Bonds Mar 31

50tn yuan in bonds for new infrastructure

Thousands of projects such as 5G base stations and intercity rail links to be built across China over next few years 

50-trln-yuan infrastructure funded by bonds
Funds from 49-trillion in bonds will be used to create 'new infrastructure' across China, such as 5G base stations, plus rail lines between cities over the next few years, the government has said. Photo: AFP

(ATF) Though all data is not yet in, by now 25 provinces, autonomous regions and municipalities across China have announced future investment plans. The outlay on 22,000 projects will reach at least 49.6 trillion yuan (US$7 trillion), with planned investment in 2020 of 7.6 trillion yuan.

According to the stated aims of China’s leadership ‘infrastructure’ is the new slogan for development.

So what exactly is "new infrastructure"? Where are the opportunities in this approximately 50 trillion yuan exercise?

The goal is to drive economic growth, as Wen Laicheng, executive director of the Zhongcai-China Securities Pengyuan Local Finance Investment and Financing Research Institute at the Central University of Finance and Economics told the China Economic Weekly. Wen said this year the national deficit is likely to increase via the issuance of long-term debt. A jump in issues of local government bonds and the portion of funds raised via debt would increase public investment to drive growth.

Communist leaders say that in years past the Soviet Union, for example, realized the significance of electrification, motorization, and radio technology when the country began to build itself up. It vigorously promoted industrialization and electrification. By 1927, the Soviet Union's railways had reached 75,000 kilometers, and the country's power grid and telephone network was nationwide. In the United States, which had just experienced the Great Depression, Roosevelt's New Deal saved American banks, industry and agriculture. 

Base stations, rail links

The importance of national infrastructure is self-evident, Hunan television told its viewers. "New infrastructure" after this epidemic will include 5G base stations, ultra-high voltage, intercity high-speed and intra-city railways, new energy sources, big data and artificial intelligence. This is similar to transportation, communications and manufacturing 100 years ago, but has higher, faster, stronger and ‘smarter’ attributes. In fact, the role of the ‘new infrastructure’ has been around us since the coronavirus outbreak, the state broadcaster said.

China Mobile has proposed constructing 300,000 5G base stations by the end of 2020. China Unicom and China Telecom aim to complete some 250,000 base stations in the first three quarters. 5G construction itself includes hardware such as chips, devices, materials, and precision processing, as well as software such as operating systems, cloud platforms, and databases. The combination of 5G with ‘big data’, artificial intelligence and other related technologies will drive many industries and lay the foundation for digital transformation in many fields.

The China Academy of Information and Communication Technology has forecast that by 2025 the country’s estimated cumulative investment in 5G networks will reach 1.2 trillion yuan. In the next five years, the scale of investment in network transformation for industrial enterprises is expected to reach 500 billion yuan. The construction of 5G networks will drive the ‘upstream’ and ‘downstream’ of the industrial chain and the application investment in various industries is tipped to exceed 3.5 trillion yuan.

The current infrastructure is alleged to have vastly improved China’s handling of Covid-19 response.

Pandemic response

The Zhejiang Provincial Center for Disease Control and Prevention cooperated with Alibaba in February. First, AI robots were placed on the frontline of the epidemic. They were responsible for entering contaminated areas to deliver medicines and meals to patients. They only need to be disinfected and recharged before being used again.

Secondly, with the application of AI testing technology, doctors need to do viral DNA analysis for patients on a regular basis. AI technology can shorten the test analysis time from 12 hours to half an hour.

AI imaging technology can also analyze the results of CT and MRI images. In the epidemic, it analyzed 30,000 clinical cases, which not only improved doctors’ work efficiency but also reduced labor intensity. The key is to improve accuracy. These technologies will be further fully applied in the future. In the ‘latter’ stage of the epidemic, the application of mobile health codes were said to have greatly improved the efficiency of people's resumption of production, work and prevention of disease spread.

A meeting of the Central Committee’s Politburo held in February announced that China will increase research and development support for re-agents, drugs, and vaccines, and accelerate the development of biomedicine, medical equipment, 5G networks, and the industrial Internet.

The Party is now wants to actively expand domestic demand and accelerate projects under construction and strengthen the guarantee of labor, land and funds. It is generally believed that this ‘new infrastructure’ is different from the traditional "iron public infrastructure", such as railways and highways. It refers to infrastructure at the "technological end" of things, especially 5G.

But is this 50-trillion-yuan drive to save the economy an unprecedented figure? Judging from the projects announced by various provinces and cities, these infrastructure outlays will be the biggest.

Yunnan

For example, the “Four One Hundred” project is about to begin in Yunnan. In 2020, 525 key projects will be launched, with a total investment of about 5 trillion yuan.

