Local governments must invest prudently

The government should foster growth points and quit its reliance on investment-boosted economic growth, said an article in the 21st Century Business Herald (excerpts below).

The Sichuan provincial government recently disclosed its investment plan of 4.26 trillion yuan ($676 billion) from 2013 to 2014. The amount is 1.79 times Sichuan’s GDP.

Some investments by local governments have been spent on projects with low returns.

Once government investment declines, large amounts of non-performing assets will appear.

It is hard for local governments to sustain such a low-efficient large-scale investment plan. The interest rate will swallow a considerable part of their revenue.

Huge investments also aggravate inflation pressure. The vicious cycle means credible cash-thirsty projects cannot get enough financial support, while those with excess production capacities absorb too much capital.

Too often, local governments treat land as a debt financing lever. This means land transfers have actually become a non-regular tax distribution form.

Local borrowers have the audacity to maximize profits from land and invest the money in large-scale projects, regardless of their feasibility. As an investment method, it fall short of what the economy needs.