China axes $4.6bn subway as debt fears grow

China axes $4.6bn subway as debt fears grow

Suspension of regional project highlights broader move to reduce risk

Shenzhen, China: subway construction site dreamstime.com

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   China’s central government has ordered a small city in Inner Mongolia to halt construction of a Rmb30.5bn ($4.6bn) subway project, signalling Beijing’s willingness to sacrifice growth to rein in financial risks.

The city of Baotou had intended to fund 60 per cent of the project’s cost from bank loans and held a groundbreaking ceremony in May, which was attended by Baotou’s top two officials.

Over the past decade, local governments have relied on debt-funded investment projects to bolster their economies. In August the IMF warned that China’s non-financial sector debt would exceed 290 per cent of gross domestic product by 2022, compared with 235 per cent last year. 

But at a Chinese Communist party congress last month, President Xi Jinping departed from precedent by not mentioning the government’s official economic growth targets, signalling his administration’s higher tolerance for slower growth. 

Zhou Xiaochuan, China’s central bank governor, also recently criticised local government profligacy. “[In good times] industries and local governments pursued rapid growth and demanded easy money supply,” Mr Zhou wrote last week in an essay posted on the central bank’s website.

Baotou doesn’t particularly need a metro system

Jonas Short, Sun Hung Kai Financial

Speaking at the World Bank and IMF’s autumn meeting in Washington last month, he also noted that local governments routed most of their investments through corporate financing vehicles. “The result is that banks and financial institutions have underestimated local government fiscal risks,” Mr Zhou said. 

A Baotou official, who asked not to be identified, told the Financial Times that the project was suspended shortly after Yu Zhengsheng, then the ruling Communist party’s fourth-highest ranking official, visited Baotou in August. Mr Yu retired from the party’s most powerful body, the Politburo Standing Committee, last month. 

Baotou’s planning department declined to comment on the decision, which was first reported by Caixin, a Chinese financial magazine.

As recently as July, the Baotou municipal government reported on its official website that “the subway carries the hopes and dreams of the people and construction work is accelerating”. 

Baotou has been under financial strain this year. The city’s income over the first three quarters of 2016 was Rmb17bn, down 25 per cent over the same period last year. The project would have increased its existing Rmb90bn of debt by at least 20 per cent. 

Baotou also has a small population of 2.9m people, about two-thirds of whom live in its urban districts. “Baotou doesn’t particularly need a metro system,” said Jonas Short, head of China policy research for Sun Hung Kai Financial, an investment group. 

On Tuesday, the National Bureau of Statistics reported that urban fixed asset investment growth slowed to 7.3 per cent for the first 10 months of the year, compared with the same period in 2016.

Investment by state-owned enterprises and private sector companies also slowed over the same period, growing 10.9 per cent and 5.8 per cent respectively. 

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