City outlines $130bn stimulus plan after green light from Beijing

Changsha, a gritty industrial city in central China, has set out a $130bn investment plan that could pave the way for other local governments to launch stimulus programmes as the country’s economic growth slows.

The central government has vowed to avoid a repeat of its mammoth 2009-10 stimulus, which led to soaring debts and inflation. But it has also started to call for more investment to support the economy, opening the door for growth-hungry local governments to unveil ambitious spending targets.

Changsha, capital of Hunan province, is the first to announce a comprehensive plan. Analysts said the move made clear that China’s top priority now was to prop up the flagging economy, which expanded 7.6 per cent, a three-year low, in the second quarter.

“This is the beginning of a new wave of fiscal stimulus led by China’s local governments, in response to the recent green light given by Wen Jiabao, China’s premier, to promote investment and expand employment,” said Shen Jianguang, an economist with Mizuho Securities.

But there were questions about whether Changsha could finance its plan and worries that another spending binge would lead to wasteful investment, harming China’s long-term economic outlook.

“There are disagreements about how much the government should stimulate, and there are constraints both on the monetary and the fiscal side, otherwise we would have seen more of these [investment plans] by now,” said Jian Chang, an economist with Barclays.

When the global financial crisis erupted in 2008, China unleashed a debt-fuelled stimulus that propelled the country to a strong recovery, but saddled its banks with problem loans and fuelled a property bubble.

That has led central government to be far more cautious this year in the face of the economic slowdown. But local governments, which have seen their revenues crumble as land sales have cooled, have been raring to ramp up investment and appear to have the political backing to push ahead with such plans.

Changsha, a city of 7m, aims to spend Rmb829bn ($130bn) on 195 projects, ranging from an airport expansion to road construction, waste treatment plants and improving the look of the city.

“Although Changsha’s economic situation remains very good, we cannot ignore the pressures and we must encourage stable, healthy growth,” Chen Run’er, the city’s Communist party chief, was cited as saying by China News Agency.

The announcement came as the State Council, or cabinet, said it had approved a plan to promote the development of central provinces. It urged local governments to focus on equipment manufacturing and high-tech industries as well as investing in infrastructure such as airports.

Essential numbers were missing from Changsha’s announcement, which made it hard to gauge its potential effect. For example, it did not say over what length of time the money would be spent, nor did it say how many of the projects were new.

It was also unclear how the city would bankroll the spending, with the headline target equivalent to 147 per cent of Changsha’s gross domestic product last year. It is also more than one-fifth the size of the Rmb4tn stimulus that China launched in 2008, despite the fact that this earlier money was spent nationwide while Changsha is a single municipality.

Mr Shen said local governments often overstated their investment plans and that the final amount spent might only be a third of the initial target.

Changsha said it would invite “global financial institutions” to participate in the investment, alongside the government and local banks.

“Financing is a problem,” said Zhang Zhiwei, an economist with Nomura. “To what extent this plan can be realistically implemented largely depends on access to bank loans.”

Banks in effect cut off local governments from lending over the past two years after concerns about the debts they had accumulated during the previous stimulus. Yet regulators have started to loosen the reins in recent weeks, telling banks they can lend to projects that are likely to deliver good returns.

Local governments have responded to the loosening of policy by presenting large investment plans.

Xi’an, capital of northern Shaanxi province, said this week it would build nine underground train lines, adding to the six it was planning to build. Meanwhile, Guizhou province in the south said it wanted to spend about Rmb3tn on the development of its tourism industry.