MNI: China's Renewed PPPs To Lift Investment, Curb Debt Risks

China’s refreshed public-private partnership (PPP) regime will help stem the flow of falling private investment in 2024 by encouraging more active private-sector ownership of user-paid infrastructure and utilities, while curbing the growth of local government implicit debts, policy advisors and market analysts told MNI.

Private investment, which accounts for more than half of overall financing, fell 0.5% y/y in 2023’s first 11 months, but many expect that trend to reverse next year as policy kicks in and the real-estate sector stabilises.

Wu Yaping, researcher at the Investment Research Institute, China Academy of Macroeconomics, said the failing property sector had fueled 2023’s decline, despite infrastructure and manufacturing maintaining relatively high growth rates at 14.2% and 9.2% in the January-November period. Wu believes the new PPP mechanism will offer private investors more opportunities.

The guidelines, jointly released by the National Development and Reform Commission and the Ministry of Finance last month, include a list of projects that must be wholly owned or controlled by private companies, such as solid waste treatment and parking lots, while private equity must represent no less than 35% of other enterprises – including urban water, gas and heating.

Authorities hope the mechanism, which targets user-paid projects with clear methods of payment, will make it easier for the public and private sector to form partnerships without government assuming too much of the debt burden, said Wu. (See: MNI: China To Pursue Moderate Policy Support In 2024)

Wu estimated less than 10% of current projects would qualify and the market – once valued at over CNY10 trillion – will likely scale down to about CNY1 trillion investment a year at best.

“Projects on the list are very suitable for private investors,” said Yang Xiaoyi, senior researcher at local government investment advisory BRI Data. Private companies with registered patents will find themselves competitive in proposals with certain technical thresholds, while the size of the projects – typically below CNY500 million – will fall within their affordability range, she continued.

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Yang believes the new mechanism marks the end of the previous model, which relied heavily on government funding, or local government credit, but added to off-balance sheet debts.

Beijing in November called on local governments to halt problematic PPPs, replacing a 10% budget spending allowance with a vetting mechanism as it attempted to curb municipal debt risks.

With a focus on self-sustaining projects, private companies will only need to provide certain credit enhancements or financing guarantees instead of using too much of their own credit, Yang added. She warned, however, a lack of legal identification on private enterprises within the new guidelines could present challenges, given the actual controllers of some private holding companies are sometimes state-owned enterprises in the infrastructure sector.

Jia Kang, president at the China Academy of New Supply-side Economics, told MNI authorities must pass legislation to promote the long-term development of PPP. Meanwhile, to restore private investor confidence, Beijing should overturn some typically unjust and false property rights convictions, along with a thorough correction of erroneous remarks about the private economy in society, Jia added.