Policy banks in China have been authorized to issue new bonds that will channel money into infrastructure spending. State media has reported that planners have been fretting over declining economic indicators.
The stock market rout that lasted for a month, coupled with weak performance of the manufacturing industry has scared Beijing. There has been an insistent move to direct money into what analysts call the “actual” economy and this move stems from the last reading of the Caixin Markit purchasing managers’ index. It was published at the beginning of this week and it revealed that the development in the manufacturing sector in China had dropped more than what was initially thought.
An estimated RMB 300 billion (US$ 48 billion) will be issued by policy banks that were recapitalized earlier this spring. Around RMB 1 trillion has been planned, according to the Economic Information Daily.
The money that has been raised will be invested in pipeline infrastructure, housing, and other domestic projects, according to the news report. These efforts are in tandem with the central bank’s plan to develop a more targeted set of monetary policy tools that will augment the economy even as capital inflows cease.
The move reflects a shift towards direct central government support of infrastructure investment. This comes after years of investment at local levels consequently resulted in massive debts for the local government. Beijing made efforts to reduce the debt of local government and this resulted in minimizing the capital available for infrastructure spending.
Andrew Batson of Gavekal Dragonomics said that investment in China’s infrastructure has largely been financed by local governments and they have been doing it in a way that is neither desirable nor sustainable. The two options, Andrew Batson said, are that the central government can either step into the ring or they can give up on restricting the debt of the local government.