China Infrastructure Report Q3 2009

The strong results of China Railway Group (that has been bolstered by new government contracts), as well as the existence of several ongoing infrastructure projects, are clear signs of sustained activity in China's infrastructure sector. These developments put China's infrastructure sector on a positive footing to achieve the 7% industry value real growth rate that BMI forecasts for 2009 and 2010.

According to the Beijing Municipal Development and Reform Commission, as cited by China Knowledge, Beijing alone is planning to spend US$160bn in infrastructure projects in 2009. Infrastructure projects will represent 35% of the municipality's fixed asset investment in 2009, a 4% rise from 2008.

This is quite a surprising announcement given the significant investments in the city that were already made in preparation for the Olympic Games. The pledge does highlight the high government commitment to infrastructure spending, but we also believe it raises questions as to whether or not the funds are being allocated where they can maximise productive capacities.

In this Q309 China Infrastructure Report, we maintain our forecasted growth levels for 2009 and 2010 at 7%. We anticipate that the growth rate in the industry value will decelerate thereafter as the stimulus expires and the government focuses on rebuilding its savings, leaving the industry to its own devices. Our outlook for the actual effects of the stimulus plan is in line with the local industry view which has been expressed in various press reports over the past quarter. Accordingly, the situation will normalise and positive effects for the industry will be felt towards the end of Q409. In tandem, the demand for raw materials will also rise (steel and cement), though huge stockpiles will mean that there is plenty of domestic supply to sustain the initial phases of the infrastructure plan, and thus demand for building material imports is expected to rise in H110. For 2009, BMI forecasts that the industry value will be CNY1,770bn and will rise to CNY1,882bn in 2010.

According to BMI's revised Infrastructure Business Environment and Project Finance Ratings, China's infrastructure business environment and investment risks are relatively low. For the business environment, the country achieves an overall score of 69 out of 100, coming in at second place in the Asia Pacific region. The score is bolstered by strong industry growth and the large size of the market. The Project Finance ratings offer a more mixed picture. The overall score is 60.4, suggesting a moderate level of potential risks throughout a project's life cycle in the country. However, according to our tables, the market does present higher risks in the Design and Construction phase when compared to other markets in the region. When compared to other regional markets in the Commissioning and Operating phases, meanwhile, the risk environment in China is more appealing than others. This could mean there is greater chance for revenue generation to become disturbed in the longer term.