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
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 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
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. These efforts could potentially further push down the interest rate, which could benefit infrastructure project loans and support infrastructure investment.
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 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.
 https://www.gov.cn/zhengce/2020-06/18/content_5520277.htm (source in Chinese)