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The slowdown in infrastructure investment has had a limited impact on economic growth.
Release date:
2018-05-16
Source:
Data shows that, in the first four months of this year, China's fixed-asset investment continued to decline, falling to 7%—a drop of 0.2 percentage points compared to 2017. Notably, infrastructure investment slowed significantly, serving as the primary driver behind the overall downturn in investment. From January to April, infrastructure investment grew by 12.4% year-on-year on a cumulative basis, yet this growth rate was 6.6 percentage points lower than in 2017. Meanwhile, regional disparities in infrastructure performance were evident: Tibet and Hainan emerged as the fastest-growing provinces in infrastructure development, while provinces like Tianjin, Inner Mongolia, and Xinjiang—regions facing heavier local debt risks—experienced a noticeable decline in infrastructure investment.
Data shows that, in the first four months of this year, China's fixed-asset investment continued to decline, falling to 7%—a drop of 0.2 percentage points compared to 2017. Notably, infrastructure investment slowed significantly, serving as the primary driver behind the overall downturn in investment. From January to April, infrastructure investment grew by 12.4% year-on-year on a cumulative basis, yet this growth rate was 6.6 percentage points lower than in 2017. Meanwhile, regional disparities in infrastructure performance were evident: Tibet and Hainan emerged as the fastest-growing provinces in infrastructure development, while provinces like Tianjin, Inner Mongolia, and Xinjiang—regions facing heavier local debt risks—experienced a marked slowdown in infrastructure investment.
In the author's view, the current decline in infrastructure investment is hardly surprising, primarily due to the waning emphasis on GDP-driven incentives and growing fiscal constraints. However, the negative impact of slowing infrastructure spending on the economy can be mitigated through region-specific, strategic initiatives—such as the accelerated implementation of the Beijing-Tianjin-Hebei strategy and the Hainan Free Trade Zone initiative. As a result, cities like Xiong'an and Hainan are expected to emerge as new growth hubs for investment in the coming phase, potentially making 2018 a year when regional disparities in infrastructure investment begin to widen significantly.
Reasons Behind the Decline in Investment
Although the trend of deleveraging and strengthened regulatory oversight is advancing, in my view, the primary factor behind the decline in infrastructure investment is the intensified fiscal constraints during the same period. In 2018, the drop in investment was particularly evident in non-private investments—those closely tied to infrastructure—which plummeted significantly. From January to April, non-private investment fell sharply to 4.8%, far below the 7% growth rate seen in overall fixed-asset investment over the same period. Meanwhile, private investment, benefiting from stronger underlying economic momentum, actually surged to 8.4% during the same period, suggesting that monetary policy wasn’t the main driver of the infrastructure slowdown. After all, compared to non-private investment, private investment would naturally face more pronounced challenges under tight funding conditions—such as greater difficulty securing loan access and higher borrowing costs.
Looking at the data by province, the three provinces and cities that saw the largest declines in fixed-asset investment during the first quarter were Tianjin, Inner Mongolia, and Xinjiang. In the first quarter of this year, their respective investment growth rates were -25.6%, -26.2%, and -30.3%, representing drops of 26.1, 33.4, and 50.3 percentage points compared to the overall growth in 2017. Notably, these provinces and cities are all facing severe fiscal constraints.
So far this year, the effort to "trim the fat" from regional data in the areas mentioned above has been a steady, ongoing process. Typically, once the "water content" in the data is cleared out—meaning inflated or exaggerated figures are corrected—investment statistics tend to show a significant decline. But looking beyond the surface, what’s driving this shift—from local governments previously engaging in "overreporting" to now actively "squeezing the water"—is a deeper, fundamental change: the transformation of how officials are evaluated. Compared to the past, when GDP was the sole and dominant metric for assessing local leaders’ performance, today’s emphasis is shifting away from sheer economic growth figures. Instead, there’s growing attention being paid to critical factors like debt risks, environmental sustainability, and people’s well-being. This evolving approach reflects a broader recognition that sustainable development requires not just rapid growth, but also a focus on improving the quality of that growth—balancing economic progress with long-term stability and social responsibility.
Furthermore, not only have incentive mechanisms shifted, but stricter accountability for debt has completely reversed the situation. Among the six provinces and cities where local government bond issuance grew by more than 10% in 2017, Xinjiang and Tianjin experienced particularly rapid debt expansion, with growth rates reaching 19% and 18%, respectively. In 2018, Xinjiang took the lead in halting government-backed projects altogether, ordering a complete suspension of all PPP initiatives. For construction projects already in the early stages of preparation, any that fail to secure adequate funding will be categorically barred from being submitted for approval.
Of course, as deleveraging and tighter debt controls took hold, multiple sources of infrastructure investment narrowed in 2018. For instance, PSL, once a low-cost funding channel for local projects, saw its growth rate decline starting in 2018. Meanwhile, since late 2017, the Ministry of Finance has issued several directives aimed at tightening regulations on local financing and PPP projects, explicitly requiring financial institutions to fully comply with guidelines governing their investment and lending activities involving local governments. These measures established clear red lines—four "must-nots"—to strictly limit financial firms' involvement in partnerships with local governments.
