Boston, MA -- (SBWire) -- 07/31/2013 --As BMI's China Country Risk analysts' expectations for a moderation in economic growth play out, so does our forecast for a slowdown in China's fixed asset investments. The break-up of the Ministry of Railways, which for the past decade has epitomised China's massive infrastructure programme, in our view signals the upcoming moderation (and in some ways, rationalisation) in the infrastructure spending. We maintain our forecasts for 2013 onwards as the infrastructure stimulus plans announced in September 2012 remain in place and in the utilities space the state-onwed energy companies have pledged major projects. This will fuel an uptick in 2013 - as indicated by fixed asset investments figures - but this will dissipate towards the end of the year.
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The new government has been quick to implement changes to the infrastructure programmes in China, starting with the break-up of the powerful Ministry of Railways. The environmental ministry also seems to be more empowered; no doubt on the back of increasingly vociferous public opposition to the deteriorating environmental conditions. These changes suggest to us that the new government is re-thinking several of the previously announced infrastructure projects in transport (especially railways) and power generation and utilities. The massive US$103bn spending for railways in 2013 that was going to add another 5,200km of new tracks (announced in 2013) may be severely scaled down, especially in light of the fact that a principal priority of the new railways entities (China Railway Corporation and State Railway Administration) is to pay down the debt amassed by the MoR.
We had factored in our forecasts the late-2012/2013 infrastructure stimulus to run out of steam in the second half. This view is reinforced by the latest macroeconomic data out of China which have shown growth of 7.7%, much below the market expectations. The fact that the new government allowed such a reading to come out suggests to us that not only are they willing to scale back the stimulus, but also to show that they are weaning the economy away from the fixed assets investment model that has been the linchpin of economic activity the past decade.
This is not to say that large scale spending for projects is going to come to an abrupt halt. We believe that major projects will continue, especially in tier-two and tier-three cities - even though the economic viability of some will remain highly questionable. The plans for a second mega-airport in Beijing testify to the ambitions of the government in terms of building up infrastructure. However, we anticipate that the pace of growth will moderate and projects will be more scrutinised.
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