Affected by the impact of the new crown pneumonia epidemic in 2020, the global economy has been hit hard, and the global economic operation risks have increased. Under the complex international situation and the inherent structural contradictions of the domestic economy, China is still under great pressure to complete the “six stability” and “six guarantees.” Investment is an important engine for both the demand side and the supply side. As the impact of the current epidemic continues to deepen, relative to consumption and import and export, the effect of the policy and its role in promoting the economy have become more prominent.
Expanding infrastructure investment is an inherent requirement for improving the level of effective investment. However, infrastructure investment faces the “dual constraints” of capital and debt. It cannot rely solely on traditional financing methods, but should rely on the advantages of China’s huge stock of high-quality assets and innovate financing tools and methods.
On April 30 this year, the China Securities Regulatory Commission and the National Development and Reform Commission jointly issued the “Notice on Promoting the Pilot Work of Real Estate Investment Trust Funds (REITs) in the Infrastructure Sector”. Taking public REITs as a guide, revitalizing a large number of high-quality assets, guiding the transformation and optimization of infrastructure investment and financing structure, and playing its role in promoting infrastructure investment will become an important measure for stable investment and stable growth in the future.
1. Infrastructure investment and financing are subject to many factors, and the main body and functional structure need to be optimized
In recent years, in order to suppress the downward pressure on the domestic economy and smooth out economic fluctuations, the state has continued to increase its support for infrastructure investment. However, due to economic structural contradictions, the growth rate of infrastructure investment has continued to fluctuate at a low level since 19% in 2017 In 2018 and 2019, the growth rate of infrastructure investment remained at 3.8%. In the first half of 2020, infrastructure investment fell by 2.7% year-on-year. Although the resumption of work and production has accelerated in recent months, the effects of national economic stimulus policies have gradually emerged, and the growth rate of infrastructure investment has rebounded, but the pressure of low shocks still cannot be underestimated, and the prosperity of infrastructure investment cannot be repeated. Analyzing the reasons for the decline in the growth rate of infrastructure investment in the past, it is not difficult to find that financial difficulties, debt risk constraints, and structural differences in investment and financing have become important factors restricting infrastructure investment.
China’s infrastructure funding sources are divided into five categories: state budget funds, domestic loans, use of foreign capital, self-raised funds, and other funds. Among them, state budget funds, domestic loans and self-raised funds are the main sources of infrastructure funds. The ratio reaches 90%. Although the government has continued to increase its funding and credit support for infrastructure construction in recent years, its funding dilemma has not improved significantly. The rapid growth of government fund income in self-raised funds under the background of “land finance” in the past has led to the rapid development of local infrastructure investment. However, in recent years, the continuous reduction of land reserves and the regulation of real estate prices have made the growth of land transfer income difficult to say optimism. Since the policy of tax and fee reduction in 2018 has continued to deepen, the new burden reduction in 2018 and 2019 will be about 1.3 trillion yuan and 2.36 trillion yuan. It is expected that the new burden reduction for market players will exceed 2.5 trillion yuan in 2020. The growth rate of fiscal revenue from central to local governments has declined significantly. In the first half of this year, the national general public budget revenue was 9.6176 trillion yuan, a year-on-year decrease of 10.8%, of which tax revenue fell 11.3%.
The enthusiasm of local governments in infrastructure investment is difficult to regain due to the sharp decline in tax growth. Although the scale of local government special bonds has continued to expand, from 0.4 trillion yuan in 2016 to 2.15 trillion yuan in 2019, and to 3.75 trillion yuan in 2020, a large amount of funds flowed to shed reform and For land bank projects, only 20% of the funds were actually invested in infrastructure in the past few years, and the excessively low proportion severely restricted the contribution of special debt to the increase in infrastructure investment. Although this year’s new limit for special bonds has increased from 2.15 trillion yuan in 2019 to 3.75 trillion yuan, an increase of 1.6 trillion yuan, an increase of 74%, and the new part is mainly used for major infrastructure investment, it is still difficult to meet actual needs .
The financial dilemma makes debt risks exist for a long time, the macro leverage ratio is high, and the security of the investment and financing structure is limited. In the past, local governments vigorously developed infrastructure investment under the stimulus of the “GDP Championship”. Local government financing platforms such as urban investment companies were important main bodies of infrastructure construction. The rapid expansion under loose fund management caused serious debt problems and hidden local debt. Both scale and debt risk are at a high level. Although the Ministry of Finance has always emphasized “resolutely curb the increase of hidden debts and actively replace existing debts”, China’s capital market system is not yet sound and some deep-seated structural contradictions are still prominent. The management and control situation is still under great pressure.
As of 2019, the leverage ratio of China’s non-financial corporate sector is still at a global high of about 150%, and the leverage ratio of urban investment companies and real estate companies is even higher. In the first quarter of 2020, the leverage ratio of the non-financial corporate sector rose to 161%, while the leverage ratios of the residential and government sectors were only 58% and 41% during the same period. Such a high leverage ratio puts huge pressure on the stability and sustainability of China’s infrastructure construction, and this pressure will further limit the expected growth rate of infrastructure investment in the context of the current loose countercyclical macro-control.
