FAI to remain a key mainland growth driver
Updated: 2011-06-22 07:46
(HK Edition)
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Fixed asset investment (FAI) has played an important role in China's economic growth in the past and it remains a vital factor.
Yesterday, I discussed and shared my views on FAI, focusing more on the property sector. Today I shift my focus to other components of FAI, particularly infrastructure investments.
This year marks the first year of the 12th Five-Year Plan (FYP) and the year before the 18th Congress of the CPC. During the global financial crisis, Beijing unveiled a 4 trillion yuan stimulus plan, while major provinces announced various regional plans.
Planning and construction of many major projects would take several years, and a large part of the projects are related to infrastructure investment. The construction cycle itself would take more than three years.
Meanwhile, local governments' 12th FYP are set for rollout this year. In some of them, we can still see the sentiments of "GDP worship". GDP growth targets for most provinces remains above 10 percent and their investment growth targets exceed 18 percent.
According to various studies conducted by the Ministry of Land and Resources earlier this year, a large number of major investment projects in the areas of infrastructure, strategic emerging industries, social welfare and modern services will be rolled out and kicked off in some provinces this year as local governments try to pursue a good start for their 12th FYP.
As we observed, while the central government has launched another round of property control and credit contractions, urban FAI still posted relatively fast growth in the first quarter. According to our on-the-spot investigations, regional shifts in Chinese industries have become more pronounced since last year.
The construction of a large number of investment projects in Central and Western China may be a major reason for the worsening labor shortage in East China and accelerating national investment growth. As a matter of fact, the central government mandated in its Central Economic Working Conference at end-2010 that local governments should not take advantage of the start of the 12th FYP to launch new projects blindly.
The central government's pre-controls, together with the weakening effect of proactive fiscal policy as well as the tightening credit policy, makes the rapid growth of overall infrastructure investment less likely. However, the actual result will depend on the negotiations between the two levels of government and the dynamic change of the overall economic and political environment.
From the perspective of local governments, infrastructure investment is the key driver of accelerating urbanization. Therefore, it is impossible for the central government to completely reject all the supporting infrastructure projects related to urbanization and regional integration proposed by local governments, such as inter-city rail, urban mass transit and municipal pipeline networks.
Meanwhile, as China's economy now finds itself at a critical point of restructuring, environmental protection, resource conservation and industrial upgrading work all faces unprecedented pressure, demanding a massive amount of related infrastructure investment.
The widening income gap between urban and rural areas as well as food inflation pressure is also pushing Beijing to increase investment in agriculture and water conservancy.
Considering all these factors, the central government will likely allow local governments to launch some projects under the 12th FYP that focus on social security housing, agriculture, water conservancy, education, medical and health care, energy conservation & emission reduction and environmental protection. The investment growth in these sectors should outpace that of last year, driving the overall infrastructure investment growth this year from 18.1 percent to around 20.7 percent.
From the perspective of industry chains, mechanical and electrical equipment as well as building materials industries related to the investments will be the biggest beneficiaries. As such, I expect overall urban investment growth to decline from 24.5 percent in 2010 to around 21 percent this year. Investment in agriculture, mining, urban mass transit, information transmission, computer and software services, scientific research technology services and geological exploration, water conservancy, education, medical and health care industries will grow more rapidly. However, the growth of investment in manufacturing, property and construction industries will slow down further. Given the stronger price effect and lower contribution from inventory investment, the overall investment for this year will make a significantly lower contribution to the growth of GDP, down from 5.6 percentage points last year to 4.2 percentage points this year.
The author is Executive Director of BOCI Research Ltd. The opinions expressed here are entirely his own.
(HK Edition 06/22/2011 page2)