2013-08-25 09:11:30 - New Construction research report from Business Monitor International is now available from Fast Market Research
We see a credit crunch spreading and persisting in the infrastructure and wider construction sector in China and as such we have moved to downgrade our 2014-2022 industry value forecasts. Despite the revisions, we still note strong downside risks to our forecasts stemming from the curtailment in liquidity that fuelled the most recent surge in fixed asset investments. We believe that the prevalence of shadow banking assets in infrastructure and real estate is currently the single largest risk facing the entire construction sector in China as it can prompt a steep and deep recession in the sector.
Our view on the temporary and short lived nature of the uptick in railways in particular was based on the issues with diminishing return
on expenditure, meaning that each round of easing needs to be larger than the last in order to generate same impact on headline growth. The stimulus announced in September 2012 that included US$100bn for railways for 2013, while sizeable, was a fraction of the 2009 stimulus that fuelled nearly 50% in railways construction and other infrastructure. In addition, the break-up of the Ministry of Railways, which for the past decade has epitomised China's massive infrastructure programme, in our view signals the upcoming moderation (and in some ways, rationalisation) in the infrastructure spending. The 2012/2013 stimulus was also fuelled by a massive liquidity surge in off balance sheet assets. Tighter government control over the expansion of shadow banking practices in China will have an impact on the ability of local governments and large scale developers to develop infrastructure and property. Though data is elusive, it is estimated by BMI's China Country Risk analysts that off balance sheet assets are equivalent to 80% of the GDP.
Full Report Details at
- www.fastmr.com/prod/670554_china_infrastructure_report_q4_2013.a ..
The new government has been quick to implement changes to the infrastructure programmes in China, starting with the break-up of the powerful Ministry of Railways (MoR). The environmental ministry also seems to be more empowered; no doubt on the back of increasingly vociferous public opposition to the deteriorating environmental conditions. These changes suggest to us that the new government is re-thinking several of the previously announced infrastructure projects in transport (especially railways) and power generation and utilities. The massive US$103bn spending for railways in 2013 that was going to add another 5,200km of new tracks (announced in 2013) may be severely scaled down, especially in light of the fact that a principal priority of the new railways entities (China Railway Corporation and State Railway Administration) is to pay down the debt amassed by the MoR.
We had factored in our forecasts the late-2012/2013 infrastructure stimulus to run out of steam in the second half. This view is reinforced by the latest macroeconomic data out of China which have shown growth of 7.5%, a moderation from the previous 7.7%. Official data dating up to May 2013 suggest that growth in fixed asset investments (a proxy for our construction and infrastructure estimates) may be tapering off, further reinforcing our 2013 estimates and forecast for the growth trajectory in infrastructure sectors.
The fact that the new government allowed such a reading to come out suggests to us that not only are they willing to scale back the stimulus, but also to show that they are weaning the economy away from the fixed assets investment model that has been the linchpin of economic activity the past decade.
This is not to say that large scale spending for projects is going to come to an abrupt halt. We believe that major projects will continue, especially in tier-two and tier-three cities - even though the economic viability of some will remain highly questionable. The plans for a second mega-airport in Beijing testify to the ambitions of the government in terms of building up infrastructure. However, we anticipate that the pace of growth will moderate and projects will be more scrutinised.
Therefore, our long term growth trajectory view remains the same, showing a steady deceleration in construction industry value real growth. Risks to our forecasts are to the upside - though much less pronounced than we thought at the end of 2012 - stemming from a better than expected economic performance for capital investments.
Key developments in China's infrastructure sector:
* Fixed asset investments in railways halted a two-year contraction showing the first year-on-year (y-o-y) increase in November 2012 - a result of the stimulus measures announced in September 2012. The liquidity surge and base effects have fuelled growth in railways fixed asset investments, touching 26% yo- y growth in February 2013. Since growth has moderated, but we have adjusted our forecasts upwards for 2013 to factor in this steep increase. We forecast railways infrastructure industry value to reach CNY234bn (US$36.6bn), registering growth of 5.2%.
* Following two years of a marked deceleration in real estate fixed asset investments we are seeing a sustained revival in fixed asset investments in the sector. New curbs in property speculation came into effect (as anticipated) in March 2013, though they are not as strict as the ones implemented previously. Last quarter, we intervened in our 2013 forecast to increase growth significantly as base effects take charge of the market. Long term, we maintain our view of a deceleration in residential and nonresidential construction industry value.
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