More social funds for local govt fiscal spending to fuel infrastructure boom

Infrastructure construction could be further fueled by inviting more private funds into local governments' fiscal spending under new policies and clarified regulations, on which policymakers will count to shore up the world's second-largest economy this year.

Even though credit growth in January was faster-than-expected, experts believe that this may not be fast enough to boost infrastructure projects, given the large funding gap for the government. They said more proactive fiscal tools could be used.

Many members of the National Committee of the Chinese People's Political Consultative Conference have proposed to accelerate legislative work on the first national-level regulation on public-private partnerships, a financing model to jointly invest capital from both the private and government sectors into infrastructure and public service projects.

Officials and experts close to the country's finance ministry say the progress will soon result in a breakthrough. After that, legal PPP projects will be backed by the law, and some affirmative rules will further encourage private investment.

The final draft is likely to be proposed to the State Council soon after the annual two sessions－the country's top legislature and top political advisory body will gather in Beijing this weekend－or that could not be later than June, the officials and experts said.

In some recent replies from the Ministry of Justice to answer CPPCC members' questions, the ministry said the draft law will be further modified based on collected opinions and it is "trying to hand in the draft to the State Council as soon as possible".

"Government departments, including the National Development and Reform Commission and the Ministry of Finance, will issue more supportive policies for PPP financing, to promote the asset trading platform of PPP projects and launch a securitization pilot program," the Ministry of Justice replied on its website.

The moves will expand financing channels for PPP projects and benefit private capital investment. Fiscal policies, such as tax cuts and interest-free loans, are also under consideration to accelerate PPP projects, said the ministry.

Investors are speculating that PPP financing could get a fresh boost in the second half, after a hold-up during the de-risking campaign since mid-2017.

Data from the Ministry of Finance showed that, by the end of January, the number of PPP projects increased by 1,517 from December 2017, with a total investment of 2.4 trillion yuan ($358.7 billion). The investment of all the PPP projects registered in the ministry reached 13.2 trillion yuan, and 54.2 percent of those had started construction.

"The strong growth since the second half of 2018 is expected to be more remarkable this year," said Wang Zecai, a researcher at the Chinese Academy of Fiscal Sciences under the Ministry of Finance, who also participated in the legislation discussion of the draft.

Lu Ting, chief economist with Nomura Securities, said that new projects are likely to be located either in developed areas with a high population density, or in remote mountain areas, especially in rail and urban transit systems, while major cities are still facing significant barriers to fund those projects.

Chinese financial regulators once worried local governments' contingent debt, or the debt out of the balance sheet, might expand fast due to some illegal borrowing disguised as PPP equity funding. The government pushed the deleveraging process by cracking down some high-risk projects and constrained some financing channels, resulting in a slowdown of fixed-asset investment growth to 5.9 percent last year.

The upcoming law will clarify the boundary between legal PPP projects and the definition of local governments' "hidden debt", and a performance evaluation mechanism is suggested to embed in the entire PPP project management process to strengthening performance appraisal monitoring, said Wang.

During the whole investment process, local governments should confirm affordability of the fiscal spending－10 percent at most in any of the PPP projects, without any guarantee of fixed returns, he added.

An official from the Ministry of Finance's PPP center said that the potential fiscal risks with PPP projects have been generally monitored and controlled, and all local governments' spending was under the 10 percent "red line" by the end of December 2018.