China's Infrastructure Boom Heading For Rapid Slowdown In 2018

Tyler Durden's picture

There have been signs since October’s Party Congress that China’s infrastructure boom was about to cool off as the leadership seeks to contain debt levels and focus on the quality not the quantity of growth. Subway building is one sector which has seen some high-profile project cancellations. In mid-November 2017, Caixin reported that China’s top economic planning authority, the National Development and Reform Commission, was “raising the bar for subway proposals” – increasing scrutiny in terms of fiscal conditions, population and GDP. In recent weeks, we’ve seen two large subway projects shelved, one in Hohhot, the capital city of Inner Mongolia (worth 27 billion Yuan) and another in Baotou, another Inner Mongolian city (worth 30 billion Yuan). As Caixin noted.

The cancellation of the Inner Mongolia subway projects is having a ripple effect in other cities. Several city governments, including those of Xianyang in Shaanxi province and Wuhan in Hubei province, said in statements that their subway plan are unlikely to win immediate approval under the central government’s crackdown on financial risks related to borrowing for such projects.

The crackdown on local government debt, a key source of infrastructure financing, will have a knock-on effect on Chinese GDP growth. A difficulty for China’s central planners is that the infrastructure share of Chinese fixed asset investment has been on a rising trend, surpassing 20% during 2017 versus just over 15% in early 2014. While we’ve been expecting China’s infrastructure spend to slow next year, we are surprised by the rate of slowdown estimated by Bloomberg, which surveyed a large number of forecasters.

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.

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."

Slowdown or not, the scale of spending on Chinese infrastructure remains vast, about $1.7 trillion during January-October 2017. The pick-up in spending during the last two years followed efforts by the authorities to promote PPP (public-private partnerships) to finance infrastructure projects as one way to limit the growth in local government debt. As is the case with many things related to investment in China, the policy was quickly subject to abuse. In the majority of cases, the “private” partner in PPP projects turned out to be a state-owned firm, which merely added to the state’s debt burden via a different route. Eight local governments have been reprimanded by the finance ministry and the National Audit Office for “disguised borrowing”. We can only imagine the degree of abuse when local governments guaranteed returns on PPP-funded projects. According to Bloomberg.

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."

The challenges for Xi Jinping and his top bureaucrats are mounting, as 2018 looks like it will see the convergence of a host of major reforms of which slower infrastructure spending and altering PPP funding arrangements are a small part. Other major ones include cooling the property market, reducing overcapacity in heavy industry, pollution control, continuing the crackdown on corruption, deleveraging and reforming the out-of-control shadow banking sector.

The China bulls will undoubtedly downplay the scale of these challenges, expecting little deceleration in Chinese growth, helped by a near seamless transition from investment to consumer-led growth. We will be amazed very impressed if Xi can pull it off.
 

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Number 9's picture

shitload of china doom porn tonight

The Darwin Mode's picture

Maybe so Number 9, but we've never seen Keynesianism on the scale that the PBOC is presently attempting, and one could reasonably expect a near-term macroeconomic reality check in China. I'm with you in noticing this surge in anti-China propaganda across American mainstream and alt-media, though.

Number 9's picture

it is starting to become obvious china is kicking some serious ass in diplomacy.

we have Financialization . decaying ghettos and military threats but china has the production..

production always wins..

38BWD22's picture

 

 

Maybe OBOR (new Silk Road) and the BRICS Bank are way over-hyped.  That's my hunch.  I've never been impressed with any of the BRICS, I have (briefly) visited each, and am unimpressed with their long-term prospects.

Not an expert though, take my remarks for what they are worth (not much, but you decide).

Number 9's picture

wars are usually won by how much iron you can sink into the ocean..china wins

computing power..china

missile tech.. russia with china copying

you cant lead the world if you suck at production

 

Five Star's picture

Chinese fixed capital spending as a percentage of GDP since 2000:

http://thesoundingline.com/chart-day-chinese-fixed-capital-investment-ne...

There is no more room to grow

Rjh's picture

How'd production work out for Germany and Japan in WWII?

Albertarocks's picture

Dude, you've gotta raise your bar higher than that.

Giant Meteor's picture

Agreed. Now if he had simply said Jack Ma's ma can blow me ...

Bar higher !

Antifaschistische's picture

but China needs more subways....

because everyone freakin wants a car they don't need, don't have a place to park...

and because of that, the roads are now in major traffic jams...

the mass transit busses, which are very efficient...are now caught in the traffic jams with the people who can't drive worth a shit..

the taxi's can't move...and people are resorting to renting those stupid bikes just to avoid the traffic jams

roddy6667's picture

I have oticed the same thing. They can do what Singapore does. Charge a lot to register a car. A moderately priced car like a Toyota Camry costs about $75,000 to register. A Banz or Audi a lot more. Keeps traffic down.

I see a big future for car sharing apps, where you use you phone to rent a car for an hour or two or for a day, then park it. Works like ZipCar in NY.

NumberNone's picture

I'm sorry but does this mean anything other than more stimulus and Dow 350,000?

Number 9's picture

even if we have to hook up the windmill to its nutsack we are gona juice this fvker.

DaiRR's picture

"Spending on Chinese infrastructure remains vast."  I don't see a big problem.

Juggernaut x2's picture

Paul Krugman, is that you?

roddy6667's picture

ZH has been talking about China's economy or housing or banking or leadership or something crashing as long as I have been reading it. So far, wrong.

radbug's picture

Rio Tinto reported recently that it would only mine its highest grade iron ore (of which it has plenty and its competitors have a lot less) to become the most attractive supplier. Sounds like recession.