China will put up a substantial $120 billion in hand for critical spending on projects. Image Credit: Reuters

Beijing: Beijing ordered state-owned policy banks to set up an 800 billion yuan ($120 billion) line of credit for infrastructure projects as it leans on construction to stimulate an economy battered by coronavirus lockdowns. The announcement could help finance a significant chunk of infrastructure costs this year. Bloomberg Economics estimated China’s infrastructure spending came to 23 trillion yuan in 2021.

Large policy lenders include China Development Bank. Beijing’s calls for faster implementation of growth-boosting policies have intensified since official data showed that economic activity contracted in April and unemployment rose sharply. High-frequency indicators suggest the decline continued in May, leading Li to warn last week of risks from a possible year-on-year contraction in the second quarter.

The infrastructure push will help Beijing support that kind of investment “amid weak credit demand in the private sector,” Nomura Holdings ltd. economists wrote in a note. Nomura estimates the government has a 6 trillion yuan funding gap, created in part by a sharp contraction in revenue from land sales, a key source of funding of infrastructure investment by local governments.

The economists maintained their estimate for infrastructure investment growth to rise to around 10 per cent this year, and said Covid-related uncertainty still pose risks to the economy. They forecast annual gross domestic product growth of 3.9 per cent for 2022, well below the government target of about 5.5 per cent.

Funding ways

The China State Council didn’t say how the policy banks would fund the lending. The development banks’ main source of funds come from issuing bonds or loans from China’s central bank. In 2014, the People’s Bank of China extended a reported 1 trillion yuan loan to China Development Bank to help lower financing costs for government-backed housing projects.

Nomura estimated the 800 billion yuan funding accounts for nearly half of the 1.65 trillion yuan in new policy bank lending in 2021. Given low market rates, it’s likely the banks will sell bonds to raise the funds, it said.

China has aimed most financial support this year at corporations rather than households. The State Council reiterated vows to back internet platforms seeking domestic and overseas public listings. The top government body also said targeted support measures should be provided for people who have lost jobs or income, and will distribute subsidies to some migrant workers.

Covid cases have moderated in recent weeks, leading to an easing of the lockdown in Shanghai. Still, the government’s strict ‘Covid Zero’ policy, which requires restrictions on activity wherever outbreaks occur, means that consumption is likely to remain muted.

Allan von Mehren, China economist at Danske Bank A/S, said China’s growth outlook depends on how it’s able to manage Covid outbreaks.

“The Shanghai lockdown has been an outlier so far, but as a minimum we should expect more outbreaks requiring some level of restrictions,” he wrote in a note.