Infrastructure Stimulus Still Favoured

BMI View: We believe the latest increase in China's railway investment target indicates that fixed asset investment in infrastructure remains the government's favourite tool in stimulating economic growth. Although this increase poses an upside risk to our railway infrastructure forecasts, we maintain our stance that this growth model is unsustainable and could come at the expense of future growth in the infrastructure sector.

China's state-owned railway operator China Railway Corporation (CRC) recently announced that it had increased its spending target for 2014 to CNY800bn (USD128bn). CRC had previously said in January that around CNY630bn would be allocated as fixed asset investment into the railway sector in 2014 (cited from the China Daily), and the revisions to date represent an increase of CNY170bn.

We believe this latest revision to CRC's investment target indicates that fixed asset investment - particularly in the infrastructure sector - continues to be the government's favourite tool in stimulating economic growth. Various economic growth metrics such as trade activity, manufacturing indexes, and rail freight volumes show that China's economy is experiencing a significant slowdown ( see 'Trade Contraction Unlikely To Spur Knee-Jerk Stimulus', April 11 2014). We have seen the Chinese central government gradually increase the scale of its stimulus measures in 2014 to prevent further decelerations in economic growth ( see 'Piecemeal Stimulus Does Not Alter Core View', April 3 2014).

Stimulus The Preferred Way
China - Fixed Asset Investment (FAI) Data, Railways

BMI View: We believe the latest increase in China's railway investment target indicates that fixed asset investment in infrastructure remains the government's favourite tool in stimulating economic growth. Although this increase poses an upside risk to our railway infrastructure forecasts, we maintain our stance that this growth model is unsustainable and could come at the expense of future growth in the infrastructure sector.

China's state-owned railway operator China Railway Corporation (CRC) recently announced that it had increased its spending target for 2014 to CNY800bn (USD128bn). CRC had previously said in January that around CNY630bn would be allocated as fixed asset investment into the railway sector in 2014 (cited from the China Daily), and the revisions to date represent an increase of CNY170bn.

Stimulus The Preferred Way
China - Fixed Asset Investment (FAI) Data, Railways

We believe this latest revision to CRC's investment target indicates that fixed asset investment - particularly in the infrastructure sector - continues to be the government's favourite tool in stimulating economic growth. Various economic growth metrics such as trade activity, manufacturing indexes, and rail freight volumes show that China's economy is experiencing a significant slowdown ( see 'Trade Contraction Unlikely To Spur Knee-Jerk Stimulus', April 11 2014). We have seen the Chinese central government gradually increase the scale of its stimulus measures in 2014 to prevent further decelerations in economic growth ( see 'Piecemeal Stimulus Does Not Alter Core View', April 3 2014).

These stimulus measures continue to centre around fixed asset investment, particularly in the railway sector. Since the start of 2014, the railway investment target for 2014 has increased thrice, from the original target of CNY630bn, to CNY700bn, CNY720bn and finally CNY800bn. The Chinese government has also expanded its investment plans in water utilities and in power generation since the beginning of 2014 ( see 'Greater Water Opportunities Not Without Risks', February 19 2014, and 'Energy Sector Expansion To Bolster Deteriorating Economy', April 22 2014).

However, we have long highlighted that this method of using fixed asset investment to spur economic growth is unsustainable ( see 'Construction On Course For A Slower 2014 Despite Reforms', January 5 2014). Further reliance on this growth model would exacerbate the structural imbalances within the Chinese economy and could come at the expense of future growth in the infrastructure sector. These structural imbalances include a shaky financial system, an overvalued property market, expensive infrastructure build-up, and a huge industrial overcapacity.

Upside Potential
China - Railway Infrastructure Industry Value Forecasts

Overall, the new target of CNY800bn poses an upside risk to our railway infrastructure industry value forecasts for 2014. Should the new target of CNY800bn be realised, we project that fixed asset investment into China's railway sector would increase by 23% from what was achieved in 2013 (CNY651bn). Conversely, the original target of CNY630bn was around 3.3% lower than investment in 2013. We are currently forecasting real growth for China's railway infrastructure industry value to decline from 5.2% in 2013 to 3.1% in 2014.

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Related sectors of this article: Infrastructure, Transport Infrastructure, Railways
Geography: China
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