SHANGHAI -- Though a closely watched gauge of Chinese manufacturing activity is expected to point to continued growth, some observers see the risk that the public-private projects supporting the world's second-largest economy are storing up problems for the future. The average market forecast predicts that the January reading of China's official manufacturing purchasing managers index, to be announced Wednesday by the National Bureau of Statistics and the China Federation of Logistics and Purchases, will come to 51.2. This would be roughly flat with December's 51.4 and above the psychologically important threshold of 50, which separates growth from contraction. "Demand for funds among companies involved in construction machinery, automobiles and robotics is stronger than expected," said a source at the Chinese unit of a major Japanese bank. Because the Chinese economy is heavily dependent on the property market, some have worried that greater regulation of housing sales could trigger a slowdown. But loan requests from manufacturers have been rising since November, according to the banker. China's PMI hit a two-year high of 51.7 in November. Though it has dipped since, the market consensus sees the figure remaining above 50 for some time. The government is expected to set its economic growth target for 2017 at about 6.5%, and a sudden loss of momentum seems unlikely. "They're not purposefully going to do something that could look bad for the Communist Party leadership in a party congress year," said Mihoko Hosokawa, a research executive at Mizuho Bank, referring to the gathering held every five years to determine the party's top leaders. While the Chinese economy seems to be on solid ground, a closer look reveals some cracks. Shares in China State Construction International Holdings rallied earlier this month after the state-run group won a contract to build highways in the city of Liupanshui, Guizhou Province. The Hong Kong-listed issue jumped more than 8% at one point on Jan. 11, and hit a roughly one-year high on Jan. 19. Under such public-private partnerships, companies gain operating rights for a time to the infrastructure they build in exchange for shouldering construction costs. This allows governments to make public investments without expanding its debt. China's regional governments together carried 17 trillion yuan ($2.47 trillion) in debt at the end of 2016. The central government is discouraging them from adding to this pile, instead urging them to mobilize private money for investments. Over 10,000 PPPs worth a total of 12.73 trillion yuan had been approved by the end of December, according to the finance ministry. Private finance initiatives have caught on in Japan, too. But in China, there is concern that PPPs merely shunt debt from regional governments to companies. Many of the projects involve roads, parking lots and public facilities with cash flows that look good on paper. But there is no guarantee they will generate the expected revenue. Some say many of China's highways are operating at a loss, and that only links between Beijing and Shanghai are reliably profitable. Most companies involved in PPPs are state-run. Beijing relied on regional governments to fund much of a 4 trillion yuan stimulus package rolled out in response to the 2008 global financial crisis. Now that their coffers are considerably ligther, the central government appears to be drawing instead on corporate balance sheets. The yuan rebounded more than 1% against the dollar in January after a series of bare-knuckled measures by authorities -- like requiring individuals to submit applications in order to exchange money -- meant to stop the Chinese currency's plunge. "Regulations have only delayed yuan-selling, which there is still great demand for, and concerns over capital flight remain," said a banking source. The Chinese economy is still saddled with two weaknesses: growing debt and a weak yuan.
Even though China's official manufacturing purchasing managers index, to be announced the end of December 2016 is expected to be roughly flat at 51.2 and above the psychologically important threshold of 50, which suggests confidence in future growth, some analysts are warning that increasing numbers of public-private partnerships, CNY12.73tn ($1.85tn) of which were approved by Wednesday, are storing trouble up for the future. Greater regulation of the property sector has also prompted fears of a slowdown, while the weak yuan adds to worries about capital outflow.