Financing urban growth

Source:Global Times Published: 2013-7-2 22:08:01

During last week's meeting of the third session of the 12th National People's Congress (NPC) Standing Committee, Xu Shaoshi, the head of the National Development and Reform Commission (NDRC), delivered a comprehensive report covering both the progress and the goals of China's urbanization efforts, marking the first time the country's top economic planner has ever put forward a specific roadmap covering urban growth.

This milestone again demonstrates the central government's belief that urbanization will unleash the consumer power buried within the domestic market. This latent force, it is thought, will push China's economy toward more sustainable growth as demand for Chinese exports thins and planners throttle back on investment-fueled growth.

But while the country's intensive urbanization program promises a bright future for China's economy, authorities can bet on problems and challenges along the way; many of which will boil down to issues of funding. If the domestic financial industry fails with its reactions to these inevitable obstacles, a lack of capital could cause the government's grand designs for the economy to backfire.

It goes without saying that China's existing financing architecture will be unable to bear the weight of the country's massive urbanization plans.

This fact is plainly evident when one considers the inefficiency of Chinese investment. For instance, over the past year, more credit was delivered to local governments than the country's manufacturing sector, which led to relatively fast growth in infrastructure spending accompanied by a slowdown in factory activity. But while China's local governments are among the most heavily leveraged entities in the country, their contribution to economic growth is shrinking even as their credit input continues to expand. To change this situation, domestic financing institutions need to focus on allocating money to less leveraged targets that can deliver stronger returns.

China's financial sector should also explore market-oriented strategies to support urbanization. Local authorities, after all, are not supposed to rely solely on banks to push forward urban construction. To date though, there are still few financing options available for urbanization projects. China should consider issuing urbanization-related debt securities with long- and medium-term maturities to domestic and overseas investors. As China accounts for about 11 percent of the world's total GDP, there is a strong demand for Chinese assets among fixed-income product investors.

Public-private partnerships could also enable local governments short of funds to cooperate with the private sector on works projects. Such partnerships are still somewhat new in most parts of Asia, but could certainly be worth trying in China. Regional governments could, for example, open certain sectors pertaining to urban development to private investment via equity financing, or they could also perhaps directly earmark certain projects for privatization in order to relieve funding shortages.

The article was compiled by Global Times reporter Wang Jiamei based on speeches at the Lujiazui Forum. bizopinion@globaltimes.com.cn



Posted in: Comments

blog comments powered by Disqus