China’s Infrastructure Spending Is Marred By Problems, Audits Show

(Bloomberg) -- Chinese provinces aren't using the funds raised from infrastructure bond sales effectively, audit reports show, raising doubts about their ability to spur investment and growth in the economy. 

Of the 25 provinces that have released audit reports of their 2022 budgets, 80% had mismanaged bond funds, according to an analysis by Sinolink Securities Co. analysts led by Zhao Wei. The problems include insufficient project preparation, misuse of the bond proceeds and money granted being left unused.  

The slow rollout of the funds is one of the “clogging points in stabilizing growth” cited in the provincial reports, the analysts wrote in a note on Wednesday. “And problems in the management of special bond funds and insufficient project preparation are likely key reasons for the slow use of the funds.”

Beijing has been putting pressure on local governments to speed up special bond sales in order to boost infrastructure spending and offset the slump in property and private sector investment. Officials set a September deadline for provinces to issue all of this year's 3.8 trillion yuan ($520 billion) quota of new special bonds, and instructed them to put the cash into use by the end of October.

The findings from the auditors show the limitations of that approach, with provinces increasingly unable to find good enough projects to invest in. 

Henan, Jiangsu and Shanxi provinces had the biggest problems making use of their funds, according to the Sinolink note. The most widespread issues uncovered were provinces expanding the sectors where the funds were meant to go — in violation of rules — insufficient project preparation and delays in using the money, the note showed.

Henan was found to have 8.6 billion yuan of funds sitting idle in the accounts of the local fiscal department or project headquarters for more than 90 days, according to the province's auditing report. That amount included a combined 6.6 billion yuan that 29 cities and counties had left unused for as long as 300 days.

The province also had more than 1,800 projects involving almost 140 billion yuan failing to carry out performance reviews as required, according to the audit report.

Shanxi saw 3.7 billion yuan of special bond funds parked in government or project accounts due to the slow progress of rolling out the investments in 38 cities and counties, according to its report. A further 457 million yuan wasn't used by 11 projects already completed. 

Debt Payments

The audit reports also showed how high debt levels are impeding local governments' ability to spend. 

In Hebei province, six cities spent 5.6 billion yuan of funds raised from special bond sales to pay for their day-to-day expenditures and repay their debt, according to its audit report. The province had a total of more than 21 billion yuan of unused funds from special bonds sold in 2021 and earlier, it said, adding that the money “did not have their role played sufficiently.”

An extremely tight budget in some regions also forced local authorities to misappropriate some funds. Nine cities and counties in Liaoning used 606 million yuan from special bonds to pay for spending in basic people's well-being, salary payouts and government operation, according to the province's auditing report. 

Some other areas there inflated bond fund spending by 434 million yuan, while another 1.3 billion yuan was left idling due to stalled project progress, it added.

The audit reports show some of the provinces are trying to address their problems. Auditors in Henan said they received more than 2,600 messages from the province's party and government leaders in response to their findings. Under the supervision of the auditors, the province logged nearly 26 billion yuan in additional income and saved spending, and retrieved 6.3 billion yuan in losses, according to the report.

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