China’s “bridges to nowhere”
The success of China’s emergence from the virus/trade war recession will depend on the size, type and success of any stimulus measures. Whatever stimulus package gradually emerges will follow several years of government restriction on credit flows following the “hangover” from the 2009 fiscal stimulus.
On the restrictive side, over the past five years, we have seen a number of policy turns, which include:
Restrictions on shadow banking, such as wealth management products invested in risky assets.
De-risking of the financial system through:
Reduction of assets for the smaller banks.
Sharp curtailment of interbank lending leading to mismatched maturities.
More careful regulation of entrusted and other loans where the link between the lender and the borrower is non-transparent.
Restriction on growth of local government debt.
On the expansionary side we have had:
Significant increase in bond issuance, both private and quasi-government (LGFVs).
Rising inclusion of private capital for fiscal ends (through bonds, Public Private Partnerships).
Steady increases in bank lending and total social financing (although below the levels of a decade ago).
And in the past six months:
Monetary injections through the banks.
Targeted lending to SMEs.
Increase of the fiscal deficit.
Tax cuts.
These recent measures add up to 6%–12% of GDP, according to my rough estimates.
However, I believe that the central government, through sheer desperation, is increasingly turning to infrastructure construction as a stimulus, paid through a combination of local government bonds, LGFV bonds, bank loans and private capital. This is a return to the heady days of 2009. That mix, though, is non-transparent (on purpose), in order to avoid any explicit increase in local or central government debt. Nonetheless, the implicit government obligation remains, which is why the stimulus programs can be conducted at low cost due to artificially low interest rates.
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