The Financial Times is reporting a rise of approx. 15% in the price of construction materials in major Chinese cities, reversing a recent trend of month-on-month declines. The data suggests an uptick in new infrastructure projects, a favored tool of policymakers to stimulate economic activity during periods of contraction.

But new fiscal stimulus is not without its own risks, particularly in the case of China, where the government is already struggling to deleverage the formal and informal lending sectors. A new state-led infrastructure bonanza could lead to more ‘white elephant’ projects which, though useful in stimulating economic activity over the short-term, seldom provide enough of a long-term growth dividend to justify the initial investment.

Think the ghost cities and empty airports that used to feature prominently in Western media reports on China. Nowadays, not so much. Amid the ongoing US-China trade war and societal tightening of the Xi Jinping era, such matters have increasingly been regarded as a closely guarded state secret.

A new round of infrastructure stimulus would contradict the Chinese government’s official line, which stresses the need for ‘quality growth’ – even if it comes at a slower pace than recent years – rather than any new major stimulus program. According to official figures, infrastructure spending grew just 3.3% over the first 10 months of 2019.

The stimulus issue boils down to two overriding considerations: growth and debt.

China’s official GDP rate came in at 6.6% in 2018, just above the government target of “around” 6.5%. This target was reduced to 6-6.5% for 2019, and there are indications that the final number may fall short of the mark. Front and center is the country’s third quarter growth rate of just 6% – its lowest rate of expansion in over 25 years. Analysts are expecting that number to fall even further in the fourth quarter, barring a sudden resolution of the trade war.

There’s always room for a healthy degree of skepticism so far as China’s official growth numbers are concerned. National figures are fed into by the country’s 32 regional governments, which are composed of officials who are essentially incentivized to paint as sunny an economic picture as possible, even if the ground-level realities don’t match up.

Michael Pettis, an American economist at Peking University, maintains that the real number could be as low as half the official rate. Xiang Songzuo of Renmin University of China has an even gloomier outlook. He believes that the real GDP rate for 2018 could be in the 1% range, or even in negative territory.

This year’s moribund third quarter GDP numbers prompted an immediate policy response from Beijing, which eased restrictions on local governments and allowed early access to their 2020 lending quotas. Upward price movement in the construction industry would seem to suggest that a significant share of this money is finding its way into new state-directed projects.

Debt is the second overriding concern of PRC policymakers, and again this is a topic where the official numbers may not reflect ground-level realities. China’s recent growth has been enabled in large part by two drivers: the informal lending sector (‘shadow banking’) and atypical local government financing vehicles (LGFVs), which were booming before a government crackdown came down in 2017 (these LGFVs were a favored tool of local governments for boosting their economic metrics, often with little regard for long-term sustainability). Both of these vehicles represent debt piles that won’t show up on national government balance sheets, even though it’s ultimately up to Beijing to provide the bailouts in the event of a crash.

Just how much money are we talking? Last year, Standard & Poor’s put off-balance sheet borrowing by local governments in China at around $6 trillion – nearly four times the size of the Russian economy. The on-sheet picture is also daunting, particularly in the corporate and household sectors. In November, China’s central bank warned about the risks associated with low-income households, as total debt is now equal to total household income (by way of comparison, Canadian households currently owe around $1.77 for every dollar of income). The speculative nature of these household debts, many of which were taken on in mortgages in full expectation of perpetual growth in prices, makes them particularly susceptible to fluctuations in the real estate market. In other words, a sharp and sudden downturn could trigger a cascade of defaults that constitute a systemic risk. This hint of systemic risk is partially why the government has also been actively bailing out distressed private sector enterprises since last year.