July 17 (Reuters) – China can stabilise economic growth this year by accelerating already-budgeted national infrastructure investment projects, economists and one government adviser said, reducing the likelihood of large-scale fiscal stimulus.
Beijing intends to counter a surprising across-the-board fall in investment, which data on Wednesday showed has dragged on growth this year, while maintaining tight control over local government spending.
The decline comes as local officials face stricter scrutiny of capital expenditure, which authorities blame for unproductive infrastructure projects, industrial overcapacity and deflationary price wars among manufacturers.
“The single biggest factor behind the current cooling of China’s economy was local governments,” Li Daokui, an economics professor at Tsinghua University, told an economic forum on Saturday.
“They are now under pressure to repay debt,” he said.
CHINA RESHAPES INVESTMENT ENGINE TO CURB WASTE, OVERCAPACITY
Accelerating national infrastructure projects could help cushion the blow from tighter local budgets.
Beijing plans to spend 7 trillion yuan ($1 trillion) this year on upgrades and new construction spanning water networks, logistics, underground pipelines, power grids, telecommunications and computing power centres, according to state media. Changjiang Securities estimates such investment could total 26.9 trillion yuan over five years.
Economists caution the push is merely a recalibration of the investment-led growth model that has powered the world’s second-largest economy for years, aimed at reducing waste and excess capacity rather than engineering the consumer-led shift long sought by trading partners.
Policymakers are betting that projects championed by the central government, along with capital channelled into high-tech industries more broadly, will generate jobs and productivity gains, breaking a decade-long pattern in which investment generated more debt than growth.
“China is now putting everything behind technology to raise productivity,” said Dan Wang, China director at Eurasia Group. “That is the only way out, and also the best way out.”
One government adviser expressed optimism that investing in computing power can yield better returns, but warned that extending new water networks into shrinking demographic areas risks misallocating resources.
“Frankly, I think this kind of large-scale investment makes little economic sense, and it’s bound to become another cycle of borrowing to repay old debts,” the adviser said, requesting anonymity due to the sensitivity of the matter.
“Some policy advisers, including myself, think the money should be spent on people, rather than poured again into inefficient, or even useless, fixed-asset investment and infrastructure.”
SCRUTINY ON LOCAL GOVERNMENTS
China’s fixed-asset investment contracted 5.7% year-on-year in the first six months of 2026, with infrastructure investment falling 2.4%, manufacturing dropping by 1.2% and real estate – in a severe downturn since 2021 – plunging 18%.
Local government spending has fallen to 35% of GDP from 41% a few years ago, with capital expenditure dropping faster than payroll or other operating costs, Tsinghua’s Li estimated.
Reuters calculations show they issued 2.07 trillion yuan in special bonds in the first half, 47% of the allowance given by Beijing, versus 49% in January-June 2025.
The adviser said it was possible that an end-July meeting of the Politburo, a top decision-making body of the Communist Party, could ask local governments to accelerate projects and allow them to “moderately frontload” their fourth-quarter debt quota into the third.
Even so, he doubted that projects that cannot repay financing costs from their own revenue would get approval.
Goldman Sachs economist Lisheng Wang said the Politburo could step up rhetoric about policy easing, but “significant, broad-based stimulus” seemed less likely.
Beijing is likely to “draw on remaining fiscal buffers quickly to stabilise investment and growth,” he said.
A civil servant in a northwestern province said no new projects have been launched this year in the region beyond some needed renovations of older housing and utilities maintenance.
“There are still some small-scale repair and maintenance projects, but large-scale development and construction projects have basically disappeared,” he said.
BUCK STOPS WITH BEIJING
Besides raising the bar for project approval, Beijing has issued a list of practices officials must abstain from.
The list has not been made public, but it likely includes unauthorized tax and fee rebates, discounted land and electricity, and subsidies for individual companies rather than specific sectors, analysts say.
The constraints on local administrations shift more of the burden to Beijing to fund the investment China needs to reach annual growth targets.
“The central government itself carries very little debt — less than 30% of GDP — and it holds a large amount of commercial assets that could be monetised,” said Tsinghua’s Li.
($1 = 6.7840 Chinese yuan renminbi)
(Editing by Marius Zaharia and Shri Navaratnam)
