New infrastructure has become one of the major initiatives to boost China’s economic recovery from COVID-19. Broadly defined, new infrastructure will not only facilitate digitization of the whole economy, but also improve people’s well-being. New infrastructure also distinguishes itself from previous boosts in terms of 1) higher multiplier effect; 2) more active private sector participation; and 3) stimulating consumption as well as production.
New infrastructure is critical for driving incremental growth of infrastructure FAI. We estimate that 39% of Guangdong’s key infrastructure investment in 2020 and a quarter of local government special bond issued nationwide in Jan-Feb 2020 is designated for new infrastructure projects. Despite construction delays in 1Q20, we forecast infrastructure FAI to maintain stable at 3.5-4.5% YoY in 2020 (vs. 3.8% in 2019) on back of new drivers and policy support.
Infrastructure investment is a long-term endeavor. Decision making should be market-oriented to ponder risk/return, financial performance and leverage positions as well as executive orders. Policy boost should not come at the cost of taking excessive risks and about that, China has already learned painful lessons in the previous stimulus cycle.
- What is “new infrastructure”? We define new infrastructure in a broad sense, which contains two major categories. 1) Technology infrastructure, which promotes technology deployment. Examples include 5G, data centers, AI, Industrial Internet, EV charging points, etc. 2) Extensions of traditional infrastructure, which enhance weak links of existing infrastructure facilities and improve people’s well-being. Examples include inter-city and urban rail transit, ultra-high voltage electricity transmission, parking lots, cold-chain logistics, etc.
- Why we turn to new infrastructure? The fact that traditional infrastructure investment is losing growth momentum is one of the reasons for chasing new targets. But more importantly, evolution sprouts new demand. Global technology development necessitates the establishment of new IT infrastructure, represented by 5G, data centers, AI, block chain, etc. Bigger cities and regional integration call for mass transit tools like inter-city railway. As economy develops, cities also need parking lots, EV charging pots, logistics facilities, etc.
- How different is it from previous infrastructure boost?
1) Boost consumption as well as investment. Unlike traditional infrastructure facilities which may take years to pay off, technology infrastructure can drive consumption as well as output growth in a speedier way. With 5G and IoT deployment, output of cellphones, ICs, industrial robots and even downstream sales of these products have been trending up since 2H19.
2) Deeper participation of the private sector. Instead of governments playing decisive roles, new frastructure projects actively involve private players so that decision making and execution is more likely to follow a market-oriented procedure, which examines risks/return profile, financial feasibilities, and leverage positions as well as government endorsement.
3) Promote technology diffusion and adoption. For example, the construction of publically available charging points will remove one of the major barriers for NEV adoption so as to achieve 25% NEV penetration by 2025.
4) To give China a head start in the next wave of industrial revolution. It is well acknowledged that 5G and data centers are critical information infrastructure to kick off digitization of manufacturing, services and all other value-creation processes.
- How large is the scale of new infrastructure?
We need to admit that technology infrastructure is dwarfed in construction size by traditional infrastructure, such as railways and roads. But the multiplier effect is seminal. For example, 5G is estimated to incur RMB 1.2tn construction FAI by 2025 but is to trigger RMB 3.5tn investment along its supply chain, let alone investment in other remote industries and derived consumption demand.
In order to gauge the scale of new infrastructure (based on our broad definitions), we examined key construction projects of Guangdong Province. Among the planned RMB 441.2bn infrastructure investment in 2020, we found that RMB 174.2bn, or 39% is planned for “new infrastructure” projects. These include IT infrastructure (RMB 17.2bn), intercity railways (RMB 10.9bn), offshore wind power (RMB 26.6bn), electricity transmission projects (RMB 42bn, including ultra-high voltage ones), and urban rail transits (RMB 62.7bn). Among the newly-launched projects in 2020, 87% investment is designated for new infrastructure.
- Where does money come from? Funding environment for infrastructure projects is amiable. Channels include novel funding sources, such as local government special bonds (LGSBs) and PPP projects, as well as municipal bonds and bank loans. Of the RMB 949.8bn new LGSBs issued in Jan-Feb 2020, we estimate that 82% is planned for infrastructure projects and among this, 25% is for new infrastructure. PPP projects are also viable choices particularly when the private sector involves in construction and maintenance of facilities. Total investment of PPP projects entering execution stage reached RMB 10tn at the end of Jan 2020, and we estimate roughly 24.4% involves new infrastructure according to our broad definition.
- How to avoid spending spree? 1) Adopt market-oriented decision making, to comprehensively assess risk and return; and 2) encourage private sector participation in both construction and maintenance management of facilities to promote efficiency.
- Outlook for infrastructure investment. Major interruptions were caused by COVID-19 in 1Q20 and work resumption rate of the construction sector was barely 60%. We expect infrastructure FAI to post YoY decline of 1-2% in 1Q20 and gradually pick up in 2Q. Over the whole year, we forecast infrastructure FAI growth to maintain stable at 3.5-4.5% YoY (vs. 3.8% in 2019) on back of fresh drivers and all-rounded policy support.
