The End: Provinces Plan 45 Trillion Investment Binge

We have finally reached the end of the cycle. You can be bullish, you can be bearish, but this is it. Chinese officials are out of ideas. Real estate investment is already slowing and the economy needs an offseting source of growth if GDP targets are to be met. Provincial leaders opened the old playbook: 23 of 34 provinces have announced 40 trillion yuan in infrastructure spending. Adding in the remaining provinces will push the final total past 45 trillion.
"China Times (Public: chinatimes)" Reporters compared to investment plans around the discovery of investment projects in many projects around the "iron machine" project investment is dominated, its status is difficult to shake. As we all know, real estate investment in the past has been unabated, but the real estate this year may no longer be a hot investment. So, the local government to stabilize GDP, what can replace the past continued growth in real estate investment? The answer is, infrastructure investment.

According to statistics released by the provinces, 23 provinces announced 2017 fixed asset investment targets, the cumulative investment of more than 40 trillion yuan, adding in yet to announce provinces,this year's investment will not be less than 45 trillion.

"These investments are mainly to cope with the economic slowdown, through the investment to play a key role in the project." Beijing Fusheng De economic consulting firm chief economist Feng Delin to "China Times (Public: chinatimes)" reporter said that the current investment is necessary But also to consider the profitability of investment projects and sources of funding channels.
Some of the plans involve picking new industries. The same development model that led to coal, steel and cement overcapacity, as well as the much quicker failure of local electric car manufacturers.

There's also lots of infrastructure spending. Or rather, mostly infrastructure spending:
As a reporter to sort out, after the Spring Festival launched a number of major investment projects around, of which Hubei, Shaanxi, Henan and other places to start a major project total investment of more than 100 billion yuan, the first batch of Jiangsu started a major project investment is up to 1.33 trillion yuan giant

According to the Shaanxi provincial government announced on January 4, Shaanxi Province will be arranged in 2017 600 key projects, with a total investment of 3.7 trillion yuan, annual investment of 482 billion yuan, these projects include infrastructure, energy and chemical industry, equipment manufacturing, Strategic emerging industries. Shaanxi Development and Reform Commission said that in the context of the national investment growth slowed down significantly, Shaanxi Province, the focus of the project for the province's economic development provides a strong support.

On the same day, Zhejiang announced a new 624 projects with a total investment of 790.3 billion yuan. The day before, Henan Province, signed a total of 108 PPP projects, a total investment of 379.4 billion yuan.

In the interview, many places are still trying to launch a number of major infrastructure projects. "Plans to invest 1 billion yuan Langzhong Airport continued construction, is stepping up." Sichuan Langzhong Airport Construction Headquarters Office Director Tang said. January 16, Sichuan Guangyuan Mayor Zou Zijing to participate in the review of the Sichuan Provincial Government "work report" suggested that to vigorously support the G5 Jingkun high-speed Guangyuan section expansion transformation, Guangyuan Panlong airport expansion project. Aviation is ready to dock the planning of the two navigation airports, that is, in Guangyuan Wangcang County and Qingchuan County to build airports, do low-level tourism projects.

"Central and western heavily dependent on investment to stimulate economic growth phenomenon still exists." Guangyuan City, Sichuan Province, a deputy director of investment to tell the "China Times (Public: chinatimes)" reporter, the province of each city and county infrastructure investment space Are still large, many places high-speed rail, poor roads, also need a huge investment.
iFeng: 45万亿!地方投资大爆发各地大项目纷纷落地

What Chinese local governments want and what they get are two different things. If financing isn't there, these plans won't get off the ground. Recall PPP financing went terribly in 2016, covered in-depth here: Why Did Private Investment Collapse? Private Investors Fled Public Projects. The government sent investigators around the country and the numbers improved in the second half. That occurred during a real estate boom, in a comparatively optimistic period with booming credit growth. This year is less optimistic and local governments are under pressure because land finance growth is slowing. That's why, even though the PBoC is tightening credit and local governments are cracking down on speculation in real estate, they don't want land prices to fall.

