Beijing is calling on local institutional investors to pour in more capital for infrastructure projects while lowering its economic growth target to a range of 6% to 6.5% for this year.
Its request featured as part of the work report delivered by Chinese Premier Li Keqiang at the convening session of the National People’s Congress (NPC) on Tuesday (March 5). The two-hour-long speech outlines the social and economic development goals of the world’s second-largest economy in 2019.
Li said the government would “properly” lower the capital charge for infrastructure projects as well as utilise financial instruments to attract more “social capital” into special building projects in key areas.
Xia Chun, chief research officer at Noah Holdings Group, told AsianInvestor that social capital refers to asset owners like insurers. China is keen to encourage them to invest more in long-term infrastructure investments to support the country’s economy and create more job opportunities.
Li did not specify exactly how the government intended to drop the cost of capital for infrastructure projects, or what instruments it would prioritise. However, it is possible that Beijing could prevail upon China’s insurance regulator to reduce the capital cost of infrastructure-related debt or equity investments for local life insurers.
Li added that state and provincial authorities plan to invest Rmb800 billion ($119 billion) in railway projects and Rmb1.8 trillion in toll road and water transport. The government also intends to construct a new batch of hydraulic projects, speed up the planning of the Sichuan-Tibet railway, and expedite the investments in infrastructure like intercity transport, disaster prevention, aviation and others, he said.
The central government's budget for these investments is Rmb577.6 billion; Rmb40 billion more than it had set aside in 2018, he said.
LIMITED PROJECT POSSIBILITIES
While Beijing appears to see a big round of infrastructure investment as a necessary step to stimulate economic growth, it may find it harder to implement, Xia warned.
The most immediately necessary infrastructure has largely been built already across China, except for some related to disaster prevention mentioned by Li. Plus, it’s difficult to source promising building projects and the investment returns and efficiencies of such projects are not as strong as they were a few years ago, he noted.
That said, insurers have been rapidly increasing their investment portfolios in recent years, as their policy businesses have rapidly expanded. As a result, even if companies don’t opt to invest a higher percentage of their portfolio into infrastructure, the organic portfolio alone will mean they invest more into infrastructure, he said.
China’s life insurers’ investment assets grew by 9.97% to Rmb16.41 trillion in 2018, according to data from the China Banking and Insurance Regulatory Commission. Of this total, 39.08% was placed in “other investments”, a broad category that includes infrastructure, policy loans and trust products.
Beijing made its desire to boost infrastructure investments known last year when China’s economy showed signs of slowing down and the US-China trade dispute intensified.
In August, the central government ordered local governments to issue more than Rmb1 trillion in special purpose bonds to meet a Rmb1.35 trillion quota by the end of October. Such bonds are tailor-made local government debt for funding infrastructure projects.
Then on October 31, the State Council announced a directive aimed at encouraging new infrastructure projects with a series of policy recommendations. However, this strategy was somewhat undermined just a few days later, when the People’s Bank of China cautioned investors about the risks in infrastructure investments in its China Financial Stability Report.
Insurers and other institutional investors have been seen to do the central government’s bidding to invest into infrastructure via a variety of ways, including investing through bonds, debt investment plans, public-private partnerships or listed shares.
Ping An Group, for example, is likely to raise its exposure to infrastructure project debt by buying new debt investment products from its fund management subsidiary.
Ping An Asset Management and the National Council of Social Security Fund (NCSSF) are cornerstone investors in the Shanghai initial public offering of the operator of the Beijing-Shanghai high-speed railway, according to a listing document uploaded on the securities regulator on February 26.
The emphasis on infrastructure is designed to help prop up an economy that is seeing its growth rate soften.
China’s GDP grew at 6.6% in 2018, the slowest in nearly three decades. It is expected to slip further still , between 6% to 6.5% this year, Li said.
Benjamin Deng, group chief investment officer of China Pacific Insurance Group (CPIC), told AsianInvestor that China’s GDP growth is likely to slow to 6% or even lower over the long term, but what’s most important is that the government can manage market expectations.
Even a 5% GDP growth is huge given China’s economic scale, Deng noted. He added that while the country is still growing, it’s no longer emphasising the speed of its growth anymore so much as its quality.
Deng added that he is upbeat about economic growth in China and the investment outlook this year, noting that Beijing is employing countercyclical policies to prevent tail risks or systemic risks in the market. Plus, he believes the Chinese and US governments will reach a trade agreement because it’s beneficial to both of them to do so.