China’s economic growth has encountered an inflection point, making it challenging to keep its GDP growth rate at the same level as last year. According to many experts and academicians, the main drag on economic growth is consumption among three major demand factors: consumption, net exports, and investment.

Beijing authorities are powerless to do anything about it since they have yet to boost demand effectively.

Chinese regime data shows that final consumption expenditure will contribute 5.3 percentage points to China’s GDP growth in 2021, accounting for 65.4% of GDP growth, far more than 20.9% of net goods and services exports, and 13.7% of the investment.

China’s consumption growth underperformed in 2021, and it keeps falling. According to data, the average growth rate of total retail sales over the last two years was just 3.9%, lower than the 5.1% average GDP growth rate during the same period.

The major consumption figures for this year’s New Year holidays show the trend. For example, China’s Ministry of Culture and Tourism showed a 2% year-on-year decrease in travelers, while tourism revenue decreased by 3.9%.

In addition, data from China’s National Film Bureau shows that the movie box office, one of the major consumption indicators, also declined. Between New Year’s Eve and the sixth day of the first month of the Lunar New Year, movie ticket sales dropped by 23% year on year.

This year, the number of people returning to their hometowns has increased by 48%. Local authorities were required not to prohibit people from returning to their hometowns for the New Year’s holidays. While people’s traveling has improved, tourism and movie box office figures are still sluggish, which further confirms the weakness of consumption.

Since November 2021, some local authorities have introduced measures to encourage consumption, but they mainly targeted the incentives to promote the sale of cars and homes.

However, as Reuters reported on Dec. 15, China’s property sector faced new headwinds. In November, home prices, sales, investment, and construction decreased due to sluggish demand and a cash shortage among the developers.

China’s local authorities, meanwhile, are increasing funding to speed up infrastructure projects.

According to the Securities Daily, as of Feb. 6, eight provinces and cities, including Beijing, Hebei, Shandong, Shanghai, and Jiangsu, Zhejiang, Guangdong, and Sichuan, have released their 2022 major project investment plans, with a total of 6,501 projects and a total investment of at least $2.5 billion.

Experts said that the special bonds issued by local authorities to raise funds for specific projects are a vital launching point for stabilizing investment.
According to China’s Ministry of Finance data, the amount of new local authority special bonds arranged last year was $577 million. However, the new special bond issued was $566 million, accounting for 98.2% of the allocated amount.

In mid-December last year, the Ministry of Finance increased the quota for new special bonds for 2022 by $230 million. According to Wind’s statistics, as of Feb. 10, local authorities have issued $85.6 billion in new special bonds this year, accounting for 37% of the early-approved special bonds. As the ministry has explicitly requested that special bonds be issued and used early, it is expected that the issuance of special bonds will peak in the first quarter of this year.

According to a Goldman Sachs report published in September, the total debt of local authority financing platforms (Local Government Financing Vehicles-LGFV) increased from $2.5 billion in 2013 to $8.2 billion at the end of last year, equivalent to about 52% of China’s GDP and higher than Beijing’s total outstanding debt.

Furthermore, local authorities rely on land concessions for revenue. Still, with the real estate market downturn and a string of real estate developer defaults, local authorities are facing the prospect of selling land.

Bloomberg reported in their article that local authorities rely heavily on land sales for revenue, and sales have slowed as the crisis at property developer China Evergrande Group worsens.

Goldman advised Beijing to increase the bond quota for 2022 by more than $79 billion from this year’s level of $577 million to cover the financial shortfall caused by falling land sales.

Most provinces have currently lowered their budget revenue targets for 2022. According to Caixin Global, as of Feb. 9, 23 of the 25 provinces that have released relevant data have lower 2022 budget revenue targets than they did in 2021. Only Henan and Tibet set a goal for 2022 budget revenue to grow faster than last year.

Mainland media reported that infrastructure investment is an integral part of stabilizing growth this year. Special bonds are an essential source of funding for infrastructure investment. But some studies have shown that infrastructure investment’s role in driving economic growth is limited.

Some experts oppose the idea of promoting new infrastructure construction because the investment is too large, often costing hundreds of billions of dollars; the second is that it is not very useful for the time being.

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