Case study: How does China pay for her infrastructure? – An introduction

The Chinese government has consistently maintained public spending on infrastructure development as a means of modernising its economy. In the last decade, government stimulus programs and development plans have driven significant growth in infrastructure investment which has increased from US$0.62 trillion in 2008 (13% of GDP) to US$2.1 trillion in 2015 – accounting for approximately 20% of GDP.

Nonetheless the investment challenge remains acute, with research conducted by McKinsey forecasting the infrastructure investment needed in China to be approximately US$16 trillion through to 2030. This constitutes an investment of 6.4% of GDP, just to maintain stock of assets at current levels.

In 2019, China invested over US$120 billion in its ten largest infrastructure projects by value, despite its economy showing signs of slowing growth. In terms of source of capital, public funding continued to provide the majority of that investment, but interview-based discussions highlight a concerted attempt in recent years to expand international private investment.

The increased government investment has seen China improve markedly in terms of its infrastructure quality ranking. In the 2018-2019 World Economic Forum Global Competitiveness report ranked China 36th in terms of   infrastructure quality, improving from 46th overall in the 2017-2018 report. Interviews with policy makers and prospective investors highlight that the scale of economic ambition pertaining to infrastructure quality will necessitate a pronounced increase in private infrastructure financing, which will be a comparatively new phenomenon.

In contrast to developed economies such as the UK, where approximately 70% of infrastructure is funded by private sources, infrastructure investment in China has historically been undertaken by the state. The Global Infrastructure Hub estimates that total Infrastructure investment in China amounted to US$3.3 trillion over the five-year period 2013-2018. It is noteworthy however that private investment constituted a mere US$10 billion of that total.

The Chinese National Bureau of Statistics (CNBS) confirms that 78.9% of fixed assets infrastructure investment by value (approx. US$1,986 billion) are classified as “stateholding”, while the remaining 21.1% (approx. US$530   billion) is financed by either public-private joint ventures or private sector investors. Furthermore, as highlighted by Ansar et al, state-holding investment has had the most pronounced growth, from US$0.5 trillion in 2008 to US$1.45 trillion in 2015, which is largely a direct consequence of government-led development programmes initiated after the 2007/08 Global Financial Crisis.

There are emerging opportunities and reforms which may alter the infrastructure investment landscape and present extensive opportunities to international investors. Interviews with policy makers and advisors showcased how China’s continuing urbanisation offers a major flow of extensive infrastructure projects and associated investment opportunities. In addition, a number of institutional investors contributing to this research implied that major reforms and guidelines have improved the investment environment, and paved the way for significant international investment in railways, gas pipelines, telecommunications and clean energy in recent years. From a very marginal position, the private investment market has expanded markedly in recent years, constituting circa 9.4% of the entire market composition in 2008 (equivalent to US$60 billion) and increasing to approximately 18.3% (or US$461billion) in 2017.

• Next week: Financing the biggest infrastructure project in history – the Belt and Road Initiative.