China's infrastructure investment: Current situation, problems and countermeasures

Four trend characteristics of China's infrastructure investment change

1. Overall investment growth slowed down

In 2022, driven by proactive fiscal policies and expanding effective investment policies, the growth rate of infrastructure investment, including electricity, will jump to 11.5%, playing a very key role in stabilizing investment. However, from a longer period of time, the overall growth rate of China's infrastructure investment is slowing down. Since 2013, infrastructure investment has entered a downward channel, and the growth rate has continued to decline from double digits. Especially since 2018, the growth rate of investment has fallen off a cliff. In 2018, infrastructure investment, including electricity, grew by only 1.8%. Although it rebounded to 3.3% and 3.4% in 2019 and 2020, it fell below the single digits again in 2021, dropping to 0.2%. On the one hand, the decline in the growth rate of infrastructure investment is related to the stage of China's economic development. At present, China's economy has entered the stage of high-quality development from the stage of high-speed growth, and the economic growth center has declined, including the investment growth center of infrastructure. On the other hand, preventing and resolving local government debt risk management has led to more limited sources of local government investment funds, and the growth rate of infrastructure projects that rely on direct government investment such as parks and green Spaces and municipal roads has declined most significantly.

(b) The investment structure is gradually tilted towards water conservancy, environment, public facilities management and new infrastructure

With the constant changes in China's economic and social needs, the structure of infrastructure investment has undergone profound changes. Benefiting from the rapid development of urbanization and the construction of a resource-saving and environment-friendly society, investment in water conservancy, environment and public facilities management has grown rapidly since the 12th Five-Year Plan period, and its proportion in infrastructure investment has increased from 25.1% in 2005 to 34% in 2010 and to 40.6% in 2015. It surpassed the transportation industry to become the largest infrastructure industry in terms of investment. Driven by the development of the new generation of information and communication technologies, investment in information transmission, software and information technology services has grown rapidly and accounted for an increasing proportion of infrastructure investment. Since the "13th Five-Year Plan", the new infrastructure represented by information infrastructure, integration infrastructure and innovation infrastructure has received wide attention and become a hot spot of government support and social investment. According to the estimates of the China Academy of Information and Communications Technology, during the "14th Five-Year Plan" period, China's new infrastructure investment will reach 10.6 trillion yuan, and the proportion of infrastructure investment will increase to about 10%.

3. Investment growth is significantly differentiated among regions

Since 2000, China has successively implemented the overall strategy of regional development, such as the development of the western region and the rise of the central region. The state has strengthened policy and fund support for the central and western regions, and infrastructure investment in the central and western regions has grown rapidly. The western region has taken the lead in infrastructure investment, accounting for 26% of total infrastructure investment in 2003 to 34% in 2020. Infrastructure investment in the central region began to accelerate from the latter part of the 12th Five-Year Plan, accounting for 20.5% in 2012 to 24.7% in 2020. The proportion of infrastructure investment in Northeast China increased first and then decreased. From 2003 to 2008, the proportion increased from 6% to 10.5%, and since 2014, there has been a trend decline, and the proportion has been less than 4% in 2020. By 2020, China's eastern, central, western and northeastern regions will account for 37.5%, 24.7%, 34% and 3.8% of infrastructure investment, respectively.

(4) The proportion of private investment is still low

For a long time, China's infrastructure is mainly invested and constructed by the government and its subordinate enterprises. Since the Third Plenary Session of the 16th Central Committee, especially since the reform of the investment and financing system in 2004, the proportion of private capital participating in infrastructure investment has continuously increased. In 2008, private capital accounted for only 7 per cent of investment in basic industries and infrastructure. In 2017, the proportion of private investment in infrastructure investment increased to 24.5 percent, becoming an important force in infrastructure investment. However, whether it is compared with 90% of private investment in manufacturing, or compared with more than 55% of private investment in overall fixed asset investment, the proportion of private investment in infrastructure is significantly lower, and there is still much room for improvement in the future.

There are three major problems and challenges in China's infrastructure development

(1) The weak board is still prominent, and the quality and efficiency need to be improved

According to the World Economic Forum's Global Competitiveness Report 2019, out of 141 countries in the world, China ranks 28th in comprehensive competitiveness, and only 36th in infrastructure, eight places behind the overall ranking. Among the top 30 countries and regions in comprehensive competitiveness, China is one of the countries with a large gap between infrastructure ranking and comprehensive ranking. From the perspective of supply quality and service efficiency, China's infrastructure needs to be improved. China's road quality, air transport service efficiency, port service efficiency, water supply stability (no interruption and flow fluctuation) ranked relatively low, ranked 45th, 66th, 52nd, 68th, not only with the United States, Japan, Germany, Singapore and other developed countries, some indicators even less than India. From the perspective of different fields, the problem of structural imbalance is more prominent. The competitiveness of China's transportation facilities and the quality of electricity supply ranked 24th and 18th respectively, while the safety of drinking water and stability of water supply ranked only 74th and 68th, with a large gap between the transportation and electricity.