Through public offering of REITs, infrastructure stock assets that lack liquidity can be transformed into financial products with higher liquidity using ABS, open up social investment entry and exit channels, and build a sustainable investment and financing ecosystem. Picture/Fox
With infrastructure investment facing the “dual dilemma” of capital and debt, structural optimization of investment and financing is also difficult. The first is that China’s modern fiscal system needs to be improved. The relationship between central and local financial powers and powers needs to be further optimized. The main responsibility of infrastructure investment lies with the locals. However, the phenomenon of local “small horse-drawn carts” makes the optimization of the structure of investment entities “weak.” Secondly, China’s financial supply-side structural reform continues to deepen, and the structure of instruments with direct financing as the mainstay still needs to be improved. Non-standard financing is restricted by new regulations on asset management. Tighter regulation has kept its shrinking trend unabated. PPP, as a useful attempt to cooperate between the government and social capital, has experienced a “blowout” and “regulation” period. Problems such as debt and excessive capital accumulation period have led to a slowdown in growth. The development of certain types of REITs is even more restricted by the lack of standardization, loose project operation supervision and difficulty in investing in infrastructure, multi-level, multi-field, and efficient infrastructure The structure of investment and financing instruments cannot be effectively established.
2. Publicly offered REITs have become an effective tool to relieve infrastructure investment and financing structures
Investment has long been the ballast stone of China’s economic “promotion while maintaining stability”. In the context of increasing economic uncertainty and suppression of traditional financing channels, only innovative investment and financing mechanisms can be used to increase capital by using market-based financing methods. Only by waiting for the efficiency of the allocation of supply-side factors can infrastructure investment become an important driving force for economic vitality and economic recovery. In this context, the launch of infrastructure REITs is at the right time and will surely become an effective tool to bail out infrastructure investment and financing structures.
Revitalize huge stock assets, broaden infrastructure investment and financing channels, and form a benign infrastructure investment cycle. China has experienced rapid development over the past few decades and has accumulated hundreds of billions of infrastructure stock assets. However, due to the long payback period of infrastructure construction capital, the risk and uncertainty caused by fund precipitation, a large number of stock assets The exit channel is severely blocked, hindering the market’s enthusiasm for infrastructure investment under the current expansion of domestic demand. And through public offering of REITs, you can use ABS to transform the lack of liquidity of infrastructure stock assets into a form of financial products with higher liquidity, open up social investment entry and exit channels, form a virtuous infrastructure investment cycle, and enhance social capital Attraction, continue to support infrastructure construction, and build a sustainable investment and financing ecosystem.
Resolve local government debt risks, and balance “expansion investment” and “risk prevention”. Infrastructure investment has always been an important driving force for China’s economic growth. Local governments and urban investment platforms have played an important role in this. However, urban investment corporate debt has also exacerbated local hidden debt risks. As the main body of infrastructure construction and the original stakeholder of publicly offered REITs, the pilot issuance of publicly offered REITs will not only help meet the current stage of increasing investment and coping with the economic downturn, under the sufficient capital guarantee brought by the long-term precipitation of funds and the revitalization of existing assets. The need for counter-cyclical control can also replace state-owned capital in stock assets, help local governments and urban investment companies unload their debt burdens, reduce their dependence on illegal borrowing, and prevent and resolve major risk barriers while expanding effective investment. Improve the investment efficiency and construction quality of quasi-public projects such as toll roads, water, electricity and heat.
Build a multi-level capital market and rationally guide the efficient allocation of social capital. Building a multi-level capital market, developing direct financing, and promoting the efficient conversion of savings to investment have always been the key to China’s financial supply-side structural reform. The launch of the pilot infrastructure REITs not only provides a value anchor for the Chinese capital market, but also promotes the value discovery and efficient capital allocation of real estate investment. It also securitizes the large-scale stable cash flow generated by the existing real estate in the capital market. Liquidity effectively fills the investment gap in the capital market, meets the investment needs of large-scale capital such as social security funds and pension funds, truly links the supply and demand of social capital, and accelerates the process of transforming savings into effective investment. In the long run, the pilot implementation of REITs may become the key to solving some of the structural contradictions in China’s infrastructure investment and financing system and help China’s economic transformation and upgrading.
3. Fight the policy “combination punch” and release the investment and financing reform dividend
Expanding effective investment has become an important starting point for stabilizing the economy. In order to improve the investment and financing structure and release effective investment dividends, the coordination of REITs+PPP will become the key to economic recovery in the post-epidemic period. To this end, it is necessary to focus on comprehensive reforms in multiple areas, make good use of tax-benefit policies, pricing mechanisms, and publicly funded infrastructure performance evaluation systems, play a good policy “combination punch”, and guide REITs to accelerate development to promote the optimization of investment and financing structures.
