Chinese Infrastructure Projects Flounder

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Monday, June 15th, 2015
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Key sectors of the Australian economy could be hard hit by a slowdown in Chinese infrastructure development.

Setbacks and delays are plaguing infrastructure projects in China with increasing frequency, posing a major impediment to economic growth given the country’s continued reliance upon fixed-asset investment.

While China has long been renowned for the whirlwind pace at which it creates skyscrapers, infrastructure assets and even entire cities from whole cloth, the reality on the ground is that major construction projects are becoming increasingly fraught with difficulty and delay.

A study published toward the end of last year by government-affiliated economists showed that the rate of delivery for infrastructure projects had dropped to 60 per cent over the past decade, as compared to highs of 79 per cent in the 1990s.

A recent Thomson Reuters survey found that the median time it now takes for construction and building material companies in China to obtain payment from clients had hit 177.23 days – twice as long as the figure five years ago. Official data further indicates that growth rate for fixed-asset investment during the January-April quarter was China’s lowest in almost a decade and a half.

These problems could severely impede stimulus effect of the $US320 billion in infrastructure projects announced by the Chinese government since the start of last year as part of efforts to prop up flagging growth.

Major projects that have recently stalled include a gargantuan affordable housing project in Shanghai intended to house almost 40,000 residents, as well as a slew of over 100 developments in the Shanxi province coal hub of Datong.

According to economic observers China’s construction sector will continue to be stifled by Beijing’s efforts to curb the exorbitant off-sheet debt burden of local governments and foster the development of the municipal bond market.

In particular, the central government’s efforts to shift the funding model for local government could leave key construction projects hard hit during the transitional period.

“The transition of local infrastructure project financing from local government financing vehicle (LGFV) loans to public/private partnership and provincial government bonds has resulted in a lot of new projects being unable to secure sufficient funding,” said Credit Suisse analyst Vincent Chan.

“The old financing channel is closed and the new one has not been established yet.”

The slowdown in growth that this creates could have heavy implications for the Australian economy – in particular the iron ore sector, given its heavy dependence upon the Middle Kingdom’s market.

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