Infrastructure projects will lift China’s economy higher in 2nd half

With China’s housing market making a recovery and June’s economic numbers surprising to the upside, buy-side investors in Hong Kong are feeling more confident that the economy has bottomed out.

For the second half of the year, Asia Unhedged expects to see acceleration in government-led infrastructure projects, especially the One Belt One Road economic corridor. The One Belt One Road corridor, which will stretch across Central Asia to both Europe and Africa, contains many smaller projects in the areas of coal and gas, mining, electricity, telecommunications, infrastructure, agriculture, and people-to-people exchanges that will help trade and capital flow.

And the government is putting a lot of money into these projects.

As we’ve reported before, China is birthing not one, but two development banks this year. Tuesday saw the launch of the New Development Bank by the BRICS nations (Brazil, Russia, India, China, South Africa). It will start with $50 billion. Last month, China’s baby, the Asian Investment Infrastructure Bank (AIIB), signed its articles of agreement. The AIIB will start with $100 million in capital.

Both banks will make loans to fund infrastructure and development projects, and China is sure to be running quite a few of those.

Add to that China’s key policy banks. We reported earlier that the China Development Bank (CDB) plans to invest more than $890 billion into the One Belt, One Road initiative. This money is expected to fund 900 projects involving 60 countries.

Then on Wednesday, the People’s Bank of China injected $31 billion into the CDB and Export-Import Bank of China.

As the People’s Bank of China guides the banking system’s firing power into the real economy, including bonds issued by local governments, there is no doubt in our mind that China can keep up its growth momentum even in the face of a quieter financial market. Industrial production for the second quarter grew 6.3% year over year, compared with 6.4% growth in the first quarter.

Screen Shot 2015-07-23 at 9.27.30 AMAfter significant growth last year, the transportation and IT segments have slowed increasingly this year. But the PBOC is very supportive in its pledged supplementary lending (PSL) to the China Development Bank.

The money will be used mainly for rail, water facilities and slum rebuilding. Recovery in these two fields will be led by the developments in the “One Road, One Belt initiative,” which are expected to support industrial production  at the current levels.

Investment quickened to 11.4% y-o-y in the full 1H15, on par with the first five months. Infrastructure regained Screen Shot 2015-07-23 at 9.27.50 AMmomentum in June but industrials slowed further. Local governments are supporting investments as they issue more local government bonds and extend fiscal expenditure. At the same time, SOEs are trying to fan the fire. FAI in 2H15 will have better growth momentum. Private investments are at 10.2% y-o-y in June, on par with May.

 

Retail sales growth accelerated to 10.6% y-o-y from May’s 10.2%. Going into 2H, the consumption picture will remain stable at 10.5% y-o-y. June’s retail sales growth is driven by automobiles, home appliances and medicine. Automobile sales growth edged higher but the pickup is viewed only as a hiccup. As more discounts have yet to move inventories at dealers, the automobile sector will face a Screen Shot 2015-07-23 at 9.28.12 AMtough 2H.

 

On the bright side, the recent real estate market recovery should give strength to home appliances and furniture sales as home buyers upgrade to bigger apartments. This should continue into 2H15. Retail sales via the internet in the first six months remained high at 39.1% y-o-y, dropping a small 20 bps from the first five months. Sales growth on the internet is expected to stay at 30-35% in 2H. Altogether, that gives us a stable 10.5% y-o-y.

 

 

 



Categories: Asia Unhedged, China

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  • James Jerome

    All praise to the greatest economic project in the History of the world led by China, and without the US and Israel, who will try to sabotage it.

  • Mr. Bernard Wijeyasingha

    Read the article and the comment. China’s incredible economic progress deserves praise, but that progress really started when Nixon helped China open her economy in 1979.
    Many think that China’s economy will progress on the ashes of the US economy. That cannot be more far from the truth. A good deal of China’s growth is export driven. If the US economy completely crashes in a similar manner to Greece, and if the US Dollar crashes, so will China and good deal of the world. That is part of the “global village”, a term coined in the 1990’s of an increasingly interdependent world .
    The US is the world’s largest economy pegged at around 15 to 18 trillion dollars. This economy also holds the world’s largest debt. China of all nations cannot afford the collapse of
    the US
    The EU
    The Middle East
    for China is not an island, nor is India and least of all America.