Abstract
Official statistics show that China had a very strong second quarter, with
growth hitting 7.9%. BMI’s
Country Risk team noted in July 2009 that
‘upon recovering from the current global downturn, we expect
China
to return to its previous strong growth path, albeit at a more sustainable
level of around 7-8%. This
move towards a more balanced growth path will
be led by a structural shift away from fixed asset
investment and net
exports, and towards private consumption’. The structural shift away
from fixed
capital investment is central to our outlook, and indeed is a
key factor behind our long-term forecasts.
The impact of the stimulus plan
has been impressive. Activity has picked up, though with urban fixed
asset
investment rising by 35.3% in June 2009 compared with the previous year. Our
earlier caution
regarding its desired effects has been replaced by a
bullish forecast of 14.5% industry value real growth
for this year. This
is based primarily on our forecasts that fixed asset investments will peak
this year on
the back of the stimulus plan. In tandem, the demand for raw
materials (steel and cement) will also rise,
though huge stockpiles will
mean that there is plenty of domestic supply to sustain the initial phases
of
the infrastructure plan, thus demand for building material imports is
expected to rise in Q409.
Though our forecasts for the short term
(2009-2010) have been revised upwards, our long-term forecasts
remain
unchanged. We maintain our view that the sector will reach maturity in 2011
following a decade
of relentless spending on infrastructure, and this
slowdown will be symptomatic of the anticipated
structural shift in
economic activity.
On the corporate side, the strong results of China
Railway Group (that have been bolstered by new
government contracts), as
well as the existence of several ongoing infrastructure projects, are clear
signs
of sustained activity in China’s infrastructure sector. Two
major infrastructure-related initial public
offerings (IPOs) are pending.
The biggest one will be the IPO in late July of China State Construction
and Engineering, which is expected to be the largest ever in China and
possibly globally. The second
biggest will be the listing of a new company
that will control railway assets in Shanghai and Beijing. The
timing of
the IPOs highlights that companies operating in the infrastructure field in
China are in a strong
position to capitalise on their gains from the
stimulus plan, which guarantees that they will see sustained
business
while other sectors struggle. The proceeds from IPOs will assist with the
financing of
infrastructure projects. Last but not least, Bank of China
International (BOC) and Singapore' s Temasek
are reportedly in negotiations
to establish a fund to invest in infrastructure in China. Reuters cites
unnamed sources that say the talks between Temasek and BOC International, the
investment banking
arm of the Bank of China, are still in the early
stages, but the idea is for a joint venture agreement to
establish a fund
of between US$1bn and US$2bn. These funds would be invested in Chinese
infrastructure projects, particularly targeting projects supported by the
Chinese stimulus plan.
According to the Beijing Municipal Development and
Reform Commission, as cited by China
Knowledge, Beijing alone is planning
to spend US$160bn in infrastructure projects in 2009. Infrastructure
projects will represent 35% of the municipality' s fixed asset investment in
2009, a 4% rise from 2008.
This is quite a surprising announcement given
the significant investments in the city that were already
made in
preparation for the Olympic Games. The pledge does highlight the
government’s commitment to
infrastructure spending, but we also
believe it raises questions as to whether or not funds are being
allocated
where they can maximise productive capacities.
According to BMI’s
Infrastructure Business Environment and Project Finance Ratings,
China’s
infrastructure business environment and investment risks are
relatively low. For the business
environment, the country’s score
increased this quarter as a result of higher industry forecasts, and China
now achieves an overall score of 71.4 out of 100, up from the previous 69,
coming in at second place in
the Asia Pacific region.
The Project
Finance ratings offer a more mixed picture. The overall score is 60.4,
suggesting a moderate
level of potential risks throughout a
project’s lifecycle in the country. However, according to our
tables,
the market does present higher risks in the Design and
Construction phase when compared with other
markets in the region. When
compared with other regional markets in the Commissioning and Operating
phases, meanwhile, the risk environment in China is more appealing than in
other regional markets. This
could mean there is greater chance for
revenue generation to become disturbed in the longer term.
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