China eases infrastructure funding to boost growth

The Chinese government has moved to ease borrowing restrictions for infrastructure projects, potentially giving a significant boost to investment and supporting steel demand in the medium term.

Beijing has allowed major infrastructure projects to include special bonds issued by provincial governments as part of the project capital, which can then be used to secure bank loans. The change, announced on 10 June, will cover railways, highways and power and gas projects, among others. Retail investors and insurers are being encouraged to buy the special bonds, while banks are being told to invest in infrastructure projects.

China's construction sector, including real estate and infrastructure projects, accounts for over 60pc of domestic steel use. Strength in these sectors has kept steel mills profitable since 2016.

Beijing has so far allowed provincial governments to issue over 2.15 trillion yuan ($311bn) in special bonds this year to finance infrastructure projects. But infrastructure growth has remained modest by recent standards at 4.4pc in January-April, despite the government saying multiple times that it is accelerating fiscal spending on these projects.

"Financial officials reiterated recently that China still has plenty of policies in its toolkit to offset the impact from the ongoing trade tension with the US," the government said as it announced the rationale for the project financing decision.

The new rules will help increase project capital at large infrastructure projects by Yn100-200bn, while enabling them to secure bank loans worth up to 4-7 times the amount of project capital, analysts at Hua Chuang Securities said.

China's infrastructure investment growth may increase by 3-5 percentage points from last year's levels as a result of this decision, the analysts said. This could add 0.2-0.4 percentage points to GDP growth, which the government is forecasting at 6-6.5pc in 2019.

Analysts at Citic Securities expect the project funding changes to raise infrastructure investment growth by 3-3.5 percentage points this year, but said the impact on the economy is unlikely to be seen before September.

Securities firm CICC put the impact on infrastructure growth slightly lower, at 1.5-2.4 percentage points.

Any boost to infrastructure growth would support steel demand and prices, amid headwinds from slower manufacturing growth because of weaker domestic automobiles sales and the impact of US tariffs on Chinese exports. Real estate investment growth has remained robust this year, and should continue to support steel markets given Beijing is unlikely to tinker with the sector in a slowing economy.

"There is a shortage of capital, and this government decision will significantly strengthen the willingness and ability of local governments to invest in infrastructure," analysts at China Merchant Securities said. Domestic infrastructure and real estate investment will continue to grow steadily, the firm said.

The government decision has boosted share prices and ferrous markets over the past couple of days, Citic Securities noted, although it said the market reaction is largely sentiment-driven.