Recently, increasing numbers of local governments have announced huge investment plans, in-line with central government’s initiative to put economic as the top priority. All these announcements have come amid the central government’s talks about growth stabilisation, but without firm confirmation from the central government that these are all going to happen.
The latest plans came from Tianjin and Guangdong. Tianjin, for instance, plans a RMB 1.5 trillion investments in 10 major industries according to Reuters, while Guangdong plans another RMB1 trillion according to First Financial Daily. Earlier this week, we have also leaned that Chongqing has announced a RMB1.5 trillion plan according to First Financial Daily. We have already read a somewhat curious plan from Shanxi, hoping to attract some RMB2 trillion of private capital to invest according another report by First Financial Daily.
Earlier counts show that total investments already announced have already exceeded RMB4 trillion. With the latest announcements of all these plans, the total amounts being mentioned should have well exceeded RMB4 trillion, which was the amount being announced during the last major steroid shot stimulus. All these trillions of yuan of money are planned to be spent over the next 3 to 5 years, we assume.
So far, as we all know, stock market is not as impressed as it was during the last major stimulus. The main problem with these plans as most economists have identified is the lack of funding. As mentioned before, some of these local governments which have announced these plans simply do not have enough revenues to fund these projects. But this is not the key problem of course, because we should presume that these local governments will be able to borrow, so the problem is whether these local governments can borrow that much despite the fact that local governments’ balance sheets are getting more stretched now than it was.
Again, we return to our position that ultimately it is the central government and/or the central bank to decide whether they would really like to see a repeat of the 2008/09 stimulus, which we stressed again and again, was widely regarded as mistake within the country as it created high inflationary pressure and real estate bubble. So how much of these planned investments will actually get funding will depend on whether the government wants to go crazy in stimulating the economy. At the present moment, we believe that some investments will get funding, but that should be nowhere near the numbers they have actually announced. Indeed, far from it, unless, well, the economy deteriorates much further for longer, perhaps.
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