Workers on a Beijing construction site. Credit: ILO via Flickr
When China’s GDP growth is below target, successive governments have relied on the same tool: government spending on infrastructure investment to stimulate the economy. But the success of fiscal stimulus requires getting the details of implementation right.
Two challenges stand out. The first is financing. While Chinese policymakers rely on fiscal spending to help achieve the official growth target, they are uneasy about the central government’s rising leverage ratio and about moral hazard at the local-government level. Given this, they are reluctant to finance infrastructure investment through the general public budget.
Instead, the authorities use other “budgeted funds,” including local-government special-purpose bonds (SPBs) and revenues from the sale of land rights. Such financing is augmented by “self-raised funds,” obtained mainly through municipal-bond issuance, bank loans, and state-owned enterprises.
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