China leans on state-owned policy banks to deliver $120 billion stimulus

Beijing is turning to state-owned policy banks once again to help rescue an economy under strain, ordering them to provide 800 billion yuan ($120 billion) in funding for infrastructure projects.

The stimulus, announced at a State Council meeting chaired by Premier Li Keqiang, could help finance a significant chunk of infrastructure costs this year and give some relief to local governments grappling with plunging revenues. President Xi Jinping has called for an all-out effort to boost infrastructure this year, turning to an old playbook of driving up growth through public investment. Funding the extra spending has proven to be tricky though, after a plunge in land sales and widespread Covid outbreaks battered government revenue. 

“We think the three key ingredients for investment — projects, financing and incentive — are all falling into place this year,” said Ding Shuang, chief economist for Greater China and North Asia at Standard Chartered Plc. “The additional 800 billion yuan loans from policy banks will help fill the financing gap.”

Standard Chartered forecasts infrastructure investment will grow 10-15% this year, although that may still not be enough to offset the headwinds to economic growth. Bloomberg Economics estimated China’s infrastructure spending came to 23 trillion yuan in 2021. 

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. Nomura Holdings Ltd. estimates the government has a 6 trillion yuan funding gap this year, created in part by a sharp contraction in revenue from land sales, a key source of funding of infrastructure investment by local governments. The 800 billion yuan funding announced by the State Council accounts for nearly half of the 1.65 trillion yuan in new policy bank lending in 2021, economists led by Lu Ting wrote in a note.

Finding support

China’s policy lenders include China Development Bank, the Agricultural Development Bank of China and the Export-Import Bank of China. They are considered key stabilizers of the economy, and are often called upon to provide financing support for big projects, including infrastructure.

The State Council didn’t say in its latest announcement 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. The banks may be able to raise the money by selling bonds — likely long-term ones with tenors of five, 10 or 20 years — to fund an expansion in credit, according to economists from Nomura, NatWest Group Plc. and Australia & New Zealand Banking Group Ltd.

Beijing at work

• Prez Xi Jinping had called for an all-out effort to boost infrastructure this year
• In 2021, China had spent $3.45 trillion on it
• Standard Chartered forecasts infrastructure investment will grow 10-15% this year
• Banks may be able to raise the money by selling bonds with tenors of 5, 10 or 20 yrs
• Economists forecast GDP growth of 4.5%, Govt’s  target is 5.5%