Investment Highlights of the New Phase
Given the measures outlined above, the author believes that infrastructure investment this year may continue the downward trend observed since the first quarter—particularly in provinces already burdened with excessive debt risks, where the decline could be even more pronounced. Of course, the question remains: Could infrastructure investment suddenly stall, potentially dragging down overall economic growth for the year? The author, however, doesn’t believe the outlook is quite so bleak. In contrast to the slowdown seen in some provinces, regional investment this year still holds promising opportunities—especially as construction accelerates in the Hainan Free Trade Zone and the Xiong'an New Area, which could largely offset the risks associated with a rapid downturn in investment.
In the first quarter of 2018, Hainan saw investment growth of 25.3%, significantly higher than the 10.1% recorded in 2017, making it stand out prominently among all provinces. Hainan aims to establish itself as a pilot zone for deepening reform and opening up, a national ecological civilization experimental zone, an international tourism and consumption hub, and a critical service and support area for major national strategies. For Hainan—whose current economic development and infrastructure levels remain relatively low—these ambitious goals will demand substantial effort, paving the way for rapid growth in future infrastructure investments, including ports, highways, bridges, waterways, and airports.
Additionally, on April 21, the "Outline for Planning of Hebei Xiong'an New Area" was released. The outline highlights that by 2035, the area will have essentially become a high-level socialist region characterized by green and low-carbon development, advanced information and intelligence, livability and business attractiveness, strong competitiveness and influence, and harmonious coexistence between humans and nature. Modern Transforming the city—In the author's view, the ambitious plan, once implemented, will undoubtedly spur rapid growth in investments across multiple sectors, including environmental protection, infrastructure development, and rail transit, potentially becoming a key driver of regional investment over the next decade.
Meanwhile, looking at the three key drivers of this year's economic growth—investment, consumption, and trade—we see that while investment has dipped slightly, consumer spending remains relatively steady, and trade continues to perform strongly, providing crucial support against downside economic risks. Notably, in April, China's total retail sales of consumer goods grew 9.4% year-on-year, falling short of expectations—mainly due to a decline in property-related spending categories such as furniture and home appliances during the same period. Meanwhile, auto consumption remained relatively stable. Looking ahead, as the real estate sector stabilizes… Sales The continued slowdown in construction-start data will likely continue to weigh on related consumption. However, overall, with the government’s efforts to boost domestic demand and the impact of tax cuts, both the consumer environment and individuals’ disposable income are expected to receive support, helping consumption remain moderately steady.
In terms of trade, although external factors have introduced uncertainty into this year’s export growth, the trade data for January-April remain encouraging. Measured in U.S. dollars, China’s cumulative imports and exports grew by 16.5% from January to April—surpassing last year’s full-year growth rate by 5.1 percentage points. Meanwhile, export and import growth rates reached 13.7% and 19.6%, respectively, exceeding last year’s annual figures by 5.8 and 3.5 percentage points. This suggests that the ongoing recovery of global economies and the improving outlook for the international trade environment have yet to undergo any significant changes.
Among these trends, thanks to the U.S. economy performing better than expected since the beginning of the year, China's exports to the U.S. grew by 13.9% from January to April—slightly higher than the average growth rate of 13.7%. Meanwhile, exports to Europe remained relatively robust, with China’s exports to the EU increasing by 12.9% during the same period. However, when looking at European trade data, the slowdown in export growth in the first quarter was largely driven by weaker performance measured in euros, likely tied to the euro’s appreciation. In contrast, exports valued in U.S. dollars continued to stay at historically high levels seen since 2012, indicating that the positive momentum in European-bound shipments has yet to reverse. Additionally, trade with countries along the Belt and Road Initiative routes continued to grow at a strong pace, serving as a key driver behind China’s overall trade recovery.
In 2018, investment trends are expected to remain generally downward—this applies not only to infrastructure investment but also to real estate investment, which is set to slow down. Although real estate development investment reached 3.0592 trillion yuan from January to April, representing a nominal year-on-year growth of 10.3%, the overall market sentiment remains firmly focused on "housing for living, not speculation." As regulators continue to ramp up measures in overheated regions and forward-looking indicators for the housing market show signs of weakening, real estate investment is likely to face ongoing downward pressure in the months ahead.
Therefore, the author believes that, as debt constraints tighten and deleveraging continues to deepen, infrastructure investment will likely remain on a downward trajectory. Indeed, given the shift in GDP evaluation mechanisms, an increasing number of provinces have either lowered or abandoned their fixed-asset investment targets since 2018. Of course, concerns about whether infrastructure investment could stall—or even significantly drag down overall growth—seem largely unwarranted. In the author’s view, with the accelerated implementation of strategies like the Beijing-Tianjin-Hebei initiative and the Hainan Free Trade Zone plan, Xiong'an and Hainan are poised to become key highlights of the next investment phase over the coming five to ten years. 2018 may well mark the year when regional investment disparities begin to widen further. Meanwhile, steady consumer spending and the positive momentum in net exports will help cushion the impact of declining investment to some extent.
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