The South China Morning Post reports China Doubles Value of Infrastructure Project Approvals to Stave Off Slowdown.
The National Development and Reform Commission (NDRC) has approved 21 projects, worth at least 764.3 billion yuan (US$107.8 billion), according to South China Morning Post calculations based on the state planner’s approval statements released between January and October this year.
The amount is more than double the size of last year’s 374.3 billion yuan (US$52.8 billion) in approvals recorded over the same period, which included 11 projects such as railways, roads and airports.
Local governments have been under increasing pressure from Beijing to support the economy, but they have less budget room due to lower tax revenues after the central government over the past year ordered individual and business tax cuts.
To fill the gap, Beijing has allowing local governments to sell more special purpose bonds, whose proceeds can only be used to fund infrastructure projects. At the beginning of this year, the Ministry of Finance raised the quota for special bonds to 2.15 trillion (US$302 billion) from 1.35 trillion (US$190 billion) last year. And when local governments came close to exhausting their annual quota set this autumn, the central government brought forward a portion of their 2020 quota so they could continue to raise funding for new projects.
Infrastructure Urgency
Michael Pettis, Finance Professor, Peking University, and author of the China Financial Markets website has an interesting take infrastructure projects.
Allocation of Money
To fund the projects China Cuts Banks’ Reserve Ratios, Frees up $126 Billion for Loans.
Analysts had expected China to announce more policy easing measures soon as the world’s second-largest economy comes under growing pressure from escalating U.S. tariffs and sluggish domestic demand.
The People’s Bank of China (PBOC) said it would cut the reserve requirement ratio (RRR) by 50 basis points (bps) for all banks, with an additional 100 bps cut for qualified city commercial banks. The RRR for large banks will be lowered to 13.0%. The PBOC has now slashed the ratio seven times since early 2018. The size of the latest move was at the upper end of market expectations, and the amount of funds released will be the largest so far in the current easing cycle.
The broad-based cut, which will release 800 billion yuan in liquidity, is effective Sept. 16. The additional targeted cut will release 100 billion yuan, in two phases effective Oct. 15 and Nov. 15.
Real Growth
With real growth at probably half reported levels – which measure growth in activity, whether or not it is wealth enhancing – lower-than-expected growth rates are not a bad thing: they mean credit growth, while still too high, is slowing.https://t.co/s8aCyK2SOQ via @scmpnews
— Michael Pettis (@michaelxpettis) October 20, 2019
World Bank has just cut its GDP forecast for China to 6.1% in 2019, 5.9% in 2020, 5.8% in 2021. For this to happen, debt-to-GDP ratios would have to rise by at least 12-15 percentage points, which I think is very unlikely. I’ll bet 2021 growth is below 5% (still way too high). https://t.co/1M5ljprfJW
— Michael Pettis (@michaelxpettis) October 10, 2019
Trade Agreement
I suspect that the only thing driving “substantial progress” is election pressures in the US. I don’t think any agreement between Washington and Beijing will matter for more than few months.https://t.co/aRFimMFljZ
— Michael Pettis (@michaelxpettis) October 12, 2019
Chinese Local Government Funds Run Out of Projects to Back
On October 16, the Fiancial Times reported Chinese Local Government Funds Run Out of Projects to Back.
“There are not many economically viable projects for us to take on,” an official at Sichuan Development told the FT. “We have plenty of bridges and roads already.”
GDP Formula
GDP = C + I + G + (X – M)
GDP = private consumption + gross investment + government investment + government spending + (exports – imports).
Whether or not the projects are viable, government spending adds to nominal GDP.
If the government paid people to spit at the moon it would add to GDP.
Arguably, that’s a far better use than dropping bombs and making enemies in the process.
Not Writing Down Losses
China isn’t writing down losses, but neither is the US, EU, or any other country.
With that in mind How Badly Overstated is Chinese and US GDP?
Concern over GDP with no concern over losses and malinvestment is concern over nonsense.
Mike “Mish” Shedlock
China is brilliant. Spend its money on its own people and its own infrastructure. The United States, print money like China, give it to banks, which then hand it over to the Jews. And further direct subsidy to their country in the Middle East.
At least the money is being spent on real things instead of just bidding up speculative assets or paying for a medical racket. The Chinese are consciously importing as much technology, knowledge, and resources as they can. They figure they can sort out which techniques work best later. If there is not enough money or the game stops at a certain point, they are a lot better off than 40 years ago. Better off insolvent with a lot of technology, infrastructure, and extra housing than solvent without it.
