July 14, 2020
To cushion the impact of the COVID-19 outbreak on the
economy, China has increased its support for infrastructure construction.
Historically, infrastructure investment has served as an
important tool to stabilize economic growth. Following the COVID-19 outbreak,
China’s Politburo on February 3 proposed increasing investment in new projects
and accelerating project construction to mitigate the impact of the outbreak.
The government then rolled out a series of counter-cyclical
adjustment policies such as raising the deficit ratio, issuing special treasury
bonds, expanding quotas for special local government bonds, renovating a
growing number of old residential sites, and accelerating the construction of
“new infrastructure” and major projects.
Infrastructure investment is poised to accelerate
Policy support
Infrastructure investment growth MoM started to improve in
February 2020, turned positive in April, and recovered to 10.9% in May. Looking
ahead, it appears that infrastructure investment growth is poised to accelerate
MoM on the back of the large number of projects, funding visibility, and relatively loose
monetary policy, in our view.
To highlight China’s determination in boosting
infrastructure investment, a government work report delivered on May 22 proposed
expanding effective investment and giving strong support for the construction
of “new infrastructure,” “new urbanization” and major infrastructure facilities
such as transport and water conservancy.
This push could create a large number of infrastructure
projects and from our analysis of statistics from 22 provinces that have
announced annual transport investment plans, we found that their combined planned
transport investment rose 16.9% from 2019.
Figure 1: Aggregate planned transport investment in 22 provinces
up 16.9% in 2020
Source:
Provincial housing and urban-rural development authorities, CICC Research
Special local government bonds
New funds for infrastructure investment in 2020 are mainly
from special local government bonds, special treasury bonds, and a larger
budget (higher budget deficit ratio).
China plans to issue Rmb3.75trn worth of special local
government bonds in 2020, up Rmb1.6trn YoY. The country also intends to issue
Rmb1trn of special treasury bonds, and 70% of the proceeds are reported[1] to fund infrastructure construction. China’s budget deficit ratio rises 0.8ppt
YoY to 3.6%.
Overall, it appears that special local government bonds will
play a key role in supporting infrastructure investment.
Figure 2: Government fund expenditures (including proceeds from special
local government bonds) have increased YoY
Source:
Ministry of Finance, CICC Research
Figure 3: China spent 55.5% of proceeds from special local government
bonds issued YTD to fund infrastructure investment, with 29.4% to fund
transport projects
Note:
Data as of June 26
Source: www.chinabond.com.cn, CICC Research
Monetary policy
The May 22 government work report also proposed promoting a
sustained decline in the interest rate and guiding the TSF growth in 2020 to
surpass the growth in 2019.
In 5M20, TSF growth reached 58.6% YoY, indicating that
monetary conditions remained loose. Furthermore, at a meeting on June 17, the
State Council said financial institutions need to reduce charges and help
enterprises save Rmb1.5trn.[2] These efforts could potentially further push down the interest rate, which
could benefit infrastructure project loans and support infrastructure
investment.
Structural opportunities
Prefabricated buildings
Construction of prefabricated buildings has grown rapidly in
recent years. According to the Ministry of Housing and Urban-Rural Development
(MOHURD), new-starts GFA of prefabricated buildings rose 45% YoY to 420mn sqm
in 2019, with a CAGR reaching 54% in the past 3 years.
Furthermore, the State Council has set a target of having
the penetration rate of prefabricated buildings reach 30% in 2025 (the
penetration rate was 18.4% in 2019, measured by new-starts GFA), which could potentially
lead to a structural opportunity in the prefabricated buildings segment.
Safety testing
Safety testing of existing homes could potentially be
another area of growth for the construction industry, as it appears that China
has switched its policy focus from demolition, to the renovation of old
buildings.
For example, while China demolished about 6mn homes in
shanty towns per annum over 2014–2018,
the number of planned demolitions fell to 2.85mn homes in 2019. In addition,
the country renovated around 19,000 old residential sites in urban areas in
2019, affecting 3.52mn households. It plans to renovate another roughly 39,000
old residential sites in 2020, affecting almost 7mn households, which could
present opportunities for the safety testing market.
Given this possible shift toward renovation, existing homes
will have a longer average lifespan and regular safety testing could be of
vital importance.
Figure 4: The market for existing buildings is expanding
Source:
NBS, CICC Research
For more
details, please see our report 2H20 investment strategy: Still embracing
structural opportunities published in July 2020.
[1] https://www.yicai.com/news/100674849.html (source in Chinese)
[2] https://www.gov.cn/zhengce/2020-06/18/content_5520277.htm (source in Chinese)