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Project approvals don't herald a new wave of stimulus
By Ma Jun |
September 17, 2012, Monday
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ON September 5 and 6, the National Development and Reform Commission (NDRC) approved 22 subway projects and some other transport projects with a total investment of about 1 trillion yuan (US$158 billion). Many journalists and commentators believe that these approvals represent a new stimulus package, and as a result, the share prices of many construction-related companies jumped September 7.
However, we believe this is a misunderstanding, as these projects are part of the ongoing 12th Five-Year Plan, and its impact on GDP growth in the near term will be negligible. Our specific points on these projects are as follows.
These projects are part of the 12th Five-Year Plan for transport sector investments. According to the 12th Five-Year Plan released in March 2012, the total length of subway lines should increase by 5,600 kilometers by 2020.
The subway projects announced in the past few days (with a total length of about 1,100 kilometers and a total investment of about 700 billion yuan) are part of this plan. In fact, the projects announced were approved individually between April and August.
The yuan amount of subway investments could be revised up marginally, but its impact on the overall economy could be minimal. The 12th Five-Year Plan includes a projection of the length of new subway lines, but not the yuan amount, partly due to the uncertainty of costs. So, analysts have made their own assumptions on construction costs and based on these assumptions made forecasts of total capital expenditure.
Given the announced yuan amount of the 25 new subway projects, it is possible that analysts will revise upwards the total yuan amount of investments for the next five years by 10 percent.
Note that subway projects account for only 1 percent of fixed-asset investment in China. So, the 10 percent upward revision to subway project investments implies a 0.1 percent increase in total fixed-asset investment, or a 0.05 percent increase in GDP growth, all other factors being unchanged.
These subway projects are medium- and long-term investments which typically last four to eight years, and, therefore, the annual average investments will be a modest 150 to 200 billion yuan. In other words, these projects are not primarily intended to boost GDP in the coming one or two quarters.
No guarantee
Unlike the 4 trillion yuan stimulus package in 2009, the funding of these projects announced in the past few days is not guaranteed in the short term. It is required that the sponsors of these projects come up with a capital of at least 20 percent (funded mainly by local government revenue) and the rest would be financed by bank loans, bond issuances and other sources.
Given that land revenue (accounting for 20 to 30 percent of local revenue) fell 28 percent year on year in the first half of this year, banks are reluctant to finance local-government financing vehicle projects, and foreign direct investment is falling year on year, it would be difficult for some local governments to fund these projects in the near term after the approvals. The NDRC may be able to increase its quota for the issuance of enterprise bonds a bit more, but its size is too small to make a meaningful difference. Note that the issuance of enterprise bonds may reach 800 billion yuan this year, compared with total new bank lending of about 8.2 trillion yuan and a total fixed-asset investment of about 36 trillion yuan this year.
To conclude, we believe that the recent project approvals do not represent a new round of stimulus as funding constraints are not relaxed significantly. Their impact on annual GDP growth, if any, may be 0.1 percent.
Considering the recent weakness in Purchasing Managers' Index and Producer Price Index, and the slowing trend of manufacturing fixed-asset investment, we in fact see a bit downside risk to our second-half GDP growth forecast of 7.6 percent.
The article was based on a research note issued by Deutsche Bank on September 10. The opinions expressed are his own.
However, we believe this is a misunderstanding, as these projects are part of the ongoing 12th Five-Year Plan, and its impact on GDP growth in the near term will be negligible. Our specific points on these projects are as follows.
These projects are part of the 12th Five-Year Plan for transport sector investments. According to the 12th Five-Year Plan released in March 2012, the total length of subway lines should increase by 5,600 kilometers by 2020.
The subway projects announced in the past few days (with a total length of about 1,100 kilometers and a total investment of about 700 billion yuan) are part of this plan. In fact, the projects announced were approved individually between April and August.
The yuan amount of subway investments could be revised up marginally, but its impact on the overall economy could be minimal. The 12th Five-Year Plan includes a projection of the length of new subway lines, but not the yuan amount, partly due to the uncertainty of costs. So, analysts have made their own assumptions on construction costs and based on these assumptions made forecasts of total capital expenditure.
Given the announced yuan amount of the 25 new subway projects, it is possible that analysts will revise upwards the total yuan amount of investments for the next five years by 10 percent.
Note that subway projects account for only 1 percent of fixed-asset investment in China. So, the 10 percent upward revision to subway project investments implies a 0.1 percent increase in total fixed-asset investment, or a 0.05 percent increase in GDP growth, all other factors being unchanged.
These subway projects are medium- and long-term investments which typically last four to eight years, and, therefore, the annual average investments will be a modest 150 to 200 billion yuan. In other words, these projects are not primarily intended to boost GDP in the coming one or two quarters.
No guarantee
Unlike the 4 trillion yuan stimulus package in 2009, the funding of these projects announced in the past few days is not guaranteed in the short term. It is required that the sponsors of these projects come up with a capital of at least 20 percent (funded mainly by local government revenue) and the rest would be financed by bank loans, bond issuances and other sources.
Given that land revenue (accounting for 20 to 30 percent of local revenue) fell 28 percent year on year in the first half of this year, banks are reluctant to finance local-government financing vehicle projects, and foreign direct investment is falling year on year, it would be difficult for some local governments to fund these projects in the near term after the approvals. The NDRC may be able to increase its quota for the issuance of enterprise bonds a bit more, but its size is too small to make a meaningful difference. Note that the issuance of enterprise bonds may reach 800 billion yuan this year, compared with total new bank lending of about 8.2 trillion yuan and a total fixed-asset investment of about 36 trillion yuan this year.
To conclude, we believe that the recent project approvals do not represent a new round of stimulus as funding constraints are not relaxed significantly. Their impact on annual GDP growth, if any, may be 0.1 percent.
Considering the recent weakness in Purchasing Managers' Index and Producer Price Index, and the slowing trend of manufacturing fixed-asset investment, we in fact see a bit downside risk to our second-half GDP growth forecast of 7.6 percent.
The article was based on a research note issued by Deutsche Bank on September 10. The opinions expressed are his own.
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