China’s State Council released a blanket ban on some new state-funded construction projects in 12 provinces and regions throughout the country in recent weeks. The directives directed local governments and state-owned banks to stop work on projects that contain less than 50 percent of their planned investment. The twelve regions affected by the new ban are Chongqing, Gansu, Guangxi, Guizhou, Heilongjiang, Inner Mongolia, Jilin, Liaoning, Ningxia, Qinghai, Tianjin, and Yunnan.
The bans also included a list of projects are to avoid are expressways and other major roadways, new airport construction or expansion projects, and metro or subway projects. Furthermore, the bans also outlined that no new construction beyond the infrastructure projects at the municipal, provincial, or ministerial levels will be allowed for the rest of the year. The directives stated that the affected regions must make every effort to lower their ‘debt risk to the low and medium level’ without saying how the government would measure the debt reduction.
Analysis
The directive is part of the Chinese government’s efforts to reduce the risks associated with the real estate market, amount of debt at the provincial and lower levels, and small/midsize financial institutions. The affected areas – such as Guizhou, Gansu, and Qinghai provinces – are considered the poorest regions in China and saw infrastructure projects as a way the preferred method to increase GDP. However, the emphasis on infrastructure projects led to massive increases in debt all provinces carry, with some estimating that the national debt is more than 300 percent of China’s GDP.
The ban would likely have minimal effect on both stabilizing and decreasing the debt levels in the 12 regions because the local Chinese Communist Party (CCP) members are not incentivized to do so. The reason why is due to the CCP placing a greater emphasis on plans or solutions that lead to short-term successes instead of alternatives that would provide long-term, sustainable growth for the region. The party members whose short-term plans achieve immediate results – such as increases in yearly GDP or manufacturing – will also be promoted to higher party positions.