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China: China Infrastructure 2012




China Infrastructure 2012


Our view on the unwinding of spending on railways is playing out, with the new figures emerging from China suggesting an 80% reduction in high-speed rail spending year-on-time(y-o-y).In BMI's new Special Statement China 2012: From Miracle to Meltdown, it is clear how much the infrastructure and macroeconomic dynamics in the country are intrinsically tied and how the unwinding of the former is corroborating our below-consensus view on the latter and vice versa. Key themes for China's infrastructure sector this quarter include:

  1. In light of steep falls in the residential and commercial construction front we have revised down our 2012 China construction industry price estimate to 5% real increase. We are maintaining our forecasts for infrastructure and its sub-sectors as we see the trend that we have in place since June 2011 playing out. We expect moderation in the transport infrastructure industry price increase and increase in energy and utilities.
  2. Notwithstanding major changes to regulations and pricing, we expect that there will be an increase in natural gas power plant construction in the coming years given growing Chinese energy request and Beijing's desire to shift energy consumption away from coal and towards natural gas. Natural gas related infrastructure (pipelines and LNG) will flourish as a result, hence our bullish outlook for the sector.
  3. We maintain our muted forecasts for railways and expect to see a deceleration in industry price increase starting this year and running to the end of our estimate period. New data from the Ministry of Railways corroborates this view, indicating a steep unwinding of spending.
  4. Our forecasts for a revival in airport construction are supported by the announcement of a new mega-airport project - to replace the Beijing Nanyuan Airport - should be completed by 2017.
  5. In the housing sector, the government has pledged the construction of another 50mn low cost housing units between 2011 and 2014. While this will drive construction, our concerns over the ability of indebted local governments to meet their share of the funding requirements mean we see risks to the timely implementation of the ambitious scheme.

China offers scale - measured in terms of total construction industry price - and high levels of increase, combined with a high level of capital investment as a percentage of GDP. The combination of these three factors plays strongly in China's favour in our infrastructure risk/reward ratings.

However, the strength of its infrastructure market often masks the high barriers to entry, the opaque regulatory and legal framework and the uncompetitive environment, which have shaved points from the country's in general ratings. As a result, we have revised down the component scores in these categories this quarter. In BMI's Infrastructure Business Environment Ratings, China receives a score of 65.8 out of 100, with its strong infrastructure market propelling it to near the top of the regional table.

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