Back to the iFeng article:
Where will the money come from?

Reporters learned that the investment for major infrastructure projects, the pressure on local funds is not small. "If the local govt can not get matching funds, no matter how good the major projects have to be stranded." The vice mayor bluntly, how to implement the project funding problems, can be said to be encountered around the common problems.

Journalists found that the provinces in the deployment of economic work are pointed out that multi-channel to raise project funds, such as "innovative investment and financing mechanism to attract social capital to participate in infrastructure construction" and other statements.

The fact is that, around the huge project investment plan, so that PPP once again become the focus of the market. Different from the past, PPP is expected to accelerate this year, and from the traffic, municipal, environmental protection to the pension, medical, tourism and other fields to expand. In the policy level, the Ministry of Civil Affairs and other 13 ministries and commissions to promote the old PPP; at the market level, some released last year's performance notice of listed companies, one of the major contribution is the implementation of PPP projects.

Encouraged by the policy overweight, since the PPP project last year, blowout growth. Ministry of Finance announced the latest data show that as of the end of December 2016, a total of 11260 projects, the investment amount of 13.5 trillion yuan. Among them, in attracting private capital, according to the Ministry of Finance PPP project library statistics there were 163 private enterprises (including private owned and private holdings), accounting for 39%.

PPP projects this year there will be a blowout growth. "Dali Erhai Lake Interception Project, Tengchong Global Tourism International Outdoor Sports Cultural Center, Ruili City Urban Underground Corridor Construction Project ... ..." This is February 14 in Kunming, Yunnan Province, the largest one of the PPP project promotion , The meeting focused on the display of various types of PPP demonstration projects, a total investment of 399.6 billion yuan, the project covers transportation, municipal and other 14 areas. Guangzhou recently announced that the document will start 28 pilot projects, investment of nearly 211.9 billion.

Journalists combing, despite the expansion of investment, PPP project investment is still dominated by municipal engineering and transportation. As of the end of December last year, in the number of PPP projects and investment in the industry, municipal, transportation, urban comprehensive development of three industry projects and investment in the top three.
They managed to revive PPP investment in 2016, but I suspect 2017 will be more difficult because local finances will eventually be under pressure following weaker land sales. Private businesses will also be under greater pressure because the private economy will be starved for credit as the real estate engine slows down. Even with all the support in 2016, the best rate of success was below 50 percent:
How is the PPP project floor rate? Reporters found that as of the end of December 2016, the national project landing rate of 31.6%, while the third batch of demonstration projects landing rate is surprisingly reached 42.9%.
Finally, the article ends with a blast of ice cold reality: the whole thing rests on land finance.
"Needless to say, this year's highlight will still further stimulate the vitality of private investment." Zhang Hanya stressed that the activation of private investment will allow private subjects willing to invest, to relax the industry access policy implemented.

But the reporter also noted that in solving the financial problems, many places did not give up land financing. With the local two sessions have been held, the hot city that will strictly implement the control policy, but the dependence on the land finance does not seem to be reduced, some cities reliance on land sales is still quite great.
The 45 trillion yuan plan shows the Chinese government is out of ideas. The development model is exhausted. Back in 2014, flaws in the land finance model were exposed. The need for reform and a new revenue stream, via a property tax, was identified. Instead of reform, the Chinese economy got more credit. The only thing forestalling a significant deceleration is still massive credit growth. Remove the credit and there will be a reckoning.

If history rhymes, by April or May real estate investment will slow significantly and the government spending plans will be off to a weak start. By May or June there will be panic because land sales will have slowed. Local finances will hold up in the first half, but the outlook for second half will turn for the worse. The Federal Reserve might hike in June or July, adding deflationary pressure. Then, once again, we'll see if China really wants to deleverage, or if it prefers the stability afforded by massive credit growth.

Eventually, the cost of this development model will be borne by the Chinese yuan.

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