China kicks off a “New Infrastructure” investment stimulation strategy to combat the looming economic downturn. If you have not heard of the buzzword “new infrastructure” before, you will hear about it a lot more in 2020.
The strategy is a reflection of China’s Keynesian economy development methodology. Whether it could revive the Chinese economy remains to be seen. But the strategy—now a national new priority—means new demand in the Chinese electricity market.
It brings some comfort to the Chinese energy market, which has been increasingly struggling amid China’s slow-down of growth, trade tensions, as well as the economic disruption due to the coronavirus Covid-19 outbreak.
But who shall benefit from the new strategy?
China’s New Infrastructures Investment Strategy
The concept of “New Infrastructure” is not novel, and made its first debut in 2018 as the state council mentioned it as one of the industry development priorities.
The term’s industry impact was limited in 2019. But that is set to change soon.
In the past January to March, “New Infrastructure” has become a keyword and frequently appeared in Beijing’s economy policy documents. While the State Council was the prime promoter of the term back to 2018, now the communist party’s Politburo Standing Committee stood behind the initiative.
The initiative has become a new priority of Beijing to stimulate the national economy, suggested by the frequent appearance of the term in national economic planning and its top-level supporter.
The scope of the “new infrastructure” sectors have changed over the years.Initially, the strategy is most relevant for the information and telecommunication sectors. But now, Beijing has expanded the coverages of the “new infrastructure” to seven areas:
- 5G
- Artificial Intelligence
- Industry IoT
- Internet Data Centers
- Ultra-High Voltage Transmission Grids (UHVs)
- EV Charging Networks
- Inter-city High-Speed Rails
Some of the “traditional infrastructure investment” areas have also made their way to the list. Two critical energy sectors are included as investment priorities: the UHVs and the EV charging facilities.
We urged the international supply chain to zoom into the opportunity brought by the new strategy.
Key Impacts on Energy: Grid & EV Charging Infrastructure Construction
We expect three direct impacts from the policy:
- the grid companies will revamp UHV constructions; UHV equipment suppliers including international players like ABB and Siemens shall benefit
- electricity market reform may slow down
- electric charging market will see exponential growth, with new infrastructure investors and operators set foot in the heating market
- reduction of national subsidy in the EV sector may be more gradual
- electricity producers face higher pressure to lower prices; such pressure may be more substantial in regions hoping to attract IDC projects
China Would Revamp Ultra-High Voltage (UHVs) Grid Installation
In the past years, China’s top leaders have taken severe measures to limit the market position (or the economic interest) of the two power grids companies in China. [READ MORE on China’s Reform on the Grid: Why is That the Key to Electricity Market Reform in China]
These measures include cutting transmission fees (10% each year), frequent executive shakeups, as well as postponing approvals on grids’ investment plans on the UHVs. [READ MORE on the Executive Shakeup in State Grid, the World’s Largest Utilitiy]
Against the backdrop, both grid companies registered revenue decrease and, as a result, resort to budget cuts in 2020.
But as China’s top priority shift from investment stimulation and safeguarding employment rate, whether Beijing would continue carrying out its reformative measures is up for discussion. We may need to change our prediction regarding the grid companies’ near-term development.
Notably, Shanghai Stock Exchange revealed last week that it had accepted State Grid’s application for issuing ¥80 bond. The firm is preparing for the next construction boom.
Prior to the bond issuing, SGCC already reinstates the plan to build 13 UHVs of total cost ¥196.5bn from 2020 onward. The capital expenditure of SGCC between 2020-2022 would be ¥61bn, ¥67.4bn, and ¥32.4bn.
The massive UHV construction plan have several implications:
- to the grids: Beijing may lift the market and internal reform requirements on the grid companies. As a result, electricity market reform may be temporarily delayed. China’s reform plan to introduce new grid operators to compete with the two incumbents may face difficulties to carry on.
- to the renewable market: the massive grid construction would help the business case of the wind and solar power complexes in China’s northwest and would help to lower renewable waste. However, a majority of the existing UHVs are to transmit thermal power projects instead of renewables. UHV construction’s overall effect on the renewable sector remains to be seen.
- to electricity equipment supplier: major good news as the grids’ budgets are likely to increase.
- to the capital market: companies in the value chain may seek to secure funding from the debt market, leading to more opportunities both for domestic and oversea lenders
China’s Weapons to Save the Economy: Infrastructure & Debt
More on Beijing’s rush to push forward the strategy: why? And why now?
The most obvious answer is that the Chinese economy may be heading toward a “Perfect Storm,” from both slow-down of economics, the US-China trade war, as well as the global pandemic.
Economic growth has been slowly declining over the past years, and the GDP growth target for 2020 was set at ‘around 6 percent’, compared to ‘6 to 6.5%’ for 2019 and 8% in 2010. The trade war with the US is a factor of that lowering trend—besides macroeconomic decisions, purchase targets, and market uncertainty. About two-thirds of China’s provinces and regions and municipalities cutting their growth targets.
The COVID-19 outbreak and the draconian measures deployed in China results in in the extensive disruptions to economic activities, which will deliver a hard blow to the economy.
Beijing, thus, resort to infrastructure construction method as a stimulus.
The method is a proven strategy, an “old trick.” During the financial crisis of 2008-2009, China launched a ¥4tn stimulus package, of which 38% went to public infrastructure. Prior to that, China’s leadership led by Zhu Rongji already deployed this method during 1997 Asia’s financial crisis.
Besides the infrastructure measures, China recently lowered the barrier for companies to issue corporate bonds and urging state-owned banks to buy them. A measure aimed to strengthen companies’ balance sheets and cash positions to weather out the storm. Soon after that decision, some 25 state-owned enterprises (from heavy industry to airlines to drug distributors) issued some ¥24bn (USD 3.4bn) in bonds.
SGCC is one of the 25. But we could well expect more energy companies to seek funding from the bond market.
Would the “New Infrastructures” Save China, Again?
At this stage, it is unclear if these investments will have the desired effect on GDP growth. In theory, these measures could promote innovations and drive demand growth in the above mention areas.
But such a stimulus has its limit and struggle with diminishing effects. As China has been dedicated to infrastructure investment for more than two decades, the economic return from the incremental investment is under question.
The new path of growth is not without risks, too. These investments are financed with borrowed money, and so are many of the initiatives that will be built on it, given the new measure encourages companies to borrow, leading to a higher systematic financial risk. [READ MORE on China’s previous priority to deleverage and push companies to lower debt ratio]