One huge downside to the $586 billion stimulus that China launched in 2009 to help avert a global recession was over-dependence on public financing for infrastructure projects.

Asia Unhedged recalls the $4 trillion yuan outlay was strenuously pushed by the U.S. and other G-20 countries at the time to stave off a catastrophe — which it clearly did. Six years later, one of the consequences of this outpouring of government funds are the “ghost cities” (so derided in the U.S. media) that no one lives in. The stimulus likewise triggered spending and borrowing habits that threw many local governments into severe debt.

Financial rigor and foresight were sadly lacking. Corruption didn’t help either. China is now acutely aware that publicly financing everything is a bad idea. Wanting to foist some of the risk, the National Development and Reform Commission, the country’s top planning agency, has decided to allow private investors to fund and build infrastructure projects. New rules to come out June 1 will protect private investors and expand opportunities in infrastructure and utility projects.

To encourage private investors, NDRC officials announced at a news conference Tuesday that a number of major infrastructure projects that had previously been off-limits were now opened up.

Private investors can build projects in energy, transportation, water and environmental protection and urban utilities through franchises, according to rules issued by the planning agency, Reuters reported. Contracts would be based on build-operate-transfer (BOT) models. The planning agency pledged to “protect the legal interests of social capital and guarantee stability and continuity of franchising operations,” Reuters said.

Banks will be encouraged to provide syndicated loans for franchise projects and let policy banks offer “differentiated” credit support, including loans of up to 30 years, according to the rules due to take effect from June 1. In addition, the new rules allow projects to be funded via private equity, strategic investment and bonds, according to the new rules.

Western analysts are applauding the NDRC’s move as another step by China towards a full market economy and in avoiding a repeat of China’s building and lending scandals. Asia Unhedged agrees. But we would also like to remind everyone how such public spending kept the world economy from going over a cliff not so long ago.

When China unveiled its gigantic stimulus package in late 2008, U.S. Treasury Undersecretary for International Affairs David McCormick called it a “welcome step.” It helped alleviate a slowdown in China’s housing and investment sectors. This, in turn, helped cushion decreases in Chinese purchases of raw materials and goods from the U.S. and other developed nations. Ghost cities anyone?

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