MNI EXCLUSIVE: China Infrastructure Boost, But Projects Scarce

By Wanxia Lin

     BEIJING (MNI) - Growth in China's infrastructure investment may see a

moderate rebound in 2020, fueled by increased issuance of special-purpose bonds,

but a lack of good projects and top-up funds to keep them going remain

constraints, government advisors told MNI.

     Prompted by national authorities to bring forward issuance in order to

boost the economy, local governments had sold as much as CNY681 billion of

special bonds from the start of the year until Jan. 22, already a new record for

monthly sales of the debt, data from Wind Information showed. The bonds are

repaid by returns on projects funded and do not appear in headline central

government accounts.

     "Moving issuance forward can help to kick off more projects as soon as

possible, and boost confidence in the economy," said Zhang Yiqun, director of an

institute of fiscal studies affiliated with the finance department of Jilin

province, in northeast China. He expects special bond issuance to exceed CNY1

trillion in the first quarter, while the annual total may reach CNY2.5-3

trillion, compared to CNY2.59 trillion issued in 2019. The bonds' average

maturities have also lengthened, doubling or even tripling to a maximum of 30

years, reducing risks for debtors, he said.

     Infrastructure investment growth may jump to around 5% y/y up from 3.8%

last year, though still lower than expected GDP growth of 5.5-6%, Zhang said,

noting that funds allocated this year using the proceeds of special bonds were

overwhelmingly destined to projects classed as investment, such as roads,

railways, water installations and industrial parks. Only 0.14% of the funds have

been allocated for land reserve and shanty town renovation projects, compared to

84% in the same period of last year, according to Wind Information.

     --RISK OF UNUSED FUNDS

     But, despite this brisk start to the year, a shortage of economically

attractive projects may leave local governments struggling to find uses for

special bond moneys, posing the risk that unused funds, and repayment pressures,

might accumulate, Zhang said. This concern was shared by Su Jian, director of

the National Center for Economic Research at Peking University, who noted that,

in addition to the scarcity of viable projects, local officials may also lack

motivation to undertake those that are to be found.

     Local administrations dealing with falls in fiscal revenues may also be

unable to chip in with additional funds to keep projects going once initiated

thanks to special bonds, Zhang said, potentially leaving them with little option

beyond stake sales or encouraging corporate partners in the projects to issue

their own debt.

     But local governments have been helped by the relaxation of restrictions on

local government financing vehicles, previously the object of government

crackdowns aimed at reducing leverage. Some of these platforms can now accept

additional investment funds or issue new corporate bonds to finance

infrastructure projects, rather than being restricted to rolling over old debt.

     Some of the platforms might otherwise have come close to defaulting, said

Zhang. Current levels of implicit debts are still sustainable, he said, although

he added that they nonetheless needed to be closely monitored and lowered over

time.

--MNI Beijing Bureau; +86 (10) 8532-5998; email: wanxia.lin@marketnews.com

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

[TOPICS: M$A$$$,M$Q$$$,MT$$$$,MX$$$$,MGQ$$$]