First, coordinate and promote comprehensive reforms in multiple fields to form a joint force for development. With the increasingly complex economic situation, various reforms have strong coupling and relevance. The reform of investment and financing structure, as a key difficulty in system reform under the new normal of the economy, affects the whole body. Therefore, in the process of the reform of infrastructure investment and financing structure, it is necessary to coordinate and promote the superposition of reforms in other fields such as finance, taxation, finance, and price, to increase the stamina of reform and release the dividends of investment and financing reform.
For example, in fiscal and taxation reforms, it is necessary to further promote the division of central and local fiscal powers and expenditure responsibilities, increase central fiscal powers and expenditure responsibilities, improve the local tax system, and enhance local fiscal stability; in financial system reform, it is necessary to adopt a supply-side structure. Based on reforms, deepen the construction of multi-level capital markets, and orderly promote the efficient operation of social capital; in price reforms, it is necessary to actively promote the development of the REITs market, form a reasonable price discovery mechanism for infrastructure and other real estate, and strengthen the market in the allocation of resources Key role. The reform of the investment and financing system will be organically connected with the above reforms and promoted in coordination to form a horizontally coordinated and efficient reform mechanism that improves the overall economic operation efficiency.
Second, do a good job of effectively connecting existing investment tools such as REITs and PPP. The PPP model is restricted by operational management deficiencies, and the scale and speed of development have entered an obvious bottleneck period. However, from the perspective of long-term capital use efficiency and investment and financing structure, it is still one of the most compliant and effective means for the government to invest in infrastructure. The PPP model solves the “import” problem of infrastructure investment, but the “export” or exit mechanism is not sound. The pilot of public REITs is undoubtedly a timely rain for solving the problem of social capital withdrawal in the PPP model. If REITs and PPP projects are connected and supplemented, the development of PPP will provide infrastructure REITs with a large number of high-quality basic assets, and infrastructure REITs will provide them with investment exit channels, which is expected to stimulate social capital’s investment enthusiasm.
We must focus on comprehensive reforms in multiple areas, make good use of tax-benefit policies, pricing mechanisms, and public-funded infrastructure performance evaluation systems, and make good use of policy “combination punches”
To this end, in addition to the need to further improve the relevant systems, balancing the project operation and management responsibilities and the coordination of investment deadlines is also the key. At present, the “Notice” on the combination of REITs and PPP is limited to user-paid projects and has an operating time limit of more than three years. However, the proportion of such projects in China’s PPP development is relatively low. Considering that such regulations have reasons to avoid risks. However, it hinders its coordination effect. It is recommended to appropriately relax the payment model and operation and maintenance time review of the combination of the two, and instead strengthen the evaluation of the pros and cons of the project’s underlying assets, focusing on the sustainability of the project and the quality of revenue. At the same time, during the transition period, the transfer of operation and maintenance responsibilities between the fund management company and the project company can be arranged in advance, and it is more appropriate to consider de-entrusting the original project party or centralized and unified management by a large state-owned asset management company.
Third, actively improve the construction of supporting mechanisms for the issuance and operation of REITs, such as tax benefits and pricing mechanisms, and strengthen policy attraction. REITs are emerging tools in the investment and financing structure, and appropriate support for them will accelerate their early development. For this reason, the improvement of tax and preferential policies and pricing mechanisms will be important institutional advantages for them to catch up. A tax preference system that takes into account the principles of “tax source protection” and “tax neutrality” should be established. In the specific design and implementation, in order to effectively alleviate the current multiple taxation phenomenon, it should be clarified that the REITs level will no longer pay value-added tax and income tax, and the tax burden of income tax should be transferred to the ultimate investor. At the same time, to prevent tax sources caused by malicious tax avoidance For loss, it is necessary to actively refine specific preferential thresholds such as capital composition, dividend ratio, holding time, etc., and differentiate taxation.
In addition, it is necessary to get rid of the calculation of full life cycle profits based on infrastructure projects in the past, and shift the pricing logic from a strong entity to a strong project, use the increasingly abundant refinancing model, and consider the project’s capital structure, duration and project type. Set discount factors with different thresholds, and then calculate the operating cash flow of the project, and coordinate the intrinsic absolute value and the relative market value with an orderly and efficient pricing model.
Fourth, based on the relationship between the government and the market, actively improve the performance management of the effective connection of “REITs + PPP”. Because publicly offered REITs use asset-backed securities to realize the circulation of infrastructure funds, and they are matched with PPP, which effectively promotes the government and the market’s resource control cooperation in the field of infrastructure. However, in the follow-up supervision of its performance, attention should also be paid to combining the market performance oriented by income return with the public performance oriented by public results. Especially in the context of the current strong calls for new infrastructure projects and the limited areas in which the market cannot intervene at all, the performance evaluation process for infrastructure investment and financing under the distinction of market performance and public performance will become a mobilization of the two enthusiasm and promote high-quality infrastructure development. key.
To this end, it is necessary to accelerate the implementation of the zero-based budget concept based on the construction of budget performance management information, identify and scientifically set project performance elastic indicators on the basis of regional heterogeneity and infrastructure attribute differences, and promote the penetration of scientific and efficient budget performance evaluation In the full life cycle of infrastructure projects.
