China Powers Past Debt Purge, Leaving Dead Projects
(Bloomberg) -- A pile of rusty pipes and materials are all that remain of Lanzhou New Area’s tram project. Only a year ago it was a flagship public-private partnership for the planned city in Central China, before it fell victim to President Xi Jinping’s debt clampdown.
"The project is dead," said a guard at the office, who gave only his surname, Le. Nearby, the tram tracks are paved over, the mismatched lines of asphalt scarring a six-lane road that leads to a dead end on the edge of one of China’s most ambitious urban developments.
The size of New York City, the zone is a satellite of Lanzhou, capital of China’s poorest province, Gansu, and a place where Xi’s efforts to wean the country off debt and onto services and consumer spending can be seen in stark relief. In most of China, the economy is powering through Xi’s borrowing bottleneck, with economists surveyed by Bloomberg projecting the nation’s gross domestic product grew 6.8 percent last year, the first annual acceleration in seven years. But for less-developed areas like Gansu the story is not so simple.
Away from the industrial centers along the coast, Gansu came late to the nation’s debt-fueled investment party. During the nation’s economic ascent in the 1990s and 2000s, it became infamous for having the most polluted air in the country, a cocktail of chemicals from petroleum plants and heavy industry mixed with desert dust storms. Lanzhou New Area was only approved in 2012, just before Xi took office, driven by a central government investment spree designed to spread wealth to western regions.
Now, Xi wants to neutralize the risk of soaring debt derailing growth that accounts for more than a third of the global economic expansion. He reinforced that aim at a twice-a-decade Communist Party Congress in October and at the annual Central Economic Work Conference in December, where elite cadres set goals for 2018. From the yuan and bitcoin to banking and housing, taming potential threats is the new priority.
Economists and policy makers see the restraints on borrowing as a necessary step toward choking off some of the nation’s construction and investment excesses and building a more sustainable economy.
But there are casualties, including Lanzhou New Area’s tram, a network of tunnels for underground utility lines in the city, and more than 200 other public-private projects -- almost half the total in Gansu. In neighboring Inner Mongolia, subway projects under construction in Baotou and the capital Hohhot were halted last year because they left local government "overly indebted," the official Xinhua News Agency reported this month.
What Our Economists Say...“As financial regulation gets stricter and credit supplies tighten, it will be more and more difficult for local governments to borrow for infrastructure and industrial park development, or to borrow for repaying old debts,” said Qian Wan, a Bloomberg economist in Beijing who analyzes China’s regional economies. “Deleveraging is always painful, but will be more painful for inland provinces where growth is not as robust.”
Resilience in the $11 trillion economy, driven by consumption, offers policy makers room to address the financial risk and even tackle other ills such as pollution and poverty. Markets are buoyant and inflation is contained as borrowing costs increase modestly. Services make up more than half of output.
Surveys predict China will announce on Thursday that GDP grew 6.7 percent in the fourth quarter, a tad below the 6.8 percent expansion of the third quarter. Retail sales and factory output likely remained steady in December. But 2017 fixed investment was probably the weakest since 1999.
In Gansu, fixed investment shrank 39 percent in the first 11 months of last year, the most of all provinces, National Bureau of Statistics data show. A regional bank has stopped rolling over a loan for the local government’s infrastructure and property development arm. Many of the wide avenues and tower blocks of the new city on the edge of the Gobi desert are still empty.
In its heyday, Lanzhou New Area was a poster child for a government spending boom that followed the 2008-2009 global financial crisis. Armies of earth movers flattened hills, filled valleys and dug lakes in service of the goal to lure 1 million residents by 2030. The place achieved internet fame in 2016 for its theme-park reproductions of ancient icons such as the Greek Parthenon, Beijing’s Forbidden City and the Great Sphinx of Egypt.
The zone strives to be a "pioneering area practicing the party’s innovative theories," according to a booklet produced by the Lanzhou New Area Party Working Committee. Local communist party officials blocked Bloomberg’s requests for interviews with officials in the area and refused further comment.
While Lanzhou’s population of 3.7 million is almost as large as Los Angeles, municipal statistics bureau data show fewer than 150,000 live in the New Area, an hour’s drive north of the city center. Had it opened as originally planned next year, the 24 kilometer (15 mile) tram line likely would have traversed mostly vacant land with a few scattered factories.
Read more about how China wants to steer credit to poorer areas
Wang Rongqing, a teaching assistant in the new city, says the government should be spending money on civic amenities. “I don’t know what that tunnel is for," she said, pointing to a conduit that would have been part of the defunct utilities network. "What the New Area urgently needs is hospitals and schools.”
The local government’s investment company, housed in a modern midrise building with images of Xi displayed on the lobby video screen, was directly affected by his credit clampdown when Bank of Gansu Co. last year didn’t renew a 2 billion yuan ($312 million) line of credit.
The decision followed "comprehensive consideration of policy orientation and compliance with relevant laws and regulations," the bank said in a statement to Bloomberg. It said it has raised standards for new creditors to mitigate risk and reduce financial leverage. The bank is holding its initial public offering and expects to start trading in Hong Kong on Jan. 18.
"Financial institutions are more cautious about funding to local government financing vehicles," said Liu Xinhe, an analyst at Beijing-based China Chengxin International Rating Co. "They’re looking more seriously at whether LGFVs have stable cash flow for repayment, and legitimate collateral."
For Lanzhou, the funding drought may ultimately be mitigated by China’s latest grand investment program: Xi’s Belt and Road initiative. The city, on the banks of the Yellow River near China’s geographical center, was a major stop on the ancient Silk Road.
While Bank of Gansu restricted credit for the local government investment arm, it did help fund projects related to technological innovation, science and culture tourism.
If the government can manage the shift in investment in Lanzhou without unleashing the excesses of the past decade, the city may eventually fill its empty tower blocks and once again become a bridgehead for China’s western development.
©2018 Bloomberg L.P.