Ivy Poon, Vice President – Senior Analyst
Qingqing Guo, Assistant Vice President – Analyst
Historically, the Chinese government has relied on infrastructure investment to reverse economic downturns, such as the landmark RMB4 trillion fiscal stimulus that followed the 2008-09 global financial crisis. This changed around 2015, when government policy shifted towards consumption and services as drivers of economic growth. Last month, the government further refined its economic strategy by introducing its “dual circulation” economic growth model, which aims to promote domestic supply and demand. To this end, the government is seeking to boost household income and strengthen the social safety net as part of its effort to boost consumption, and to upgrade manufacturing industries and develop advanced technologies to increase self-reliance on domestic supply.
Figure 1: Infrastructure investment is a key component in China’s fixed asset investment
Source: China’s National Bureau of Statistics, WIND and Moody’s Investors Service
Investment will focus on developing “new infrastructure” – such as informational networks, urbanization and major transportation and water conservancy projects – while traditional infrastructure projects will continue to drive infrastructure spending, given their very large scale, capital intensity, and ambitious development targets.
Nearly all of China’s 31 provinces, municipalities and autonomous regions have announced key infrastructure investment plans for the next 5-7 years, covering 24,515 projects at RMB43 trillion, of which around 25% will be spent on transportation projects.
Figure 2: Infrastructure investment growth will accelerate after coronavirus hit
Note: Infrastructure investment growth measured by cumulative growth of fixed asset investment
Source: WIND and Moody’s Investors Service
Government stimulus will support infrastructure investment
The central government has so far shown its support for regional and local governments in this challenge. It plans to transfer RMB2 trillion in funding directly to local governments to support economic recovery, and has increased its quota for special purpose bonds – used to fund infrastructure investment – by RMB1.6 trillion to RMB3.75 trillion. It is also allowing local governments to use bond proceeds as seed capital for significant revenue-generating infrastructure projects, lifting an earlier restriction, and has introduced infrastructure real estate investment trusts (REITs) as a new funding channel. Infrastructure companies will be able to sell their projects to these REITs, shortening the payback period for long-dated infrastructure assets.
Building on experience gained from the global financial crisis, the central government is likely to be more cautious this time around in expanding credit to support the economic recovery. The total direct fiscal response package announced in May this year is equivalent to 4.5% of GDP or RMB1.3 trillion, according to the IMF Policy Tracker. This is modest compared with the stimulus package that followed the global financial crisis, when public investment in infrastructure and property construction accounted for over 10% of GDP, or about 87% of its RMB4 trillion stimulus package at the time.
Transportation will drive infrastructure investment
Moody’s expects that infrastructure investment will focus on the transport sector over the next 3-5 years, driven by increasing passenger numbers and freight demand, as well as rapid urbanization, which the government aims to increase to 70%-75% by 2035, up from 61% in 2019.
Figure 3: Expanding transportation network – high-speed rail, railway and highway (by length)
Source: WIND and Moody’s Investors Service
Moody’s expects that transportation investment will be focused on new railways in central and western regions, along with the ongoing expansion of high-speed rail, road and metro networks. This is consistent with the national ‘Outline of building China’s strength in transportation plan’ and corresponding development plans announced by various provincial governments.
Strengthening the transportation network is also essential to facilitating strategic regional development plans, such as in Beijing-Tianjin-Hebei and the Guangdong-Hong Kong-Macau Greater Bay Area.
Green energy will also remain a key focus for the power sector, although investment growth is likely to slow post-2020 as the country approaches wind and solar grid parity in 2021. Coal-fired capacity additions are also likely to slow under China’s carbon neutral strategy.
Policy-driven investment in the water utility sector will continue to focus on flood control, water conservation and water projects in poor areas, and national strategic projects.
Investment by gas utilities will focus on the consolidation and expansion of the national and regional distribution pipeline, as well as on LNG receiving terminals and storage facilities as they will increase the diversification of gas supply.
Future investment for the port sector will focus mainly on connectivity between the ports and surrounding railways and highways, smart ports that leverage disruptive technology and automation, and strategic regional integration and industry consolidation.
Infrastructure companies are likely to maintain high debt leverage
Most infrastructure companies will likely maintain high debt leverage – as measured by the ratio of funds from operation to debt – due to their sizable capital spending to support government development plans.
Nonetheless, a sustained recovery is underway for the sector, and Moody’s expects most infrastructure companies’ liquidity and debt servicing requirements will remain broadly manageable thanks to government subsidies and capital injections. Moreover, most are state-owned entities, underpinning their strong market positions, low funding costs and ample funding access.
Conclusion
While its economy appears not as severely hit by the coronavirus, China is looking at infrastructure spending to support economic recovery. This will include new and traditional infrastructure, underpinning a healthy new project pipeline along with continued high leverage for companies carrying out the work.
Ivy and Qingqing are analysts in Moody’s Public Project & Infrastructure Finance Group, based in Hong Kong and Shanghai. They cover a range of state-owned and privately-owned infrastructure and utility companies in China.
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