Following 30 years of stellar double-digit growth, China’s economy in maturing.
Policymakers are struggling to shift gears and allow consumption, not investment, to power activity at a time when strong economic expansion is needed to repay some 9.7 trillion yuan (US$1.6 trillion) that local governments borrowed from banks.
Much of China’s massive fiscal stimulus after the 2008 to 2009 financial crisis was funded by these bank loans, and investors worry that a hefty chunk of them may sour, having mostly paid for non-lucrative public works such as sewage systems.
A 30-minute train ride north of Shanghai, Jiangsu is China’s wealthiest province and an exemplar of the country’s old export-led growth model. Investment made up 59 percent of Jiangsu’s economy last year.
The local authorities envision turning Wuxi into a center for information and technology, a Chinese answer to Silicon Valley that will move its factories up the value chain.
Yet that dream of a new economy, built around a vast software park the size of 3,500 football fields in south Binhu, known as T-Park, still hinges on large state investment.
Authorities have not revealed the cost, but Wuxi Taihu International Technology Park Investment Development, a firm belonging to the Wuxi government and the main financier of T-Park, is in financial throes.
Public records show it suffered negative operating cash flows every of the last four year, with outflows hitting 762 million yuan in 2012. It has total debt of 5.9 billion yuan — or a one-tenth of Wuxi’s 2012 fiscal revenues — and has been hit by cash shortfalls, analysts from Chinese rating agency CCXI said.
“The firm has a strong public service element and a weak earning power,” CCXI said in a note, noting that its ability to repay investors depends on how much cash the government raises from selling land.
Public records show the Wuxi government has at least three other financing firms that raise debt on its behalf. Two of these firms had negative net operating cash flows of between 0.4 billion yuan and 4.8 billion yuan every year from 2009 to 2011.
Investments by the Wuxi and Jiangsu governments have ended badly before. They led a rapid transformation of the province’s shipbuilding and solar panel industries into some of the world’s biggest over the last decade. However, over-zealous investment created excess capacity, and both sectors now nurse huge losses.
To make way for T-Park, the Binhu government cleared farms and relocated residents, who were given new housing. To pay for the homes, authorities sold 1 billion yuan worth of bonds last year through Wuxi Taihu International.
The cost of mass relocation has taken its toll, just as governments’ tax income is also sliding. Officials in a town in Binhu tried to dock the salaries of some civil servants last year but quickly retracted the plan, residents said.
An online copy of the notice announcing the plan to dock wages said the government faced “arduous and heavy” relocation work and was under “huge financial pressure.”
Xu, whose demolished home lay to the west of T-Park, said the government had offered to buy her house and land for 2.4 million yuan, or around 4,140 yuan per square meter. An online search showed new houses in the area are currently selling for between 10,100 yuan to 17,840 yuan per square meter.