22 April 2019
Infrastructure spending, particularly on rail projects, will provide key support for China's economy this year. Photo: China Daily
Infrastructure spending, particularly on rail projects, will provide key support for China's economy this year. Photo: China Daily

Does China infrastructure spending spell broad equity gains?

China and Hong Kong stock markets posted strong gains in recent weeks. Among the factors cited for the rally is the mainland’s huge infrastructure spending, which according to one estimate could amount to as much as 45 trillion yuan.

Well, the number cropped up in a research report from CICC. The Chinese investment bank arrived at the figure by summing up the fixed-asset investments planned by various provinces and municipalities.

Given that a 4-trillion-yuan stimulus package in 2009 boosted China’s GDP growth to 9.2 percent that year and also helped the Shanghai market shoot up 72 percent, some market participants are speculating that the latest 45 trillion yuan spending, which is more than 10 times the previous stimulus package, will definitely provide a huge boost to the economy and stock markets.

That logic is both right and wrong.

First of all, the 4 trillion yuan package released in the wake of the 2008 financial crisis was “extra” spending on top of the usual budget. The additional fixed investment spending was designed to help China deal with the challenging economic situation at that time. In 2009, the total fixed investment spending was 22.5 trillion yuan.

Meanwhile, the 45 trillion yuan we are talking about now is the amount budgeted this year. While it is a very decent number, it is not a major departure from previous trend, if we factor in the inflation and growth over past eight years.

Yet, it is true that the expenditure is very significant.

Among the spending plans, Xinjiang and Tibet have set fixed-assets investment growth goals of 50 percent and 25 percent this year respectively. Guizhou and Yunan are expected to aim for 20 percent growth, while Guangdong and Fujian set a target of 15 percent.

Beijing has accorded top priority to deleveraging, and the monetary policy has tilted toward tightening. However, authorities are expanding fiscal spending in order to sustain economic growth.

Chinese officials believe the country is still in the middle of rapid urbanization, particularly in western regions. Hence, infrastructure investment could generate considerable boost for the economy.

Given this situation, infrastructure will remain a major trading theme this year. Enormous spending on big-ticket projects could further boost demand and benefit central and western regions in particular.

Nevertheless, from stock market perspective, the massive spending may only boost infrastructure and resources firms in the months ahead, rather than drive a huge broad-based market rally.

This article appeared in the Hong Kong Economic Journal on Feb. 24

Translation by Julie Zhu

[Chinese version 中文版]

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Hong Kong Economic Journal columnist

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