2. The investment and financing system is not perfect, and the pressure on funding is increasing

First, the financial support capacity is insufficient. Large-scale infrastructure construction and unreasonable financing methods in the early stage led to the premature and rapid accumulation of local government debt risks. Under the influence of the dual factors of preventing and resolving local government debt risks and the economic downturn, the supporting role of fiscal funds for infrastructure investment has declined. Second, the financing capacity of local financing platforms is limited. Affected by the rapid expansion in the early stage, the asset-liability ratio of most platform companies is obviously high, and it is difficult to apply for bank loans or issue bonds and other financing. Moreover, the assets of the platform company are mostly public welfare assets, poor operation and long realization period, and it is difficult to leverage market-oriented financing. Third, the channels and willingness of social capital to participate in infrastructure investment are not smooth. PPP, as the mainstream mode of cooperation between the government and social capital in the field of infrastructure, is restricted by the red line that the proportion of fiscal expenditure responsibility does not exceed 10%, and the room for further promotion is extremely limited. In addition, under the influence of internal and external environmental uncertainties, the overall risk appetite of social capital declines, coupled with the imperfect return mechanism of some infrastructure investment, and the enthusiasm of social capital to participate in infrastructure investment decreases.

(3) Constraints on land and other factors have increased, and it is difficult to promote the project

Infrastructure, especially linear infrastructure, covers a large area, and the lack of construction land has become an important factor restricting the growth of investment. Under the target of sticking to the red line of cultivated land, the contradiction between land demand and land supply has been further highlighted, and the competition for industrial, real estate development and infrastructure land has become more intense. Infrastructure projects occupy a lot of space resources and have a great impact on the surrounding environment. With the improvement of ecological civilization construction, infrastructure construction is subject to more and more environmental constraints. In recent years, many infrastructure projects have been delayed or even shelved due to environmental problems. At the same time, the construction industry, which is closely related to infrastructure construction, is a typical labor-intensive industry. With the aging of China's population and the change of the employment concept of the young generation, the problem of recruiting workers in the construction industry is very prominent, and the labor cost advantage supporting the construction of infrastructure is weakened. According to the "Migrant Worker Monitoring Survey Report" data, in 2021, the average monthly income of migrant workers in the construction industry is 5,141 yuan, ranking first in the six industries where migrant workers are concentrated in employment.

Policy suggestions on improving our country's infrastructure investment

(1) Strengthen overall planning and improve the quality and efficiency of infrastructure services

Infrastructure is an important support for economic and social development. To build a modern infrastructure system and improve the quality and efficiency of services, we should make overall planning and systematic layout of all types of infrastructure. First, new projects are aimed at serving medium - and long-term economic development. Focusing on the forward-looking layout of major national strategies such as innovation-driven, green development, city cluster construction, regional coordination, national security, and common prosperity, we will enhance the driving role of infrastructure investment in industrial investment and household consumption while improving investment efficiency. Second, we will promote the network construction of traditional infrastructure and improve the operation efficiency of existing facilities. We will focus on networking, network replenishment, and strong chains, and promote the improvement of traditional infrastructure networks, further enhance the connectivity of traditional infrastructure, enhance network efficiency, and release the potential of existing infrastructure through complementarity, encryption, and network supporting.

(2) Expand funding channels and reduce infrastructure financing costs

The characteristics of strong public welfare and long cost recovery period of infrastructure determine that investment needs to match long-term low-cost funds. First, we will appropriately increase the issuance of government bonds and general bonds of local governments. We will give priority to the central and western regions and give priority to investment in non-operational infrastructure projects. Second, we will increase support from policy development banks for infrastructure projects. Set up an infrastructure investment fund to carry out equity investment in infrastructure projects, and provide long-term and low-cost financial support to major infrastructure projects in line with the national development plan. Third, explore the implementation of the "new and old separation" treatment of the stock debt of financing platforms to release the financing space of local financing platforms. Fourth, we will promote the integrated development and construction of non-operational projects and operational projects that are directly related to assets and income. The positive externalities of non-operational projects will be transformed into internal financial benefits of comprehensive development projects, and the enthusiasm of social investors will be aroused. Fifth, we will encourage qualified private capital to actively participate in key PPP projects. Reasonably set bidding conditions and return levels, rely on the capital market to enrich the exit mechanism for PPP projects, and moderately relax the 10% red line limit on financial commitment.

3. Improving resource factors and promoting the start of major projects

Concentrating on major projects is China's institutional advantage, and actively exploring the establishment of a resource factor guarantee mechanism for major infrastructure projects under the new situation. First, we will strengthen land use for projects. We will draw the red lines for the protection of cultivated land and permanent basic farmland, the red lines for ecological protection, and the boundaries for urban development, improve the efficiency of submitting applications for the conversion of agricultural land for approval, explore ways to increase the supply of mixed land, accelerate the redevelopment of inefficient urban land, and allow the disposal of land that has not been supplied through alternate use. Second, we will strengthen energy use guarantees for major projects. We will give priority to ensuring the rational use of energy in newly started projects, fully implement policies such as listing energy consumption for major national projects separately, deducting energy use for raw materials, and excluding new renewable energy consumption from total energy consumption assessment, and actively activate energy resources. Third, we will support the construction industry in accelerating investment in equipment. To ease the pressure on construction employment caused by the decline in labor supply. Improve the effectiveness of financial services for equipment investment, and optimize fiscal and tax support policies for enterprise equipment investment.