China’s infrastructure investment remains weak, analysts say full-year growth could be lower than 1%

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China’s infrastructure investment grew 1% year over year in the first ten months, slowing by 0.5 percentage points from the first three quarters, according to data released by the National Bureau of Statistics (NBS) this week.

“Overall, infrastructure investment this year has been lower than our expectations and in particular in the second half, the growth has remained weak against the backdrop of sliding real estate investment and a pick-up in local government special-purpose bond issuance,” said Luo Zhiheng, deputy research director of Yuekai Securities.

Gao Ruidong, chief macro economist at Everbright Securities, noted that the slower growth this year is partly due to higher comparison base last year. “The two-year average growth in October was 0.9%, actually picking up slightly from the 1.8% drop in September and the 1.6% drop in August.”

Gao believes that, as local government bond issuance is expected to accelerate further in coming months and several regions recently launched some large projects, more pick-up in infrastructure investment is expected, but the upside room will be limited.

“The pickup in two-year average growth is a good sign. While infrastructure investment growth largely matches our expectations, its still relatively low compared to the manufacturing sector and real estate development,” said Wang Jingwen, macro analyst at Minsheng Bank.

Wang expect the growth to slightly rebound in the fourth quarter as the government will be more willing to conduct counter-cycle adjustments to stabilize economic growth amid rising downward pressure. She expects full-year infrastructure investment growth to be around 1.2%.

“China’s economic growth target for this year is above 6%, which is not hard to get, but there is great pressure for achieving the target of energy control, which means the government will likely control the pace of infrastructure project starts and scale of the projects, said Wang.

According to Luo’s estimates, full-year growth of infrastructure investment will be around 0.5% and the growth of infrastructure investment excluding public utilities will be only about 1%.

Infrastructure investment has been slowing since 2018, ending years’ double-digit growth, as Beijing stepped up measures to prevent local government debt risks and that has led to declines in funding for infrastructure projects, analysts say.

Meanwhile, there have been fewer qualified projects as authorities raised requirements for projects in terms of risks and business prospects.

In 2020, infrastructure investment grew by 0.9% due to the impacts of the Covid-19 pandemic.

The persistently sluggish infrastructure investment was attributable shrinking funding as well as fewer qualified projects and lower local government intensions, Luo said.

Local governments’ infrastructure projects have five major funding sources – self-raised funding, funding from national budget, domestic loans, foreign investment and others. Self-raised funding is the biggest source which accounts for 63.8% of the total, and the funding usually comes from local government fiscal revenue, local government special-purpose bonds, local government financing vehicle (LGFV) bonds, public-private partnerships (PPP) and so-called non-standard financing.

“As real estate regulations tightens, pressure on hidden local government debt rises, PPP projects are more regulated and tougher regulations on asset management reduced non-standard financing, local government’ total self-raised funding for infrastructure projects has declined. That is major reason for slowing infrastructure investment,” he said.

Luo added that infrastructure investment growth may pick up in 2022, but will never go back to the fast-growth days.