Avoiding the cliff

Beijing might finally be moving to avert an impending drop-off in infrastructure spending.

The central government is reportedly considering issuing at least RMB 1 trillion in additional sovereign debt to fund public works and help Beijing achieve its 2023 growth target (Bloomberg).

• An announcement could come this month.
• The funds would be spent on water conservancy projects and other infrastructure.

We’ve been saying for months that more infrastructure investment is coming.

ICYDK: Beijing ordered local governments to issue their full-year special-purpose bond (SPB) quota – used to fund infrastructure construction – by end-September and deploy it by end-October.

• Consequently, infrastructure investment will fall off a cliff in November and December – unless Beijing makes more funds available.

Our take: RMB 1 trillion is a lot of money. We suspect some of it would be used to capitalize new projects.

• Infrastructure projects require capital equivalent to 20% of total planned investment before they can borrow.
• Local governments have traditionally provided the capital but increasingly lack the funds.
• Late last year, policy banks stepped into the gap, providing infrastructure projects with RMB 750 billion in seed capital (see our November 28 client note).
• That role could be played directly by the central government this year.

Get smart: This isn’t stimulus.

• It’s an effort to maintain the pace of infrastructure investment and ensure it remains an economic bright spot.