The "Decision" of the Third Plenary Session of the 20th Central Committee of the Communist Party of China put forward the need to "improve the system and mechanism for government investment to effectively drive social investment". In recent years, due to the low quality of projects, the weakening of capital support, and the decrease in private participation, the driving effect of government investment on social investment has declined significantly. In order to make the limited government financial resources more effective, it is necessary to improve the government's project planning ability, promote the coordination of fiscal and monetary policies, give full play to the overall synergy of various government funds, encourage private capital to participate in government investment projects, and form a greater degree of driving effect of government investment.
On July 21, Guangzhou International Financial City, Guangdong Province, was built with high-rise buildings, and the construction site under construction was in full swing. Photo/Zhongjing Vision Photo by Lu Huadang
The proportion of government investment has increased, but the driving effect has decreased
Government investment has risen as a share of total investment. The proportion of government investment in the whole society increased from 6.3% in 2015 to 10% in 2019 and then to 15% in 2022, with an average annual increase of 1.25 percentage points from 2015 to 2022. Infrastructure, social undertakings and public administration are the main areas of government investment, which together accounted for 22.1% of fixed asset investment in 2012, increased to 29.3% in 2016, and then remained at a high level of 28-29% and 29% in 2023.
The driving effect of government investment is on a downward trend. Estimates of the mainland's fiscal multiplier have shown that the boosting effect of government investment on output declines markedly in both the short and long runs, and at a faster rate during recessions. Using the data of central budget investment, local special bonds and government bonds, the results show that the government investment multiplier also shows a downward trend, especially in the period before and after the epidemic, the government investment multiplier is 6.45 in 2019, and the government investment multiplier will drop to 1.98 and 1.65 in 2022 and 2023, respectively.
The decline in the driving effect of government investment is constrained by a variety of factors
It is difficult to guarantee the quality of investment projects. First, after nearly 30 years of rapid development, the mainland's infrastructure and public service supply capacity has undergone a tremendous transformation from shortage to abundance, many major projects to meet the needs of urban and industrial development have been completed, the number of urgent and prominent public investment projects has decreased, and the marginal utility of government investment has declined. In order to meet the urgent needs of macro-control, some projects have to adopt a "temporary patchwork" approach to deal with the declaration problem, resulting in repeated changes in planning and site selection, design scheme adjustment, and changes in the main body of the project in the process of promotion, resulting in the delay of the project, and also causing the slow progress of the use of funds and the problem of idleness.
The supporting capacity of local governments is insufficient. Different from the Asian financial crisis in 1998 and the international financial crisis in 2008, at present, the local governments on the mainland have weakened their ability to respond to the central government's policies of stabilizing growth and expanding domestic demand, and have shifted from active development from "demanding policies" to "demanding funds" for passive development, and local financial resources have to be used more to cope with debt repayment under the peak of debt repayment. At present, the proportion of local government refinancing bonds has approached 90%, and the amount of new financing has decreased significantly. Some local governments find it difficult to guarantee funds even within the scope of their powers, and they can often only respond in a false way to support major national projects, that is, they can do as much as the central government gives, and the central government's ability to actually pull local funds is weakened.
Financial institutions have weakened their support for government projects. In the past, the implementation of a proactive fiscal policy was indispensable to the strong support of monetary policy, and in addition to central and local funds, a large part of them were obtained through bank credit. In recent years, due to the accumulation and spread of local government debt risks, financial institutions have become more and more cautious about political credit financing, and loans to financing platforms have shrunk significantly. For government projects, if there is a financing platform to participate, through banks and other financial institutions to borrow money, and with expected fiscal revenue as the source of debt repayment, there is a suspicion of increasing hidden debt, which is prohibited by the policy, therefore, the participation of financial institutions in government projects such as special bonds is strictly restricted, and the space is significantly reduced.
The degree of private capital participation has decreased. In the current situation of sufficient supply of resources and funds, the crowding out effect of government investment on private capital is not mainly due to the rise in interest rates in the financial market and the rise in private financing costs due to the funds occupied by the government, but more in the fact that the government and its platform companies rely on administrative intervention and exclude the participation of private capital. For example, the government's major projects are basically undertaken by central state-owned enterprises, and it is difficult for private capital to participate in them; A large number of profitable public projects are financed by special bonds, which is a crowding out of PPP, which leads to the fact that government funds have not formed a driving force for private investment.
To enhance the leading role of government investment, multiple measures should be taken at the same time
Enhance the government's ability to plan projects. The first is to strengthen planning and guidance. Supervise local governments to do a good job in the three-year reserve of government investment projects, implement the annual plan of government investment, and do a good job of classified management according to project attributes and project categories, so as to achieve matching with the direction of various policy financial support. The second is to improve the guarantee of key elements. Promote the effective connection between government investment planning, land and spatial planning, and urban planning, promote the coordination and cooperation of multiple departments such as self-regulation, environment, and energy, coordinate the preliminary work of projects, and improve the comprehensive guarantee capacity of investment project elements. The third is to innovate the cost-benefit balance method of the project. Promote the transformation of the project income balance model from a one-time income balance to a continuous operation income balance, and from a simple development and construction model to a full life cycle development model.
Promote the coordination of fiscal and monetary policies. First, it is necessary to further strengthen the coordination between fiscal and monetary policies and form a supporting role for government investment. Comprehensively use a variety of monetary policy tools to increase the ability of bank credit to support government projects. Increase the quota of policy-based development financial instruments to supplement the capital of major projects, or bridge the capital of local bonds and treasury bond projects with certain returns. The second is to guide banking institutions to support the construction of government projects that meet the standards by means of project loans, encourage insurance institutions to provide financing support for government projects that meet the standards, and allow project units to issue corporate credit bonds to support the construction of government bond projects that meet the standards. The central bank should set up special support tools and special re-lending to guide commercial banks to increase capital investment and support the construction of major projects and the renewal of equipment.
Form the overall synergy of various government funds. Strengthen the overall cohesion and dislocation arrangements of various types of government investment. The first is to enhance the ability of government funds to support major national strategies. The issuance of ultra-long-term treasury bonds and investment in the central budget support the implementation of major national strategies and security capacity building in key areas, improve market expectations, and promote a sustained economic recovery. The second is to expand the scale of government funds used as project capital. We will further rationally expand the scope of investment of special bonds and the scope of project capital, and expand the leading and driving role of special bonds. The third is to optimize the areas and methods of investment of government funds. Funds from the central budget, special financial funds and treasury bonds can better leverage by supporting large-scale equipment renovation and investment in new infrastructure.
Encourage private capital to participate in government investment projects. The first is to support the joint investment of private investment and state-owned capital, and jointly participate in the investment of major projects through joint ventures, capital increases and share expansions. The second is to encourage private enterprises to participate in the design, construction, supply of raw materials, facilities and equipment for major projects, and treat them equally in bidding. Give full play to the comprehensive advantages of private capital in development and construction, market operation, resource integration, industrial development, etc., and provide a package of solutions for planning, design, financing, investment, operation and maintenance of government projects. The third is to speed up the improvement of the price formation mechanism of public utilities, scientifically determine the return on investment of private capital on the basis of accurately approving costs, reasonably set the price level, and promote enterprises to obtain reasonable benefits and consumers to realize reasonable burdens. (Ren Rongrong, Liu Lifeng, Researcher, Investment Research Institute, China Academy of Macroeconomics)