Andrew Collier | Aug 14, 2020
China’s Inefficient Stimulus
Prior to 2020, the largest contribution to growth of economic value add (with some fluctuation) has been the state sector. SOE value add bottomed out at -2.5% YoY in March 2020 but has since topped private value add at 4.9%.
The rapid improvement in the state sector side of the economy post-virus is clear in the data for certain state sectors, such as iron ore, whose operating rates actually increased during the onset of Covid.
The same rapid turnaround has been true for fixed asset investment and housing starts. After a sharp decline early on, both areas showed a relatively rapid improvement on a YoY basis.
China is relying on a combination of bank debt and bond issuance to fund this new wave of infrastructure- driven stimulus.In 2020, the central government authorized local governments to borrow 74.4 percent more for special projects than last year, increasing the allotment to 3.75 trillion yuan for 2020 from 2.15 trillion yuan in 2019. As of July 14, 2.24 trillion yuan of such special bonds were issued. In addition, local governments still have nearly 2 trillion yuan of general-purpose bonds to issue.
The longer-term issue is the productivity of the economy and its ability to generate growth. The infrastructure-driven stimulus will be less effective than other programs. The government appears to have backed away from the SME program of 2019 due to its failure to deliver growth and the urgent requirements during the current pandemic. Infrastructure projects can “crowd out” private investment and the high debt levels can increase stress to the banking system. Reliance on private credit will force the government to pay higher interest costs than for cheaper, bank debt.