Build, baby, build. Infrastructure spending in China is heating up again. But this time, the government wants help.

Beijing entered the year with a tough stance on debt, tightening its purse strings to head off the risk of a Minsky moment. The Ministry of Finance lowered its fiscal deficit target to 2.6 percent of gross domestic product, the first cut since 2013, and went so far as to halt all government-funded work in Xinjiang, an area bigger than France. As a result, infrastructure growth ground to a halt, dragging on the economy’s expansion.

The unwished-for trade war with the US has caused Beijing to change its calculations. The economy has turned out to be less resilient than many thought. With consumer confidence and manufacturing growth slipping, infrastructure spending can serve as a quick dose of antibiotics to kill the bacteria.

Public private partnerships, or PPP, in which private firms co-invest with local governments to build and operate public facilities, are making a comeback. Until recently, Beijing had been cracking down on these partnerships, shelving projects worth about 2.4 trillion yuan ($363 billion) since November. The downward trend stopped in June.

If anyone doubts the ministry’s intention to turn on the PPP tap again, just look at its quarterly reports. The theme in the first three months centered on canceling local projects. By the time the second-quarter report was released, there was no such mention.

There were good reasons for the clampdown. PPP started to boom in 2014 as Beijing sought to control off-budget borrowing by local governments. Some municipalities used them as a tool to hide liabilities. For instance, the private partner could be promised a fixed return at regular intervals from government land sales, and a guaranteed equity buyback.

In addition, the projects often drew little in the way of private money: More than 60 percent of the “private” partners in PPP projects are state-owned enterprises.

By the first half of 2018, debt associated with PPP projects constituted about 14 percent of local government borrowings, Bank of America Merrill Lynch estimates. The actual proportion is probably higher, with much debt held on the balance sheets of the government’s partners.

However, torn between the unenviable dual task of curtailing debt and sustaining GDP growth, the Finance Ministry has few other options. Local governments are responsible for 90 percent of China’s infrastructure projects but lack reliable sources of income. To finance spending, they depend on land sales, local government financing vehicles, municipal bond sales, and PPP.

Land sales are slowing, as developers grapple with refinancing issues. Municipal bond sales are so anemic that the Finance Ministry is asking banks to give them the same risk weighting as its own debt -- a desperate measure that the banking regulator is likely to reject. As for local government financing vehicles, they are seen as a potential trigger for a Minsky moment -- a sudden collapse of asset values after a long period of debt-fueled growth.

Of course, the Finance Ministry could abandon its fiscal deficit target and transfer cash to local governments, but the loss of face that would entail might be seen as politically unacceptable.

Hence the revival of PPP. Whether investors and private-sector partners will bite is another matter.

In the past, any talk of a stimulus package could trigger a bull run for stocks. Last year, for instance, cement companies such as BBMG Corp. soared after President Xi Jinping designated Xiongan, southwest of Beijing, to be developed into a new technology and innovation hub.

Investors are wary of being burned again, though. Beijing Orient Landscape & Environment Co. was a market darling last year because of a partnership with the government to build environmentally friendly water-treatment facilities. The company sent shock waves through markets after a failed bond sale in May, and is now being rescued by Agricultural Bank of China via a 3 billion yuan debt-for-equity swap.

A wait-and-see approach is probably justified. Chinese policy makers appear to be gridlocked, uncertain how long the trade war will last and unsure whether to prioritize growth over deleveraging. This round of public-private partnerships may end up being as public as the last.


Shuli Ren
Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. -- Ed.

(Bloomberg)