a system that ensures efficient and high-quality infrastructure investment cannot be provided, China will continue seeing unproductive investments.
In the long run, the optimal strategy entails structural reforms aimed at eradicating local protectionism, fostering a fairer market and ensuring affordability in housing. A fairer market means creating an environment in which medium and small-sized private companies have opportunities to secure bank financing in the same way that state-owned enterprises do, and engage in competitive bidding processes.
This necessitates a robust political will and a vision that not only aims at immediate growth but also sustainable, inclusive development. So far, however, transformative shifts do not look imminent for China this year.
Source: Economy - ft.com
