Xi calls for ‘all out’ infrastructure push to boost economy

China’s President Xi Jinping made a bold commitment to boost infrastructure construction in Beijing’s latest bid to rescue economic growth, a strategy that may prove less effective this time around as authorities take a hardline approach to bringing Covid outbreaks under control.

All-out efforts must be made to spur infrastructure spending, Xi said on Tuesday (Apr 26) at a meeting of the Central Committee for Financial and Economic Affairs. Infrastructure was a pillar of economic and social development, Xi added, according to a report from the state-run Xinhua News Agency. 

Officials at the meeting agreed that China’s infrastructure was still incompatible with the demand for national development and security, according to Xinhua. Strengthening infrastructure construction in an all-round way is of great significance to ensuring national security, expanding domestic demand and other objectives, it said.

Xi’s comments show China is returning to its old playbook of driving up growth through public investment, an approach that has fuelled debt in the past and caused overcapacity in some sectors, such as large vacant buildings in so-called "ghost cities". This time, the government may be more reluctant to fuel property investment, given its crackdown on the sector and worries about financial stability risks.

Speeding up construction may also be difficult to accomplish as the government doubles down on its zero-Covid approach, locking down cities like major hubs like Shanghai. Fears are growing of a similar shutdown in the capital Beijing as the city undertakes mass testing of its 22 million people. 

“The challenge for China is sequencing,” Tim Moe, Goldman Sachs' chief Asia-Pacific equity strategist said in an interview on Bloomberg TV. “The Covid situation needs to be dealt with to a greater degree before a full-fledged infrastructure spending can really take place. If an entire city is lockdown, it is hard to do a lot of infrastructure spending there”.

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Investors are looking for ways to counter the “immediate shocks” to growth in the current quarter, Moe said. 

So far, authorities have disappointed financial markets by providing limited stimulus and failing to follow through pledges with concrete actions. The benchmark CSI 300 stock index closed at its lowest level in 2 years on Tuesday, while the yuan has tumbled to its weakest level since November 2020. 

Xi’s pledge fueled a stocks rally on Wednesday though, with the benchmark CSI 300 Index climbing as much as 2.7 per cent, the best performing major Asian market, led by technology and industrial shares. The offshore yuan strengthened 0.1 per cent to 6.5832 as of 2.12 pm local time.

Economists have downgraded their growth forecasts steadily in recent weeks, with Morgan Stanley cutting its projection for this year by 40 basis points to 4.2 per cent, well below the government’s target of around 5.5 per cent.

Xi told local authorities to bolster the construction and efficiency of infrastructure networks in fields such as transport, energy and water conservation. Officials also urged increased fiscal spending, a “broadening of long-term financing channels” for construction, and better cooperation with private capital on such investment.

China had already pinned its growth hopes on infrastructure before Xi’s latest call to help prop up the economy amid a property market slump and rising global risks. 

Local governments had planned investment on major projects this year of at least 14.8 trillion yuan (S$3.1 trillion), according to a Bloomberg analysis. That is more than double the new spending in the infrastructure package the US Congress approved last year.

Although infrastructure investment remained strong in the first quarter, according to official data, there are signs the lockdowns have curbed construction activity. Areas of new construction in the country’s main economic belts around the cities of Shenzhen, Shanghai and Beijing plummeted during March, satellite data show.

Raymond Yeung, chief economist for Greater China at ANZ said Xi’s pledge was akin to the 4 trillion yuan rescue package during the global financial crisis in 2009 under President Hu Jintao. 

Even though the current push will be “modernized” with a focus on digital and green sectors, “both involve borrowing and front-load the future”, he said, “credit expansion is unavoidable.” 

Local governments are speeding up bond sales to pay for infrastructure, although many of them are financially stretched because of declining revenue from property sales. 

To help ease the financing pressure, the PBOC last week signaled a willingness to allow local governments to increase off-balance sheet debt again. Local government financing vehicles will be used to supplement the financing needs, said ANZ’s Yeung, and the infrastructure push “will guide the PBOC (People's Bank of China) policy going forward.”

All eyes are on the Communist Party’s Politburo - its top decision-making body - which is expected to gather for a critical meeting in coming days. Several prominent policy advisers and Chinese economists have called on the government to take more decisive measures to prop up the economy, ranging from the relaxation of property and Internet curbs to acting with more flexibility when it comes to Covid restrictions and lockdowns.

There are signs the weakening growth outlook and market fallout are becoming a greater concern to policy makers. Earlier Tuesday, the PBOC sought to reassure markets with a broad pledge to step up support through targeted financing for small businesses and a quick resolution of an ongoing crackdown on technology firms.

The Wall Street Journal also reported that Xi told officials to ensure the country’s economic growth outpaces the US’s this year, citing people it did not identify. 

Xi’s infrastructure pledge comes on the back of a high-profile campaign to curb debt, especially in property, and officials will need to balance that objective with a push to boost growth. 

Some officials are reluctant to ease restrictions in the property market despite the economic fallout, according to the Financial Times. Vice-Premier Liu He supports loosening moves, while his peers Han Zheng and Hu Chunhua insist property developers’ use of project revenues must remain tightly regulated, the newspaper said in a report, citing unidentified officials as saying. BLOOMBERG