Will "New Infrastructure" Jumpstart China’s Economy?

While several countries are still scrambling to contain the spread of COVID-19, many Chinese people are gradually returning to normal life. However, global markets remain deeply impacted by the virus and are desperately looking for stimulus to jump-start China’s economy. At this point, the United States has passed four stimulus packages to battle the economic fallout of a global pandemic, amounting to a total of $2.4 trillion.

Global markets had expected that some sort of stimulus package would be announced in late May at the Two Sessions—China’s annual plenary sessions of the National People’s Congress (NPC) and the National Committee of the Chinese People’s Political Consultative Conferences (CPPCC). In these sessions, China revealed its annual work report and fiscal budget. But the stimulus that was announced in May didn’t generate as much excitement as some expected it would. China’s restraint was evident.

China’s overhyped 34 trillion RMB “stimulus”

On March 4, the Politburo Standing Committee of the CPC Central Committee meeting called for accelerating construction of new infrastructure, a buzzword signifying an infrastructure that is digital, smart, and innovative. This announcement caused the Shanghai stock market to rally, registering its highest close since January 20, the day Wuhan was placed under a historic lockdown.

Historically, the first stimulus measure China takes to reverse the downward economy has been investment in infrastructure. According to one Chinese proverb: “pave the roads first if you want to get rich.”

In 2008, facing the threat of a global financial crisis, the Chinese government launched a landmark 4 trillion RMB ($570 million) stimulus package that eventually stabilized its economy. However, the stimulus was later blamed by some for causing severe overcapacity in the steel, coal, and cement sectors due to tremendous investment in traditional carbon-intensive infrastructure, including railways, roads, airports, harbors, and hydroelectric facilities.

Dozens of provinces had announced their annual budgets just before the Politburo Standing Committee emphasized new infrastructure. The media quickly associated the newly-announced provincial investment packages with the juiced up new infrastructure buzzword, giving the market some much-needed hope. The provincial investment packages originally totaled an eye-popping  34 trillion  RMB. That number would swell to more than 40 trillion RMB as more provinces unveiled their own investment plans before the Two Sessions.

What is new infrastructure?

The term new infrastructure first  appeared  in the State Council’s guideline for promoting the “Internet+” initiative in July 2015, though it was not defined at the time. Over the past five years, the term has continued to be referenced in scores of central government policies, with a loosened and evolving scope. The term does appear to focus on digital, smart, and innovative solutions, rather than the traditional carbon-intensive infrastructure that was emphasized in the years following the 2008 stimulus.

After the Politburo Standing Committee meeting on March 4, the state-run China Central Television (CCTV) clarified the meaning of new infrastructure to include seven categories.

  1. 5G networks
  2. Ultra-high voltage
  3. Inter-city high-speed rail and inner-city rail systems
  4. Charging stations for electric vehicles
  5. Data centers
  6. Artificial intelligence
  7. Industrial Internet

China's new infrastructure push emphasizes low-carbon infrastructure, such as EV charging stations.

The new infrastructure categories aim to digitize traditional industries and catalyze innovation in new areas. Most importantly, they show China’s determination to transition away from high-carbon solutions toward more sustainable economic growth.

Of the seven new categories, ultra-high voltage, rail systems, and charging stations are not “new,” but fall under the category of traditional infrastructure. Some believe that these three sectors will help bridge the gap between traditional and modern infrastructure.

A true stimulus?

For China’s provincial governments, it is an annual practice to announce an investment plan prior to the Two Sessions. For this article, we reviewed the investment plans from each provincial government and tallied the numbers in order to investigate whether provinces are actually using their investment plans to cope with the economic fallout from the pandemic. Some provinces announced annual investment plans for 2020 only, while some announced plans covering several years.

Out of the tally, 19 provinces announced multi-year investment packages in 2020, totaling 43 trillion RMB (more than $34 trillion). But the multi-year investment packages that were announced in 2019 were actually even higher, reaching 50 billion RMB. Therefore, it can hardly be said that the 2020 provincial investment plans included stimulus specifically allocated to address the effects of COVID-19. On the contrary, the stimulus appeared to be anything but.

It should be noted that economic powerhouses, like Beijing, Shanghai, and Shandong, only announced annual investment figures in 2020. The yearly aggregate 2020 investment plans for these cities came to roughly 7.45 trillion RMB, slightly higher than their combined annual investment in 2019 (RMB 7.31 trillion). Again, the numbers point to no special stimulus for China’s largest economic engines.

For a more reliable indicator of the share of public investment in new infrastructure, we examined the Public-Private Partnership (PPP) projects that have been fully recorded and monitored by the Ministry of Finance. One  report  shows that, out of the sizable 17.6 trillion RMB investment in PPP projects, 7.1 trillion RMB (41%) is marked for traditional infrastructure. In fact, only about 100 billion RMB (0.5%,) is invested in new infrastructure projects.

It’s safe to say that only a tiny portion of public investment was linked to new infrastructure. Therefore, the stock market’s excitement was unfounded.

The Two Sessions

Consumer spending, public investment, and exports are three historic drivers of China’s economic growth. Public investment is usually the first choice to stimulate the economy. In 2003, the year of the SARS outbreak, public investment shouldered 70% of GDP growth. But the marginal impact of public investment on the economy has dwindled over the past ten years, as demonstrated by the falling year-over-year growth rate in fixed-asset investment.

The Chinese government is keenly aware of this trend. On May 28, Premier Li Keqiang held a press conference during the Two Sessions, revealing a stimulus package of 6 trillion RMB ($850 billion), a rather modest figure compared to the 4 trillion RMB in 2008, considering that China’s GDP had tripled in the 12 years since 2008. Although Premier Li briefly mentioned new infrastructure, he understandably put much more emphasis on health care and medical R&D, job creation, poverty relief, and economic recovery.

Among all of these competing factors, new infrastructure stands to play a relatively minor role in China’s current stimulus package. While the stimulus aims for a short-term economic jumpstart, new infrastructure should provide some growth opportunities and, most notably, a chance to transform China’s economy in a more sustainable direction over the long run.

Dr. Kevin Mo is Managing Director of the Paulson Institute Beijing Representative Office, in charge of climate and sustainable urbanization. Xing Huang contributed to this article.

China's new infrastructure push emphasizes low-carbon infrastructure, such as EV charging stations.