China Infrastructure Report Q1 2010

This quarter BMI has introduced a new data series for infrastructure and its subsectors (transport and energy & utilities). This is an effort to address a significant deficiency in the availability of globally comparable, infrastructure-specific indicators and forecasts across a wide range of countries. BMI's new infrastructure data series enables users to quantify trends and growth patterns in the infrastructure sectors of the 35 main emerging and developed markets out of the 62 countries in BMI's infrastructure service.

Over the next three years, China will invest CNY2trn (US$292.2bn) in rail construction, reports the Xinhua news agency, with CNY247bn (US$36.1bn) spent in 2009 already. According to the figures released for the first six months of 2009, investments in railway infrastructure increased by 155% over the same period in 2008, to reach CNY201bn (US$29.4bn). Though official statistics have to be taken with caution, the data do highlight tremendous investment in transport infrastructure in China.

One surprising finding from our new data is that up until 2007, infrastructure contributed less than a third of total construction industry value in China. However, we anticipate that the infrastructure stimulus plan in place since the end of 2008 has been a catalyst for growth for the infrastructure sector, and as such we expect a significant increase in its contribution to overall construction industry value from 26.6% in 2007 to an estimated 45.3% in 2009, equivalent to CNY823bn (US$120bn). Transport infrastructure is forecast to contribute nearly 60% of infrastructure industry value throughout our forecast period.

The impact of the stimulus plan has been impressive. Activity has picked up, with urban fixed asset investment rising by 35.3% in June 2009 compared with the previous year. We have revised construction industry value real growth for 2009 upwards to 16.9% from the previous 14.5%, which is now equivalent to CNY1.8trn (US$265bn). This is based primarily on our forecasts that fixed asset investments will peak this year on the back of the stimulus plan.

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.

According to the 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 70.8 out of 100, coming in at first place in the Asia Pacific region. This score has been achieved largely on the back of growth expectations, but we caution that China’s position on the top of the regional table masks certain persistent structural weaknesses, such as a lack of competitiveness in the infrastructure market, which is dominated by state-owned firms, and high levels of corruption, which leads to issues with the transparency of the tendering process.

The Project Finance Ratings offer a more mixed picture. The overall score is 59.8, 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.