Guo Jinhua, director of the Fixed Assets Investment Division at the Yunnan Provincial Development and Reform Commission, said that the proportion of large projects had increased significantly in the "four one hundred" plan. Some 232 of the 525 projects would have a total investment of 5 billion yuan or more, while 146 projects would have total investment of 10 billion yuan or more. 

Key projects such as the Shangri-La to Lijiang Expressway, the Dali to Lincang Railway, Tengchong Aisiqi Cadre Training Institute will be completed within the year. In addition, a number of key projects such as the Lancang-Menglian Expressway and Qingshuihe large-scale water conservancy projects will be started.

Beijing’s “2020 Key Project Plan" includes 300 projects covering three major areas with investment of about 252 billion yuan. Among them, 100 infrastructure projects are planned with investment of 66 billion yuan, including seven national rail projects, five suburban rail projects, 16 subway projects, 12 highway projects, and 16 urban road projects.

Under the pressure of steady growth, the speed of approval of recent infrastructure projects is also increasing.

According to data released by the National Development and Reform Commission, as of March 3, infrastructure projects approved by the National Development and Reform Commission exceeded 228 billion yuan, 93 billion yuan more than the same period last year. As of February 25, the resumption rate of 533 major transport projects nationwide was 70%.

On February 10, the Ministry of Finance announced the fiscal revenue and expenditure in 2019. Last year, the country’s general public revenue was 19.8 trillion yuan, a year-on-year increase of 3.8%. But it failed to meet targets in the budget report. Tax revenue in 2019 was nearly 16 trillion yuan and, accounted for 83% of fiscal revenue, with a growth rate of 1%, which was the slowest rate since 1969.

In recent years, the economic downturn has led to tax and fee reductions, and the gap between revenue and expenditure has stood out. Local governments, notably those at the grassroots level, are under pressure. It is not uncommon for teachers to ask for salaries and for civil servants to be owed salaries.

"The pressure on fiscal revenue and expenditure this year is indeed relatively large. Because the economy has been declining in recent years, fiscal revenue in 2019 has increased by only 3.8% year-on-year, and tax revenue has been almost zero. Coupled with tax and fee reductions, fiscal 2020 is indeed tight,” Wen Laicheng said.

Economic shock, social impact

Wen said that given the harm caused by the Covid-19 epidemic it was likely to cause serious economic shocks and social impact. If the global economy is affected, it will further affect China's foreign trade, and domestic revenue.

"Therefore, in the face of such uncertain factors, we must first keep the domestic economy relatively stable, and the fiscal revenue and expenditure arrangements cannot be carried out in the usual way," Wen said.

However, fiscal investment in the government budget does not account for the "mountain" of infrastructure investment.

Wen Laicheng said the main investment is still social investment, while the government budget investment accounted for only about 5% of this infrastructure outlays. "Government investment mainly plays a role in driving, demonstrating and stimulating private investment."

The China-Thailand Securities Research Report also shows that the proportion of budgetary expenditure invested in infrastructure is not high. From a historical trend, the proportion of budgetary funds invested in infrastructure has increased. From 2015 to 2017, the proportions were 10.87% and 11.54% respectively.

"From my judgment, the current economic situation may not be better than during the 1997 Southeast Asian financial crisis or the 2008 financial crisis. Therefore, when making budget revenue and expenditure arrangements this year, we may need to take some unconventional measures to deal with it. The methods of the crisis, increasing fiscal deficits, expanding debt issuance, will be adjusted after overcoming the current difficulties," he said.

From the perspective of funding sources, special bonds and policy bank financial bonds may become the main source of spending to boost infrastructure.

On February 24, Assistant Minister of Finance Ouwen Han said it was necessary to concentrate the use of some of the central government's stock funds, increase transfer payments, expand the scale of local special debt issues and ensure that funds follow the project.

On February 27, Luo Guosan, the director of the Basic Department of the National Development and Reform Commission, said in a media interview the government should accelerate the release of central budget funds, actively seek loan support from financial institutions and attract more social investment to participate in major project construction.

On March 4, Ou Hong, the director of the Investment Department of the NDRC, revealed that in the next step, in order to promote major projects, the commission would adopt corresponding policies and measures with relevant parties to accelerate the release of money in the central budget and organize local governments to prepare special debt projects.

While the scale is expanding, the issuance of special bonds is also accelerating. As of the end of February, the nationwide issue of local government bonds amounted to 12.2 trillion yuan, and the progress of the local wholesale bond advance had reached 66%.

In this extraordinary period, can a new round of large-scale infrastructure construction bear the heavy responsibility of stable growth? For the Chinese economy, perhaps the test has just begun.