In principle, the urban population should be larger than 3 million to justify a metro request and 1.5 million for light rail. Meanwhile, proposed projects for metro and light rail networks must anticipate daily passenger flow of 7,000 and 4,000 people per kilometer respectively in the preliminary stage, while in the long run, peak-hour passenger flow should reach more than 30,000 and 10,000 people respectively.

The new guideline also points out that projects that obtain substandard debt financing or fail to specify source funding for debt payment will not be approved.

The act of "freezing," or calling off metro projects, is actually the result of policymakers reexamining plans for extensive metro construction since the second half of 2017 to prevent the risk of local debt leveraging.

Promoting infrastructure investment had previously been a tool to support the economy amid downward pressure. Meanwhile, in previous years, growing urbanization saw more people migrating to big cities for work, putting a strain on the traffic and transportation structures of many places. Therefore, the government hoped that the construction of metro networks in second-tier cities could drive regional development, encourage people to live in nearby cities and alleviate pressure on those megacities.

In 2015, the National Development and Reform Commission (NDRC) issued a guideline specifying the government's role in the approval of metro applications. According to the guideline, the NDRC is in charge of verifying rail transit programs reported by local governments, and local governments are to make arrangements for the approval of specific items, investment and financing. Since then, the construction of China’s rail transit has proliferated.

However, in order to stabilize growth, some local governments have developed too hurriedly, without the support of adequate population and industries, a sufficient budget and a stable cash flow as a source of repayment. Some have exploited certain favorable policies such as Public-Private Partnership (PPP), which was originally aimed at introducing social capital and reducing local debt but is instead being misused as an opportunity to implement new projects.

While China is remodeling its management of local debt by restricting Central Government bailouts and establishing a lifetime accountability system, financial organizations are still scrambling for local government projects, investing with the aid of shadow banking, assuming that the Government will bail them out anyway should they require it.

Hence, the Central Government has resolved to supervise the debt volume of local governments and the direction of its exports, so as to pursue high-quality growth and eradicate profligate projects which amplify financial risks.

This is an edited excerpt of an article written by Li Yujia, a researcher with the Shenzhen Real Estate Research Center, published by the National Business Daily

Copyedited by Laurence Coulton

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