Economic Outllook: China - roaring again?

The Chinese economy and construction sector will continue to be guided by the government’s growth-support policies in the near future. The policy shift that took place in mid-2013 has rejuvenated infrastructure investment in particular.

The main construction story for China is a rejuvenation of infrastructure, particularly within transportation. For example, Guangdong province will invest US$ 16 billion in transportation projects, with over 70% devoted to expressways. The remaining funds will go to other road construction as well as ports and waterways.

This intensive campaign will complete eight expressway projects, begin eight more and continue another 30 road projects in 2014, and is part of an official program to build nearly
2,500 km of expressway from 2014 to 2017.

This is noteworthy because even though Guangdong constructed 5,724 km of expressway up to 2013, ten counties have yet to be linked to the network (an issue to be completed by the end of 2015), and the transport network linking the eastern, western and Pearl River Delta (the core area) portions of the province are not sufficiently developed relative to growing demand.

In addition, the current waterways in Guangdong are not able to meet the requirements of economic growth without further construction, suggesting that sustained high levels of transportation infrastructure are likely for at least the next five years.

Railways and metro systems will also see an infusion of funding. Beijing, troubled by severe traffic congestion, will add an additional four subway lines in 2014, to augment the existing 17 lines that transport an average of 8.8 million people per day. By the end of 2016, 94 km of new track will be laid.

Underground capacity

The trend of exploiting underground space will continue as a way of solving problems with the city’s high urban density, and more importantly, will be followed by other first- and second-tier cities with increasing density issues, such as Guangzhou and Hangzhou.

Shenyang and Wuhan have recently been approved for new metro lines. According to the Ministry of Railways, metro lines will grow from 2,000 km in 2012 to 6,000 km by 2020, requiring up to US$ 650 billion in investment.

Intercity rail has also seen tremendous investment to enable trade flows. Such spending has been exclusively in the government domain, and the national railway corporation is nearly CNY 3 trillion (US$ 495 billion) in debt as a result.

Needing a new means of financing rail projects, China is promoting reforms to fully open railway construction to the private sector, although no majority private ownership will be allowed.

Railway development funds will be established, and new types of railway securities issued. Indeed, Sichuan will allow private capital to hold shares in two state-owned railway companies.

While national regulations on what kinds of private companies are qualified to invest, how they can invest and become controlling shareholders still remains to be worked out. Still, railway reform is a highlight of the 12th Five-Year Plan, and mixed ownership of railways is likely to begin in other regions of China.

Financing reform combined with new project announcements indicate that China will maintain railway investment of about CNY 700 billion (US$ 115 billion) over the next couple of years, roughly the same level as in 2009, when railway investment was ramped up as part of the stimulus program.

Anhui province alone has announced plans to construct a large railway network of 14 inter-city passenger lines and five lines carrying both passengers and freight. The network will be centred on Hefei and will link 11 major cities in the province with 1,485 km of rail.

Residential

Residential construction has been another linchpin of Chinese construction. While there remains concern over excess supply in parts of the market, there is a renewed focus on the neglected lower end of the sector - essentially shantytowns and slums.

There is a need to improve the living conditions of the poorer urban residents who live in crude housing that does not meet safety standards. Between 2013 and 2017, ten million housing units will be refurbished, with about eight million of those in cities. To reach this goal, China will need to renovate between two and three million homes per year at an annual cost of US$ 49 billion. Such renovation could add three percentage points per year to investment growth over the next five years.

Rail and housing construction are elements of China’s urbanisation strategy, and that strategy continues to evolve.

Among 144 of China’s prefectural-level cities, there are plans to expand or establish more than 200 urban areas. Within these areas, there are local plans to build national level financial centres, education centres and cultural centres, which would place these cities in direct competition with well-established centres among tier-1 cities such as Beijing or Shanghai.

The concern is that the rate of urban expansion is exceeding demand by a large margin, with one city with a population of 300,000 having as many as 100,000 housing units entering supply, taking up to 15 years to clear. Central leaders have indicated that new urbanisation policies will focus on developing small towns and cities into medium-size ones, to avoid the pitfalls encountered in developing current mega-cities.

However, the greatest risk with the new plan is that it will entice local governments to continue already unsustainable investment spending, further deepening their debt levels and creating overcapacity in housing, finance and education.

Infrastructure improvements will extend to drinking water, with coverage to 95% of the population by 2015, and improving electricity transmission and smart metering capabilities in city centres.

For waste treatment, the goal is an 86% treatment rate, requiring 73,000 km in new wastewater piping. China is striving for 300 GW of hydropower capacity by 2015, and has approved construction of its tallest hydroelectric dam on the Dadu River with a ten year construction cycle and a cost of US$ 4.02 billion.

The non-residential construction centre remains strong. While diversified across structure types, industrial buildings remain a priority, and there have been some significant announcements about new plants form the automotive sector.

Even so, it is the commercial and institutional structures that will grow the most as the central government makes urbanisation a priority.