Government rolls out railway stimulus plan

Investment has again emerged as a key means to prop up the economy as a run of disappointing economic figures have raised concerns that economic growth in the first quarter might slip below the official target of "about 7.5 percent".

The Southern Hainan provincial government has planned a 1.8 trillion yuan ($290 billion) investment package that includes a highway network, a medical tourism zone and a space exploration theme park, China Securities Journal reported. A program of coordinated development for Beijing-Tianjin-Hebei is also gaining traction.

As speculation rose as to whether some provincial governments may again be resorting to their own versions of an investment-spearheading stimulus package, experts dismissed the possibility of local government racing each other to roll out such packages.

"Local governments have limited scope to prime the pump of the economy because they are burdened by heavy debt," said Liu Shengjun, an economics professor at the China Europe International Business School.

Instead, the central government, which carries a much lower debt ratio, will step in, using investment to spur the economy.

Of the three major "targeted stimulus" measures announced after Wednesday's State Council executive meeting, which was presided over by Premier Li Keqiang, two were about investment: greater support for the redevelopment of run-down urban areas and more investment in railway construction.

"Accelerating the redevelopment of shantytown areas is a mandatory task for improving people's lives. It also could effectively pull up investment and boost consumption," a statement from the State Council said. It also said that more investment in railways could increase revenue and pull up a number of related industries.

For the first time, the nation will establish a special institution under the China Development Bank, a policy bank empowered to issue special bonds to finance government-subsidized housing projects.

In the railway sector, the government vowed to deepen investment regime reforms. Measures include setting up a long-awaited development fund, more types of financing bonds and greater participation of private capital.

A total of 6,600 kilometers of new rail lines will be put into use this year, an increase of more than 1,000 kilometers over last year, according to the statement. Of the newly added lines, nearly 80 percent will be in central and western China.

The government said it will issue bonds worth 150 billion yuan ($24 billion) to finance railway construction this year.

Chen Hufei, a macroeconomic analyst with Bank of Communications Ltd, said these measures are expected to prevent the flagging investment sector from slipping further.

Fixed-asset investment growth in the first two months of the year dropped to a record low of 17.9 percent, down from 19.3 percent for the whole of 2013.

"As property investment fell, and the manufacturing sector became plagued by excessive capacity, investment in infrastructure became key for the central government," Chen said, adding that his research team forecast that first quarter investment growth would end at 18.5 percent.

Investment has accounted for about a half of China's GDP in recent years. Property, manufacturing and infrastructure are the three main components of the world's second-largest economy's fixed-asset investments.

The current selective stimulus package is a rerun of measures adopted in mid-2013, when the economy was losing steam, analysts said, but they also saw signs of reform in with the investment-led pro-growth measures.

For example, the setup of a railway development fund is a new initiative, although it has been advocated for years. Experts said it is a mechanism to encourage private capital's participation, as investors are doubtful about using traditional investments.

China also signaled its willingness to loosen its tight control over railway prices by announcing on Tuesday that freight prices of a rail line in coal-rich northwestern China will be determined solely by operators, customers and investors.

This is the first time that China has opened up prices of rail transportation.

Xie Yaxuan, head of macroeconomic research with China Merchants Securities Co Ltd, said the government prefers to use reform to spur growth, though it takes more time.

"The traditional methods are like antibiotics: a quick cure but with side effects. The reform measures are like traditional Chinese medicine: fewer side effects but a slower cure. The latter is good, but I'm not optimistic about its short-term effectiveness," he said.