Will the 45 trillion investment plan boost CNY inflation?
As per a report by a Chinese securities company, 45 trillion RMB will be poured into projects categorized as fixed asset investment (FAI) by 23 provinces in 2017. The news is stirring up anxiety among Chinese, especially the middle class who have substantial bank saving.
On 15th Feb, a news conference in Beijing revealed that 18 large projects with investment totalling 153.9 billion yuan ($22.44 billion) last month amid efforts to stabilize economic growth by boosting infrastructure investment. These projects are nicknamed as “Tie Gongji” or Iron Rooster because they were usually related to railway, highway and airport. January’s number in investment was lower than the 184 billion yuan investment approved in December 2016 but still above the monthly average of 142 billion yuan in 2016.
For a long time, Chinese economic growth has become more dependent on the state-oriented FAI projects. Below is the data sheet for comparing the GDP and the FAI projects.
Source: WSJ CHINA
China’s economic dependence on investment has risen from 50.2% in 2006 to 80.2% in 2016, indicating that the efficiency of FAI investment is getting lower. With the same amount of money invested, the output is growing thinner every year. As per the 6.5% growth target, the 2017 GDP of China is expected to reach 78 trillion RMB based on the 73 trillion GDP in 2016. If 80% of the GDP are supported by FAI projects, then 62.4 trillion is expected to be spent in 2017.
45 trillion is not an exaggeration, but a reasonable number.
Where the money comes from?
The straightforward answer of a typical Chinese is that “Yang Ma” (central authority mother) will start its nuclear money-printing machine again. However, expert tells a different story.
Trending of funding source of infrastructure investment
According to a report, the funding allocation of FAI projects is like this: 15% from national budget funding, 15% from domestic consortium loans and 7% from other sources. The vast majority of the project funding is through self-financing, that is to say that the project leaders will have to raise funds by themselves. On the other hand, there is abundant liquidity in the market. If there is no proper way of investment, people will flock to the real estate market or stock market, which is not the authority wish to see as there are already too much bubble there.
Ye Tan, a famous financial analyst, offers her interpretation :
Fixed asset investment can serve as stabilizer of economic growth. Investment does not necessarily bring inflation, only invalid investment will bring inflation. Taking the airport construction as an example, on February 16, the Civil Aviation Administration of China, the National Development and Reform Commission and the Ministry of Transport jointly issued the 13th Five-Year Plan for the Development of China’s Civil Aviation. During the 13th Five-Year Plan period, China will build 74 more airports by 2020. Given the fact that 70-80% of the existing airport are running at a loss, these new airports doesn’t look profitable in the future.
According to UBS’s research report, the total debt of non-financial sector reached 205 trillion yuan or 2.77 times of GDP at the end of 2016, which is higher than the 2015 level – 175 million yuan, 2015 2.54 times the annual GDP. Since the 2008 financial meltdown, the total amount of non-financial sector debt soared 130 percentage points.
Government debt is about 68% of GDP, household debt is about 45% of GDP, corporate debt is about 164% of GDP and corporate debt ratio reached the world’s record high. The increase in investment means credit growth. The size of China’s debt is expected to escalate to over 300% of GDP within 2 years.
Everything shows that the debt may rise but will not collapse, because the purchasing power of money will go down.
Recently, mainstream media have reported the news that manufacturers are lifting price of daily consumables like liquor, milk, mustard and even commonly used drugs to
“cope with pressure of rising cost”
The inflation of fiat currency is inevitable
At the end of Ye Tan’s story, she suggests two options: one is to spend the money, the second option is to pick a trustworthy wealth-management institutes. Obviously, money sitting in the bank is the worst option and bitcoin is not being considered safe heaven despite the fact below. (by wiggy222)