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China plans a $75 billion rejuvenation fund

Reports from people close to the source have suggested that China is about to fund an infrastructure investment fund with 500 billion yuan ($75 billion). The intention of the fund will be to spur growth and revive their flagging economy by spending on infrastructure projects.

China’s economy has been in slow recovery after the supply shocks caused by devastating lockdowns, although challenges to resuming growth persist, including from a still troublesome property market, low consumer spending, and worries about a return to draconian lockdowns.

The fund is expected to be established in the fall of this year, sources believe, although no official comments have been made to back up the claims.

China has unveiled a range of economic support measures in recent weeks. However, analysts say the official GDP target of close to 5.5% for this year will be difficult to hit without discarding its strict zero-COVID policy.

Most of the support for the second-biggest economy in the world has come from cash injections intended to counteract the massive impact of the pandemic this year, with the PBOC steadily easing liquidity conditions to bring down the cost of financing.

Authorities are counting on an infrastructure push, returning to a well-used playbook to revitalize the economy, pledging 800 billion yuan ($120 billion) in new credit quota and 300 billion yuan ($45 billion) in bonds for policy banks to finance largescale projects.

Chinese citizens have tightened their belts as job losses and falling incomes continue. At the same time, exporters face difficulties arising from a potentially severe global economic slowdown as central banks tighten policy to fight spiraling inflation. In addition, analysts believe the conflict in Ukraine, rising raw material costs, and supply chain bottlenecks also pose risks moving forward.

For now, China’s inflation is mainly under control, giving space for Beijing to stimulate the economy. However, some analysts warn the global cost-push factors could start to show up in Chinese domestic prices later in the year.

Pumping more cash into expensive infrastructure projects is the government’s most practical move, but that may not be enough to take up the slack as property spending falls.

With returns on conventional projects such as roads, railways and airports now much lower, China has been trying to grow its new infrastructure focused on 5G, A.I., and data.

Sources report that China will issue a 2023 advance quota for local government special bonds in the last quarter this year, with the new allocation likely to be bigger than the 1.46 trillion yuan ($230 billion) seen this year.

The Chinese cabinet has told local governments to make sure 3.5 trillion yuan ($522 trillion) in special bond issuance for infrastructure is completed by the end of this month. Wang Yiming, a central bank policy adviser, called for issuing special treasury bonds later in 2022 to pay for large projects or raise the budget deficit.

To meet the whole-year target, China must hit 7 or 8% of economic growth in Q2 of 2022, which is 3 to 4 percentage points above the growth rate seen in Q3 and Q4 last year, Wang said. He expects China’s economy to expand at around 1% in Q2 year-on-year, slowing rapidly from the first quarter’s 4.9% pace.

In a report issued on Monday, analysts estimated a shortfall of 1-2 trillion yuan ($150 – 300 trillion) this year. Still, the chance of issuing special bonds could wane as the government turns to semi-fiscal funding, such as via policy banks.