Regional budgets to feel the pinch

Local govts to seek new financing channels amid tighter regulation

Local governments might need to expand their financing channels and rely on more financial support from the central government to weather pressure on infrastructure spending this year, as recent heightened regulation is tightening their purse strings, according to analysts.

A number of regions such as Guangdong have revised down their fixed asset investment targets this year compared to 2017, indicating the likelihood of slower growth in infrastructure spending, they said.

After introducing guidelines on fundraising via public-private partnership projects, the National Development and Reform Commission decided to oversee infrastructure projects on a more regular basis this year, according to a statement from the nation's top economic regulator released in December.

Such measures will leave no space for local governments to raise money through illegal channels or to misuse funds to repay debts, according to Zhang Yiping, an analyst with China Merchant Securities.

As local governments must now disclose off-balance-sheet borrowing, putting it back on the balance sheet, they may face financing shortages this year, according to Ming Ming, a fixed-income analyst with Citic Securities.

The financing gap for infrastructure construction is expected to hit 5 trillion yuan ($796 billion) this year, Ming said in a research note. To fill that gap, the central government might increase the central budget for infrastructure construction to alleviate the downward pressure, he wrote.

However, a former official of the National Bureau of Statistics said the central budget is not expected to increase much, if at all, and it all depends on how much room the country has to increase the deficit this year.

A report by CF40 Finance Forum, a Beijing-based think tank, said policymakers should help local governments further expand their financing channels. Money to invest in infrastructure construction raised through direct channels such as bond issuance represents less than 50 percent of local governments' total financing, while around 40 percent of their funds come from short-term, expensive products, the report said.

Zhang Bin, a senior researcher with the institution, said financial products such as real estate investment trust products should be further promoted to help local governments ease their financing woes. Such products are able to reduce debt leverage ratios and lower risks from financial intermediaries, and they serve as a relatively low-risk option for Chinese households' ever-increasing demand for investment channels other than savings, according to Zhang.