Coronavirus deals blow to China’s transport sector

S&P Global Ratings expects ‘substantial disruption’ to sector revenue in the first half of 2020 in mainland China and Hong Kong.

The significant reduction in the movement of people and goods in China and Hong Kong due to the covid-19 outbreak, which the World Health Organisation classified as a pandemic on Wednesday, is “denting the margins of the region’s transport infrastructure sector”, S&P Global Ratings said in a report.

As a result, the ratings agency expects “substantial disruption to sector revenue in China in the first half of 2020”, with a recovery occurring in the second half, followed by a strong rebound in 2021.

Toll road operators have already been affected, with China imposing a nationwide moratorium on toll collection on 17 February indefinitely, though S&P expects it will remain in force until the end of June.

“This may stress the liquidity of some toll operators,” S&P said, noting that China’s toll road sector has incurred a growing annual shortfall in toll revenue needed to pay debt and operating expenses. By the end of 2018, all construction-related debt of the sector amounted to 5.69 trillion yuan ($800.4 billion; €712.3 billion), with more than 80 percent comprising bank loans, primarily from state-owned banks.

Senior director at S&P Global Ratings Gloria Lu said, in China, most developers of transportation infrastructure projects are state-owned enterprises, whose investments are guided by the official policies and goals as well as subject to relevant funding constraints.

“We have observed that so far the plans of transportation infrastructure investment at both central and local government level remain stable, and are by and large similar to, or slightly bigger than last year,” Lu told Infrastructure Investor.

“However, these plans could be revised upward by the governments in order for stronger fiscal stimulus to contain the economic fallout of covid-19, although, so far, the fiscal stimulus has been moderate.

“We believe major Chinese commercial and policy banks will be more willing to finance transportation infrastructure projects, compared to other sectors, as these projects are supported by the governments and generally have low but stable operating cash flows.”

Fear of contagion has also affected public transport, with MTR Corp, Hong Kong’s state-owned rail company, experiencing a 50 percent drop in passenger volume in the first half of February. The company is expected to suffer more revenue losses since it offered a 50 percent rent reduction for the months of February and March to its small- and medium-sized tenants at its train stations and shopping malls.

Ports and airports

Chinese ports are also impacted with the reduction in cargo volumes resulting from 14-day quarantine requirements, disruptions to the country’s supply chain and manufacturing and global trade uncertainty. According to figures released by the General Administration of Customs on Saturday, the country’s exports dropped 17.2 percent in January and February, compared with the same period last year. Imports fell 4 percent year-on-year.

Last month, 16 Chinese ports and port groups began to waive and cut port charges. The list includes Shanghai’s container port, the world’s largest, as well as other major ports such as Guangzhou, Ningbo-Zhoushan, Jiangsu and Shandong. S&P expects volume at Shanghai’s container port to decrease by between 3 and 5 percent in 2020.

As for the aviation sector, covid-19-induced travel restrictions have grounded about half of the aircraft operated by airlines in greater China, S&P said.

“Airport revenue generation and growth are directly linked to traffic levels,” Stefano Baronci, director-general of Airports Council International Asia-Pacific, said last month. “We can therefore expect declines of significant proportion for airports in affected markets in the first quarter. However, the ripple effect will be felt across many airports beyond our region.”

According to China’s Ministry of Transportation, the country’s aviation sector saw a drop of 47.5 percent in passenger volume during the 40-day Lunar New Year period compared with the same period in 2019.

“It is concerning that China, which contributed close to 60 percent of the 2019 traffic increase, will no longer be able to fuel growth in this first part of 2020,” Baronci said.

From a macro perspective, the impact of covid-19 across all economic sectors, has led S&P to revise its GDP growth forecast for the country from its December estimate of 5.7 percent to 4.8 percent with a downside scenario of 2.8 percent. Hong Kong’s expected GDP growth was also revised downwards from 0.2 percent to -0.8 percent.