It appears the best way to avoid a debt trap is to keep on spending. At a meeting of the State Council, the de facto cabinet of the Chinese government, plans were rolled out to make infrastructure investment a “priority.”

Senior Communist Party officials, including Premier Li Keqiang, agreed last month on a pro-growth package of policies with 1.35 trillion yuan (US$197 billion) earmarked for infrastructure projects across the country.

How this squares with President Xi Jinping’s two-year war on excessive borrowing by corporations, local governments and consumers was not revealed. But it looks like a cooling economy and the threat of escalating trade tensions with the United States have prompted the move.

“There will be no great flood of strong stimulus [but] fine-tuning according to the situation to [cope] with the uncertainty of the external environment,” a State Council statement said.

Earlier this week, China’s General Administration of Customs reported that exports jumped last month despite fresh Washington tariffs.

Trade surplus

Shipments destined for the US climbed 13.3% to $41.5 billion, compared to the same period in 2017, on the back of a similar rise in June. At the same time, the trade surplus increased by 11% to $28 billion. Last year, the US trade deficit with China was a record $375.2 billion.

Still, sections of the economy are showing signs of slowing. Factory activity has dipped while retail sales are starting to stall because of higher prices.

Figures released by the National Statistics Bureau on Wednesday showed that sales at 50 leading Chinese retailers dropped by 3.9% in July compared to the same period last year. Home appliance groups were the biggest losers with sales plunging 9.9%.

“In general, the performance of China’s retail sector was rather sluggish in July,” the NSB stated.

The disappointing data comes at a time when Beijing is realigning the economy from “high-speed growth” to “high-quality growth,” with the emphasis on domestic consumption.

In the background, President Xi’s government has been squeezing cheap credit, which has slowly filtered down to consumers.

While investing in ‘big ticket’ programs will not solve that problem, it will keep the economy ticking over as Beijing loosens the purse strings.

For the first six months, infrastructure investment fell significantly, data from the National Statistics Bureau highlighted. But the 1.35 trillion yuan injection would signal a 69% increase compared to last year’s figure of 800 billion yuan.

Flagging GDP

It would also boost flagging GDP numbers. At first glance, they look healthy with China’s economy expanding by 6.7% in the second quarter. On closer inspection, this was the slowest pace of growth since 2016.

Yet embarking on another round of high-profile spending has inherent dangers, especially with Beijing grappling with an array of domestic issues, such as reforming the lumbering state-owned enterprise sector, as well as the trade conflict with the US, which continues to drag on.

During the past three months, there have been signs that this is having a profound effect on the economy.

“The government [will need] to avoid another round of stimulus leading to overcapacity and piling up of debt levels,” Pan Jiancheng, a senior economist at the National Statistics Bureau, said.

Evading the jaws of a ‘debt trap’ will be quite a challenge.