China Infrastructure Report Q3 2008

Major infrastructure projects in preparation for the Olympic Games in Beijing have been completed. The Olympics are an event of great national pride for China and have been a major incentive and boost for infrastructure development around the capital. But by no means the only one. Arguably a more powerful motive were the targets set by the 11th Five Year Plan (2006-2010), which gave rise to the momentum behind spending in infrastructure nationwide. China is currently right in the middle of this period of development and we anticipate that the momentum in infrastructure spending will remain. In BMI's Q308 China Infrastructure Report we forecast that the construction industry in China will grow by 9.79% in 2008, reaching a value of CNY 2,213.99mn.

In the first and second quarters of 2008 major projects were announced or begun construction across the range, such as the new cross-sea bridge to Hong Kong, China's first new generation nuclear power plant, and the planning of new cities along China's coast. China's infrastructure needs have expanded and foreign expertise has been recruited to meet the demand for bigger and more advanced structures. Foreign majors involved include Alstom, which is developing hydropower projects, while Westinghouse is exporting its third generation nuclear technology. Nevertheless, foreign penetration into the market (either in the form of PPPs or direct investments) has been very limited compared to the needs for development, with major Chinese giants like China State Construction Engineering Co. and Shanghai Construction Group for instance, taking the lead in their respective fields. Most significantly, Chinese companies are also developing the expertise to built high-tech equipment for transport and utilities, therefore giving China the capability to domestically produce bullet trains, wind turbines and even new generation nuclear reactors in the future.

A rapid pace of development is, however, marred by poor labour conditions, high levels of corruption and a decrepit legal system. Additional problems are surfacing regarding the cost of raw materials that are bound to take their toll on the construction sector, although arguably the large state-owned players that dominate the market are more resilient to project cost inflation and therefore we do not expect to see a slowdown of the construction activity or cancelation of infrastructure project during our forecast period, but see it as a risk for thereafter, if the prices in global markets do not abate.

According to BMI's forecast the economy will continue its robust growth, growing by 10.7% in 2008, despite the efforts of Beijing to curb growth to offset potential overheating of the economy.