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China Increases Railway Spending Plan for Second Time

China announced a jump in planned railway spending and the State Council called for private investment in utilities and health care as Premier Wen Jiabao tries to reverse an economic slowdown.

The Ministry of Railways, the nation’s largest corporate debt issuer, plans to spend 470 billion yuan ($74 billion) on railroads and bridges this year, according to a bond prospectus issued yesterday. That’s the second increase in July, making a combined gain of about 14 percent from the previous figure.

The new target exceeds last year’s 461 billion yuan in spending and follows Wen’s July 10 comments that promoting investment growth is the key now to stabilizing an expansion that decelerated to 7.6 percent last quarter, a three-year low. At the same time, Chinese officials are signaling the slowdown isn’t deep enough to warrant a return to the 700 billion-yuan level of railway-construction funds in 2010.

“China is selectively upscaling the stimulus,” said Lu Zhengwei, chief economist with Industrial Bank Co. in Shanghai. “Premier Wen Jiabao said China will do something to boost confidence, and this is fresh evidence.”

Economic growth hit bottom in the second quarter and will probably rebound to 7.8 percent in the third quarter, Lu said.

Private Investors

China’s State Council, or Cabinet, said it will publish a list of projects in industries including railways, utilities, telecommunications and health care for private investors to join. The Cabinet reiterated that downward pressure on the economy is intensifying, according to a statement published yesterday after a meeting at which Wen presided.

Separately, 28 cities in China are building 2,500 kilometers (1,554 miles) of subway lines from 2010 to 2015, China Daily reported today. Construction will cost at least 1 trillion yuan, and experts are concerned that the projects may strain local resources and boost debt, the newspaper said. Cities may also be failing to account for long-term operating and maintenance costs, China Daily said.

The railways ministry, based in Beijing, will sell 22 billion yuan in 10-year bonds and 5 billion yuan in 15-year bonds, according to the prospectus posted to the Chinese government’s bond clearinghouse website yesterday.

The 470 billion yuan figure yesterday was 4.8 percent higher than a ministry figure cited in a July 6 statement by the Anhui provincial economic planning agency, which indicated a 9 percent increase from a previous number.

The ministry didn’t elaborate on the 470 billion yuan number in the document for railway infrastructure spending. A prospectus dated July 3 said the spending plan for 2012 was for 406 billion yuan. The railway ministry has not commented on the Anhui planning agency’s statement.

Growth Gauge

Railway infrastructure spending is a gauge of the Chinese government’s determination in stimulating growth. Authorities, in implementing the 4 trillion yuan stimulus package announced in 2008 during the global financial crisis, directed 601 billion yuan toward railway infrastructure investment in 2009. That compares with 338 billion yuan in 2008 and 2007’s 177 billion yuan, according to ministry data.

Relying on investment to support growth may exacerbate excess capacity and increase government debt, said Ding Shuang, a Hong Kong-based senior China economist with Citigroup Inc. At the same time, recent government initiatives have not “gone beyond the policy mix set at the beginning of the year” and instead represent “full utilization of the current budget and monetary growth target,” Ding said.

Corruption Probe

Railway investment slowed last year from 2010’s 707 billion yuan with the ousting of former Minister Liu Zhijun in a corruption probe in February 2011 and a high-speed crash that killed 40 people near the eastern city of Wenzhou in July.

Shares of China Railway Construction Corp. (601186) rose 1.3 percent to 4.61 yuan at 10:05 a.m. in Shanghai, while the Shanghai Composite Index dropped 0.3 percent.

Karen Li and Chapman Deng, infrastructure analysts with JPMorgan Chase & Co. in Hong Kong, said in a note yesterday that they remain “bullish” on China Railway Group Ltd. (390) and China Railway Construction. (1186) They said they view the “recent weakness as opportunities to buy on dips.”

To contact Bloomberg News staff for this story: Xin Zhou in Beijing at xzhou68@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net

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