China’s $1 Trillion Investment Plan: Stimulus or Not?

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With China’s growth slowing down, Beijing will approve 300 infrastructure projects worth a total of 7 trillion RMB ($1.1 trillion) for 2015, Bloomberg reports. The decision has not yet been publicly announced by the Chinese government or Chinese media.  The move is linked to a larger plan that will see 10 trillion RMB ($1.6 trillion) pumped into China’s economy by 2016. According to Bloomberg’s sources, the investment will center on “seven industries including oil and gas pipelines, health, clean energy, transportation and mining.”

The report hints that economic rebalancing still faces an uphill challenge in China, despite vocal support from top leadership. China has been extremely reliant on government investment as a driver of growth ever since 2008, when Beijing launched a massive stimulus program to compensate for a decline in global trade. With investment levels at nearly half China’s GDP, Beijing’s economy is “the most investment-dependent in history,” Financial Times notes. This strategy has also resulted in a massive amount of government debt, particularly at the local level.

Beijing recognizes these long-term concerns and plans to promote domestic consumption as a pillar of growth while easing off on investment. But as this new announcement indicates, domestic consumption simply isn’t robust enough to support growth at a level China’s leaders are comfortable with. China’s growth is widely expected to slow to 7 percent or even lower in 2015. While the Chinese government has repeatedly attempted to de-emphasize hard GDP growth targets in favor of promoting stable and efficient growth, concerns about employment and income still make Beijing incredibly nervous about overly slow growth. In July 2014, Premier Li Keqiang noted that China must keep its growth within a “reasonable range.”

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When growth threatens to dip below that threshold, it sparks a return to the comfortable and familiar method of jump-starting growth through government investment. China will continue to be reliant on government-funded infrastructure development in the short term even as it seeks to change its long-term economic drivers.

Last year, between October 16 and November 5 alone, China greenlit 21 new investment projects worth $112 billion. At the time, Chinese state media described the decisions as a way “to hedge against falling investment in the real estate market.” Chinese experts predicted further infrastructure investment as a way of compensating for a sagging real estate market; the measures reported by Bloomberg fulfill that prophecy.

Still, experts caution this does not signal a return to the stimulus era of 2008. Nicholas Consonery of the Eurasia Group predicts that the $1 trillion-plus investment package “will not mark a significant trajectory change in terms of Beijing’s determination to use fiscal stimulus to boost growth.” Instead, it’s a “public messaging strategy,” which lumps together pre-existing projects to get to a eye-catching number that helps boost confidence in China’s economy. In general, Consonery writes, “we do not expect Beijing to use aggressive fiscal stimulus to push growth above a 6.5-7 percent level in the year ahead.”

Lian Ping, the chief economic with China’s Bank of Communications, seems to agree. Lian told Xinhua in November that the spate of new infrastructure projects “should be deemed reasonable investment and non-stimulus on a massive scale,” as the projects are “quite necessary” in addition to being important economically.

Infrastructure investments are especially crucial for China’s central and western regions, where development lags behind the wealthier coastal areas. In November, reports emerged that China would earmark $16.3 billion especially for infrastructure development in those areas, part of the groundwork for the planned Silk Road Economic Belt. China Daily reported that the fund “will be used to build and expand railways, roads and pipelines in Chinese provinces” along the planned Silk Road route.

Internationally, the Silk Road Economic Belt and Maritime Silk Road projects, which also require massive infrastructure development, represent another chance to jump-start China’s economy. At the 2014 APEC summit, President Xi Jinping announced the set-up of a $40 billion Silk Road fund to finance infrastructure projects. Much of that money will go to fund Chinese-led projects in other countries. As a recent Xinhua article pointed out, for example, China is currently discussing high-speed railway projects with 28 separate countries.

China’s “one belt, one road” project offers opportunities for more than just Chinese infrastructure and investment firms. The completed trade route would open up new markets for Chinese goods in Southeast, South, and Central Asia, and beyond — even in the Middle East and Europe if all goes as planned. If implemented completely, China’s “Marshall Plan” will also be a major boon to Chinese companies.

That brings us back to China’s $1 trillion infrastructure investment plan. Beijing has made clear that the first step in creating the new “Silk Road” is to literally create roads – and railways, ports, pipelines, and the other necessities that make up an inter-connected region. While the international aspect of this strategy receives the lion’s share of the attention, China will also need to pump billions into its domestic infrastructure, particularly if under-developed provinces like Xinjiang are to take up their envisioned role as China’s “gateway to the West.”

In other words, the Bloomberg announcement shouldn’t be read only as China’s latest stimulus package. The economic ramifications are obvious, but it also ties in closely with China’s overall development and even foreign policy goals.

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