Photographer: Qilai Shen/Bloomberg
China’s Infrastructure Binge Is Set for a Major SlowdownBloomberg News
Economists surveyed by Bloomberg see pace easing to 12% YoY
Goldman sees investment shifting to manufacturing gradually
China’s frenzied construction of roads, bridges and subways is set for a major slowdown, adding a headwind to economic growth in 2018.
The nation’s fixed-asset investment in infrastructure will grow 12 percent next year, according to the median estimate in a Bloomberg survey, down from almost 20 percent in the first ten months this year. All 18 economists in the survey anticipated a moderation, adding to reports by Morgan Stanley, Goldman Sachs Group Inc. and UBS Group AG predicting a similar trend.
The cooling construction fever is taking shape as authorities renew a pledge to focus on debt management following the Communist Party Congress in October. In a rare move, China has suspended subway projects in some cities, and scrutiny has also toughened on public-private partnerships -- until now a widespread way to fund projects.
The easing could even threaten global capital expenditure growth, as China represents one-fifth of the world’s total investment, according to estimates by Oxford Economics.
"China is stepping up efforts in deleveraging, reduction of overcapacity, pollution control and reining in property prices," said Robin Xing, chief economist at Morgan Stanley Asia Ltd. in Hong Kong. "So we believe investment in property and infrastructure will slow down, leading to the deceleration in the economy."
Xing estimates the slowdown will dent demand for commodities, while having a limited impact on employment and consumption, given resilience in the "new economy" led by services. The bank forecasts infrastructure investment growth to slow to about 13 percent next year and 12 percent in 2019.
While slower infrastructure growth may weigh on the overall expansion, it may also aid the nation’s transformation toward a more-balanced growth model. The building boom, while promoting connectivity and urbanization, has also swollen the nation’s debt pile -- reaching 259 percent at the end of 2016.
According to Goldman Sachs, deleverage efforts will be felt mainly in the "old economy" and a gradual rotation of investment to the manufacturing sector is possible, economists led by Andrew Tilton wrote in a recent report. They forecast infrastructure investment will increase 12 percent next year and 10 percent in 2019.
As of the end of October, China had spent 11.3 trillion yuan ($1.7 trillion) on infrastructure this year, almost matching 2016’s full-year figure. That was supported by the state’s previously-generous stance on PPP projects, now set for leaner times amid the focus on deleveraging.
The Ministry of Finance last month banned local governments from guaranteeing returns for private investors in PPP projects or backing a project’s debt. The national watchdog for state-owned enterprises also published rules to regulate state companies’ participation -- a potential blow to a major source of funding.
"A change in central government’s attitude towards PPP does not bode well for infrastructure in 2018," according to Yao Wei, chief China economist at Societe Generale SA in Paris. "A slowdown from the rapid pace this year looks inevitable."
To be sure, even at its slower growth pace, infrastructure remains an important contributor to China’s output and the government can always ramp up spending again should it need to maintain economic growth.
Infrastructure investment "grew much faster than other investments in the past five years," Larry Hu, chief China economist at Macquarie Securities Ltd. in Hong Kong, wrote in a note. "Policy makers might be able to accept slower growth for infrastructure spending from next year, as the growth in the past five years is unsustainable."
— With assistance by Cynthia Li, Yinan Zhao, Xiaoqing Pi, and Jeanette Rodrigues