I’m puzzled by the comment “China isn’t writing down losses, but neither is the US, EU, or any other country.”. In the US, if a business undertakes an investment, and it fails, they do write it off. On the other hand, if, in the US, a governmental entity undertakes an infrastructure project, so far as I know they expense it as they build it, and never “write it on” as an asset, so there is nothing to write off, regardless of whether the infrastructure turns out to be useful.
The comment was made in the context of GDP accounting. Any old idiocy the government wastes overspent money on, here there and everywhere, adds to GDP. It makes no difference whether the money is spent on building freeways, or on blowing them up.
In GDP accounting, 1 – 1 = 2. As in 0 = 2. That’s government math for you….. You’d think people would at least be literate enough to recognize how utterly idiotic that is. But nope, the dupes still keep believing GDP is some sort of meaningful and important measure.
As a citizen the growth rate matters less than the immigration issue. I actually found it easier to find a job under Trump than Obama because employers are more reluctant to hire h1b and are looking to hire citizens and green card holders first again. My friends who were replaced by h1b holders now have multiple jobs and are getting rich under Trump. And these are all second generation immigrants with engineering degrees who suffered during the 2001 and 2009 crises.
The best use of government money is on infrastructure improvements and basic research. Otherwise, there’s little to nothing to show for it. The biggest government expense in the US is entitlements. Free money from the government. At least in China the citizens have to work for the government money.
Accompany JonSellars comments with consideration of the GDP with “no concern over losses and malinvestment” with respect to such fine US operations of places like WeWork, Netflix (26 years without turning a profit !), stock buybacks, oil shale debacle, etc, etc…
Pot meet kettle…
“Concern over GDP with no concern over losses and malinvestment is concern over nonsense.”
China is not a true capitalist country. If I borrow money to build a housing development that no one wants to live in, then it is a disaster for me when I declare bankruptcy, and a disaster for the bank that lent me the money, because it is out the money.
In China, the government will just print the money and put it in the bank. I have no losses and neither does the bank. But the money I spent is to build the development is now in the pockets of the people who did the work. And they now have money to feed their families, pay rent, save for the future, whatever.
That’s the Chinese model. It is NOT private sector capitalism. It is a growth machine for the sake of employing people and putting cash in their pockets. It will end when the world can no longer provide enough raw materials to keep growing.
“In China, the government will just print the money and put it in the bank”
Just like in America, in other words.
Otherwise, lo and behold, a, gasp!!!, Bank may have t take a loss. And then, like, The Syyyyystem willl, like, Colllllaaapsee!!!!” The horrors!
If the infrastructure is finally utilised then it is investment and the future growth as a consequent real. May not be efficient capital allocation but real investment for future growth.
Questions are – how much will be utilised (to what %), when?
Low utilisation a long way off then it’s all smoke and mirrors.
At least they will be busy maintaining it until it can find users.
The apartment sector is a worry as they are often used as investments by ordinary Chinese. If prices collapse there will be a big negative wealth impact just as China is trying to wean itself off exports to the US. You can imagine the rest.
I’d say there are two real issues – demographics and urbanisation rate. Interestingly it looks like the Chinese population may begin to contract before they hit peak urbanisation.
My theory is that so long as urban population is under 75-85% they can keep the ponzi scheme rolling. After which time they’ll have to start dreaming up creative ways to keep the workers working.
Ultimately demographics will catch up with China just like it will in the EU, too many years of the one child policy.
A recent trip to China by a group of real estate investors I work with was eye-opening. After being shown some of the new cities being built outside of major urban centers, a group went out unescorted a few evenings, and found the towers were empty. MAintenance workers went into empty, unfinished spaces to Turn on work lights so the buildings would appear occupied. Many of the towers that are 3 to 5 years old showed significant And ubiquitous spalling and failure of concrete, to the point that cracks were spreading up as far as they could see. There were towers with subsidence issues. The engineers opined that these buildings were built too quickly, with very low standards, and would need substantial structural repairs in the next few years. One guide when asked responded that it was fine – demolishing buildings and rebuilding them would provide work for many people and orders for suppliers!! Plumbing and electric work was “a joke” – in one building, the model apartments all had shower pans that were improperLy installed, and sink drains with no traps. At least one sewer stack was unvented. The investors cut their visit short. The developer wasn’t even sure the government would have allowed foreigners to buy blocks of these units, because they might not be able to control the dissemination of resale and rental data.
This was not a small-scale issue. These buildings may be uninhabitable by the time China’s lower classes migrate up to the middle, or they will simply be forced to live there in increasingly appalling and unsafe circumstances.
