“Look at the scale of this,” said Li Chongyi, an engineer, as he watched a 4-kilometer line of trucks and earth movers busy quadrupling the size of Chongqing’s Jiangbei International Airport. “This will take years.”
Jiangbei, which begins work on a third terminal when the second is done next year, is one of 15 trillion yuan ($2.2 trillion) in projects begun in 2009, almost twice the economy of India. Most were started by local governments as China’s stimulus package sparked a record 9.6 trillion yuan of loans.
The projects and their loans are stymieing efforts by Premier Wen Jiabao to curtail investment as inflation rose to 2.7 percent in February, a 16-month high. Failure to rein in local government spending could push inflation to 15 percent by 2012, said Victor Shih, a political economist at Northwestern University who spent months tallying government borrowing.
“Increasingly the choice facing the government is between inflation or bad loans,” said Shih, author of the book “Finance and Factions in China,” who teaches political science at the university in Evanston, Illinois. “The only mechanism for controlling inflation in China is credit restriction, but if they use that, this show is over -- a gigantic wave of bad loans will appear on banks’ balance sheets.”
Attempts to curb borrowing by raising interest rates would boost debt-servicing costs for local governments. At the same time, tightening credit may stall projects, triggering “a build-up of bad loans,” the Basel, Switzerland-based Bank for International Settlements said in a quarterly report in December.
Nomura Holdings Inc., Japan’s biggest brokerage, estimates local government projects started last year totaled up to 10 trillion yuan -- 2.5 times the official 4 trillion yuan stimulus plan. The Chongqing Economic Times reported April 6 that the city plans to spend 1 trillion yuan on another 323 projects.
Construction companies working on projects begun by provincial governments may be shielded from a wider slowdown in China’s property market, said Ephraim Fields, a fund manager with Echo Lake Capital in New York.
“These vital, long-term projects should get the necessary funding even if the overall economy slows down a bit,” said Fields, who holds shares of China Advanced Construction Materials Group Inc., a Nasdaq-listed concrete maker that gets more than 75 percent of its sales from government infrastructure projects.
Roth Capital Partners also favors Beijing-based CADC. The company’s stock may rise 52 percent to $8 within a year, the Newport Beach, California-based fund manager forecast. BOC International analyst Patrick Li recommends buying Xinjiang Tianshan Cement Co., which he forecasts may gain more than 15 percent, and Tangshan Jidong Cement Co., which may rise almost 23 percent. The projects begun in 2009 will help China’s cement output rise 11 percent, or 186 million tons, this year, Li predicts.
Chongqing, China’s wartime capital on the Yangtze River, is a prime example of how provincial governments multiplied the effect of the central government’s stimulus plan. The city had 900 billion yuan in loans and credit lines outstanding at the end of 2009, said Northwestern’s Shih. Chongqing’s economy expanded 14.9 percent last year, with investment in factories and property expanding the most in 13 years.
“Chongqing really stood out,” said Hong Kong-born Shih, 35, who joined Northwestern in 2003 after completing a PhD in government at Harvard University.
Roads and Rail
Chongqing’s projects include a light rail system that will receive more than 10 billion yuan in investment this year.
The city will spend at least 8 billion yuan on rail construction and another 15.5 billion yuan on 288 kilometers (179 miles) of new expressways. Jiangbei airport said it plans to raise passenger capacity to an annual 30 million when Phase II is completed next year, from 14 million in 2009. Phase III, would raise throughput to 55 million passengers.
The municipality’s construction boom has boosted business confidence and the property market, said Bruce Yang, managing director of Australia Eastern Elevators Group (China).
Sales at Eastern Elevators surged 51 percent in 2009, aided by projects such as a local-government office block in Nan’an district that needed 20 elevators, Yang said at the company’s headquarters in Nan’an. He has an order this year to install 23 lifts in a government-sponsored hospital near Chengdu in Sichuan province.
Chongqing isn’t alone. Sun Mingchun, an economist with Nomura in Hong Kong, estimates local governments have proposed projects with a value of more than 20 trillion yuan since the stimulus package was announced in November 2008. They include high-speed rail links between Wuhan in central China and Guangzhou in the south, the Hong Kong-Macao-Zhuhai Bridge, and the construction or upgrading of 35 airports. The economic planning agency says 5,557 kilometers of railways and 98,000 kilometers of highways opened last year.
The building boom boosted construction and materials stocks, raising concerns of a bubble. Baoshan Iron & Steel Co. rose almost 74 percent since the stimulus was announced while Anhui Conch Cement Co. gained 135 percent. The Shanghai Composite Index rose 80 percent in the period.
Construction of high-speed rail lines linking Xi’an with Ankang and Datong in Shaanxi province have pushed CADC’s output to capacity, President Jeremy Goodwin said in a phone interview.
“The demand is so great we are struggling to keep up,” said Goodwin.
Should the boom end in a property-market collapse, even those stocks tied to the local government projects will be affected along with most other industries, said Shanghai-based independent economist Andy Xie, formerly Morgan Stanley’s chief Asia economist.
“Corporate profits are very much driven by the property sector,” said Xie. “The largest sectors will be hit hard, especially banks and insurance companies.”
A gauge of property stocks has fallen more than 6 percent this year after more than doubling in 2009 as the government takes steps to cool rising prices, including raising the deposit requirement to 20 percent of the minimum price of auctioned land. Property sales were equivalent to 13 percent of gross domestic product last year.
“Policy makers may need to start thinking about how to handle the aftermath of the bust,” said Nomura’s Sun.
Policy makers have also moved to tighten credit. The central bank is seeking to slow lending growth by 22 percent to 7.5 trillion this year.
China’s local governments set up investment vehicles to circumvent regulations that prevent them borrowing directly. These vehicles borrow money against the land injected into them and guarantees by local governments, said Shih.
Chinese officials have pledged to limit the risks posed by these vehicles. China plans to nullify guarantees provided by local governments for some loans, said Yan Qingmin, head of the banking regulator’s Shanghai branch, March 5.
The World Bank said on March 17 that China, the world’s third-biggest economy, needs to raise interest rates to help contain the risk of a property bubble and allow a stronger yuan to damp inflation.
“Massive monetary stimulus” risks triggering large asset- price increases, a housing bubble, and bad debts, from financing local-government projects, the Washington-based World Bank said in its quarterly report on China. The World Bank raised its economic growth forecast for China this year to 9.5 percent from 9 percent in January.
The financial burden of those measures on local governments means that “loose liquidity conditions” will persist for longer than they should, said Shen Minggao, a Citigroup Inc. economist in Hong Kong.
Any effort to quickly exit stimulus policies would lead to “an immediate increase in non-performing loans in the banking sector,” he said. “To avoid a credit crisis, Chinese authorities may have to delay a policy exit in the hope that time remedies the pain.”
To contact the Bloomberg News staff on this story: Kevin Hamlin in Beijing on firstname.lastname@example.org