China to spend over $1.5trn in infrastructure

Deeper debt capital markets could join banks in helping the country plug its infrastructure financing gap. 

China is expected to spend over 10 trillion yuan ($1.5 trillion; €1.34 trillion) in infrastructure over the next five years under the government’s 13th Five Year Plan, Moody’s noted in a report released today.   

Beijing aims to roll out projects across sectors including rail, toll roads, water, ports and airports, power grid and renewable energy. Based on government estimates, spending on railway would total 3.5-3.8 trillion yuan, while toll road, clean energy and power grid investments would come to 1.65 trillion yuan, 2.8 trillion yuan and 1.7 trillion yuan respectively. 

The agency pointed out that while banks, local capital markets and government will remain the key sources of capital, the country is also forging ahead with efforts to attract more private institutional money in a bid to plug the gap. 

Currently, state-owned enterprises are the main vehicles for owning, financing and operating infrastructure projects, with domestic banks the primary source of project financing. Greater diversity in funding is needed, the agency said, particularly from institutional investors. 

The agency expects bank financing to continue to play an important role, especially loans from policy banks such as China Development Bank for greenfield projects, in some cases secured by underlying assets or concessions. The debt capital markets will also provide some funding, in the form of corporate bonds, both onshore and offshore. 

“In this context, a key measure includes the further development of China’s public-private partnership market, and success in this area and with other initiatives will require a transparent and stable policy and regulatory environment that supports long-term investments,” said Ada Li, a Moody’s vice president and senior analyst. 

Since the introduction of a pilot PPP programme in November 2014, China’s finance ministry has included 9,285 projects in its national PPP database with combined investments of 10.6 trillion yuan as of this June. 

However, just seven percent of the projects in the database, accounting for 10 percent of the total investment, had reached the implementation phase. Moody’s believes the reasons behind the low implementation rate include the rapid increase in the number of planned projects listed in the database, lengthy feasibility studies for complex projects like city railways and metros, and some projects being less attractive to investors. 

“One observation in China’s fast-growing PPP market is that it has not attracted genuine private investors in large numbers, with SOEs often taking on the role of project concessionaire instead of the private sector,” Moody’s project and infrastructure finance team said in the report. 

Private investors face challenges including an unfinished contractual legal framework for PPPs and limited clarity regarding the accountability of sponsors, governments and related parties. Also, only a limited number of private investors have the financial means and know-how to bid on large projects. 

Analysts expect the challenges to be addressed through continued reforms and revised regulatory directives. Moody's also reckons funding structures will evolve to meet the country’s infrastructure financing needs. 

The growth of China’s project bond and green bond markets and credit enhanced project financing by multilateral development banks, though relatively new to China, would be further potential catalysts for greater private sector investment in Chinese infrastructure, the agency said.