MNI INTERVIEW: China Bets On Infrastructure To Buoy Growth

--Local Governments To Boost Debt Issuance To Fund Infrastructure drive

--GDP Growth Will Be At Least 6.2% In 2019, State Information Centre's Zhu Says

     BEIJING (MNI) - China will authorise higher local government borrowing to

pay for increased infrastructure spending including a major railway expansion in

2019, as officials seek to keep economic growth to at least 6.2% despite both a

trade dispute with the U.S. and slowing domestic demand, a senior government

economist told MNI in an interview.

     "Infrastructure investment will be the main buffer for stabilizing the

economy this year, as exports, consumption and property investment will all

soften," said Zhu Baoliang, director of the economic forecast division at the

State Information Centre, a think tank affiliated with China's economic planning

agency.

     Zhu, who participates in drafting policy proposals, said infrastructure

investment would increase by about 8% on annual basis this year, up from 3.7% in

the first 11 months of 2018, keeping GDP growth at 6.2% to 6.3%, down from a

predicted 6.6% last year.

     The economist also called for moves to boost lending to the real economy,

even as corporate defaults jump, and for moderately looser controls on the

property market, until recently considered a potentially destabilising source of

bubbles.

     --LOCAL GOVERNMENTS TO BOOST BORROWING

     To fund increased spending, local governments will be allowed to sell more

than last year's CNY2.18 trillion in bonds, Zhu said. Much of this issuance will

come in the form of special bonds, which are not included in the headline

national budget figures and so will not endanger the government's preferred

fiscal deficit ceiling of 3% of GDP, he said. Local government special bond

issuance totalled CNY1.35 trillion last year.

     "To meet the demand for infrastructure, issuance of both special and

general bonds needs to be increased," Zhu noted, "The exact quota will be

announced during the two sessions of the Party in March, and will be bigger than

what the State Council approved last week."

     On Dec. 29, the last working day of 2018, the State Council authorised new

local government bond issuance of CNY1.39 trillion, including CNY810 billion of

special bonds, enabling local authorities to start issuing debt from January,

ahead of the usual schedule.

     Resorting to increased borrowing goes against the grain of the government's

deleveraging campaign of recent years, which sought to wind down what officials

regarded as dangerous levels of debt, accumulated especially by state-owned

enterprises and local administrations during the massive stimulus which kept the

Chinese economy firing on all cylinders throughout the global financial crisis.

But officials are increasingly concerned about the effects of the trade dispute

with Washington, which has imposed special tariffs on Chinese goods, and whose

effect has already been reflected in rapidly deteriorating data, including

purchasing managers' index readings indicating factory output might be

contracting.

     The government is also known to be keen to keep growth at high levels until

at least 2020, in the lead-up to the 100th anniversary of the foundation of the

Chinese Communist Party.

     Uncertainty prompted by the trade war will remain a challenge for the

world's second largest economy during all that period, pressuring employment,

Zhu said, adding that the central government could also issue special treasury

bonds to support infrastructure. The country has not issued such bonds since

2007.

     "GDP growth would drop below 6% after 2020," Zhu said.

     --FIRST QUARTER WEAKNESS

     Meanwhile, export weakness could drag the rate of expansion of GDP as low

as 6% in the first quarter of this year, said Zhu, who argued, against the views

of some investors who fear diminishing returns, that there is still space for

infrastructure investment to expand in the short term. Such spending would not

only boost the economy, but also improve worrying levels of unemployment in

rural areas, he said.

     In a sign of the scale of investment to come, China Railway Corp on

Wednesday said it would construct 6,800 kilometres of new railway lines in 2019,

almost 50% more than last year, including 3,200 kilometres of high-speed track.

     Proactive fiscal policy needs to be backed up by the People's Bank of

China, Zhu said, particularly given likely consumer price inflation of only

about 2% and even lower producer price inflation. The central bank should

facilitate bond issuance by providing liquidity and keeping interest rates low,

as well as allow expansion of M2 above 9%, he said. Growth in this measure of

broad money was 8.3% in the first 11 months of 2018, according to official

figures.

     According to Wind Information, a Chinese financial date provider, the yield

on 10-year yuan-denominated government bonds dropped from 3.9% at the beginning

of 2018 to 3.2% at the end of the year.

     --RISING DEFAULTS

     Easier credit should eventually come to the rescue of struggling companies,

Zhu said, mentioning property developers, who have suffered under the impact of

the previous deleveraging campaign.

     "The efforts of the PBOC to stimulate credit need time to work,

particularly when banks hesitate to lend considering the risk of a downturn,"

Zhu said, adding that banks nonetheless needed to ensure they lend only to

fundamentally solvent borrowers.

     According to Wind, the number of corporate bond default cases surged to 119

in 2018, from 35 cases in 2017, while the stock of defaulted bonds also tripled

to CNY116.6 billion in 2018 from CNY33.7 billion.

     Zhu also called for a moderate relaxation of controls aimed at curbing

excesses in the property market, key to the economic boom of the last decade.

     "As long as we don't exceed October 2016 levels with house prices, there is

room for some adjustment," Zhu said.

     According to MNI calculations, house price growth in 70 big cities peaked

in October 2016 at an annual 20%, slowing gradually to 10.3% in November 2018.

     China local media have reported some local governments have relaxed

policies restricting house buying and mortgage lending.

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

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

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