This is a model the world has never seen before. If Trump succeeds in choking off Chinese trade, when the SHTF, it may be a total, mind-boggling collapse.
Somehow I’m not surprised & it could be existential to the CCP if enough ordinary people lose their shirts when real estate collapses.
I’ve heard of train stations with little usage, highways with few cars per hour etc.
Without utilisation they become a future cost and drag.
I have seen this “China’s growth is much less than reported” for more than a decade now. Meanwhile, they have built several brand new cities and lifted millions out of poverty. They somehow stole all western manufacturing … but their growth is fake?
I am not saying that China’s official numbers can be taken at face value (most likely not), but I wouldn’t put much trust into western expert estimates of China’s growth either.
According to UK government statisticians the UK has a balance of payments surplus with the US. Their counterparts in America say the exact reverse. Who can you trust these days?
Who do you mean by “they.” The CCP (not) or the Chinese people, particularly all the incredibly hard working rural people who flocked to the cities to work in Shanghai sweat shops. They are the foundation of the present economy and they are rapidly disappearing due to demographics. These showcase cities were created on a celestial mountain of debt. What will happen when China has a first class debt crisis? So far, most of the debt is domestic, China can make the average Chinese take a huge haircut in their assets, but what will be the consequences of that. Avoid Chinese debt in any foreign index funds that you own. Finally, I respect Professor Pettis’s common sense explanations of the Chinese economy.
Shovel ready?
You get what you measure. True growth can only be measured by productivity growth which is at the crux of a rise in the standard of living. This number has been at or below 2% for 20 years in the US.
Agree. But the problem is that productivity increases are primarily a result of technology improvements in manufacturing. When you offshore your manufacturing, you find that you can’t apply a lot of technology to increasing productivity in cutting hair or grilling steaks.
The US still manufactures a lot of stuff. Not the things that require a lot of low skilled manual labor, but things that require skill to produce or can be heavily automated. Factory robots in the US has absolutely raised our standard of living.
Agree. My point is that the smaller the portion of the population involved in manufacturing, the smaller the opportunity for widespread productivity gains, which leads to long-term wage stagnation.
Measure it in a unit closely associated with wealth for millennia, which is not easily as easily gameable by simply counterfeiting money, and it’s been lots worse than that: Over the past 50 years, median energy consumption has trended lower; and that despite darned near every woman having been corralled into toiling in the money printers’ sweatshops over that period.
Essentially, all that technological advancements giveth, debasement and legal/regulatory driven theft has more than taketh away.
Its all relative. I’m still richer than my parents ever were or will be. On a relative basis most humans are better off than their parents and certainly better off than their ancestors debasement be damned. The money system has to support 7.2B humans or so. When I was my son’s age it had to support half that.
I assume You, like I, by now increasingly represent the past, rather than the future.
Younger people I work with, aren’t even in the same ballpark, wealth wise, compared to their parents. They may have a nicer cellphone, but their parents had/has a house in San Francisco. Something most of them never will, other than by inheritance.
And despite popular myths about “millennials,” I have yet to meet one of them who wouldn’t trade their Iphone for a house sized to raise a family within half an hour of the city they work in. It’s the same story in Santa Monica and the rest of coastal LA.
And, it is also the same story, for most younger people, even outside of corner case areas like SF. Median take home free-to-spend-as-desired pay, after “mandates” and other taxes-by-another-name, simply hasn’t even remotely kept up with cost increases, for decades now.
“We” (I’m assuming you’re not exactly a “millennial” either….) may have caught enough of the final bubble blowoff to nominally be better off than our parents on average, but if you back debt increases out, I’m not even sure about that anymore. Instead, a major reason “we” appear to be wealthier, is specifically because “we” still get assume that we can continue to live off of the artificially pumped up “wealth” all the bubble blowing has afforded us, without having to worry about paying off the debt that went with it. As it is assumed generations following us, will pay for that.
Even millenials are richer than my parents. We were a dirt poor immigrant family from india in the 1970s. We were lucky to get out of a country that discriminated against our caste when it came to opportunities for everything. My dad’s mom died when he was 8 and he helped raise his younger sisters (ages 7 and 1) and brother (age 4) within dad. I will never understand why millenials are worse off. They have the biggest inheritances coming to them of any generation. My dad is almost 80 and still works 12 hour days at his small business. He is better off than his parents were despite not having much wealth other than a house and car. Retirement didn’t happen for my parents but they lived in an era rich of experiences their parents couldn’t dream of. So please explain why millenials are worse off than their parents.