China’s local governments sharply accelerated their bond issuance in June as they looked to ramp up infrastructure spending to support economic growth that slowed to a 27-year low.
Beijing is counting on a recovery in infrastructure investment to help stabilise the world’s second-largest economy as the US-China trade war drags on, weighing on its vast manufacturing sector and business confidence.
But the economy has been slow to respond to earlier growth boosting measures, raising questions over whether more support is needed and if that risks a sharper build-up in debt.
Net local government bond issuance rose to 717 billion yuan ($104.31 billion) in June, the highest so far this year and accounting for a third of the first half’s total, Hao Lei, a finance ministry official, told reporters on Tuesday.
Over 60 per cent of the funds raised from bonds in the first six months were used for infrastructure projects such as shanty-town redevelopment, and highway and railway construction, said Hao, adding that more than half of the funds went to existing projects.
In the first half, local governments’ total net bond issuance reached 2.1765 trillion yuan, accounting for 70.7 per cent of the annual quota, the finance ministry said.
The ministry did not give figures on local governments’ issuance of special bonds, which exclusively fund infrastructure projects.
Data on Monday showed China’s economic growth slowed to 6.2 per cent in the second quarter - the weakest pace since 1992 - from 6.4 per cent in the first as demand at home and abroad faltered in the face of mounting US trade pressure.
Fixed-asset investment in January-June rose 5.8 per cent from a year earlier, picking up from 5.6 per cent in the first five months.
Infrastucture investment rose 4.1 per cent, only slightly better than the 3.8 per cent increase seen in all of 2018.
But investment readings for June showed some signs of improvement, albeit modest, raising hopes that policy loosening efforts over the past year are beginning to gain traction.
Infrastructure growth quickened last month to 3.9 per cent on-year from 1.6 per cent in May, according to Bank of America Merril Lynch.
Separate official data on Tuesday showed fixed-asset investment project approvals in the first six months increased 81 per cent by value from a year earlier.
Beijing began fast-tracking approvals last year as part of its push for more infrastructure spending, though analysts had cautioned it would take time for the effects to be felt.
The National Development and Reform Commission (NDRC) approved 94 fixed-asset investment projects in January-June, worth a total of 471.5 billion yuan ($68.60 billion), Meng Wei, a spokeswoman for the state planner, told reporters.
That compared with 102 projects worth 260.3 billion yuan in the same period last year.
‘We estimate the quickest turnaround time for project launch post-NDRC approval is four to six months,’ ANZ said in a report on Tuesday.
‘In the wake of recent government efforts, we expect infrastructure investment to pick up moderately in H2 to about 5-6 per cent y/y...However, China is unlikely to return to double-digit growth in the infrastructure sector in the near future.’
Earlier this month, premier Li Keqiang said China’s economy was facing new downward pressure, and the government would respond with more fiscal policy measures.
Beijing has already announced tax cuts worth nearly 2 trillion yuan and a quota of 2.15 trillion yuan for local governments to sell special bonds this year to fund key infrastructure projects.
Fiscal spending increased 10.7 per cent in the first six months from a year earlier, while revenue rose 3.4 per cent.
‘In the first half, the nationwide fiscal spending growth was significantly faster than revenue growth, providing a strong support for investment in key areas,’ Liu Jinyun, another official with the ministry said at the same briefing.
Slower fiscal revenue growth this year was largely due to Beijing’s tax and fee cuts, which has put pressure on local governments, the finance ministry’s Hao said.
But he added the central government has stepped up fund transfers to local government to help ease financial strains.
China’s tax revenues rose only 0.9 per cent in the first half from a year earlier, compared with a 5.4 per cent rise in the first quarter.
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