The trade war between U.S. and China over the past one year have already slowed the pace of the latter’s economy. Apart from this, the sluggish domestic demand and more than required production are once again instilling the fear of supply glut in the Chinese steel sector which is one of the key sectors of China contributing to its GDP.
Subsequently to tackle this and as an effort to boost steel demand in the medium term, the Chinese government has moved to ease borrowing restrictions for the infrastructure projects. Recently, Beijing has allowed major infrastructure projects to include special bonds issued by provincial governments as part of the project capital, which can then be used to secure bank loans which will cover railways, highways and power and gas projects, among others.
Retail investors and insurers are being encouraged to buy special bonds, while banks are being told to invest in infrastructure projects. Infrastructure and construction sector accounts for 60% of steel use in China and hence the government is making efforts to strengthen these sectors.
Beijing has so far allowed provincial governments to issue over 2.15 trillion yuan (USD 311bn) in special bonds this year to finance infrastructure projects. These new rules will help increase project capital at large infrastructure projects by 100-200 billion yuan while enabling them to secure bank loans worth up to 4-7 times the amount of project capital. Also, any boost to infrastructure growth would support steel demand and prices, amid slower manufacturing growth because of weaker domestic automobiles sales and the impact of US tariffs on Chinese exports.
However, the industry experts believe that these measures to boost the demand from the infra sector are going to add to the already piled up financial burden of the country.
Globally, infrastructure projects are funded by a combination of debt and equity. While the debt has a long payback period, equity is limited to 20% to 30% of the total outlay which gives stable cash flows. But in the case of China, the government’s stimulus package to boost infrastructure growth majorly adds up to the debt and the bolstered infra projects does not make money even today. For example, last year income from highways couldn’t cover principal and interest payments on borrowings and instead, long-term receivables have piled up on their books.
China’s new policy could amount to an additional USD 13 billion to USD 19 billion of project capital from special-purpose bond issuance and although country assured that usage of special-purpose bonds’ proceeds for project capital would be closely monitored, it still involves major risk. This is because ultimately this debt is the government’s liability even though it is classified as project capital. Industry experts anticipate that with the new stimulus measure, the local government’s leverage ratio would rise to 3% against 2018 levels, making it to 23% of GDP by 2020 and with this, it seems that China is once again going to its old ways of piling up debts and adding to its risk.
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