Core viewpoints

The recent 11th meeting of the Central Financial and Economic Commission and the meeting of the political Bureau further confirmed that infrastructure will become the main logic of steady growth this year. With the increase of special debt capacity of local governments in the first half of the year, the marginal improvement of urban investment and financing + low base effect in the second half of the year, the growth rate of infrastructure investment for the whole year is expected to hit 10%. Focus on the direction of infrastructure development: ① special bonds focus on areas such as transportation, municipal and industrial parks; ② water conservancy investment is flexible in the short term, and the space for the whole year is relatively limited; ③ new energy and power systems; ④ digital infrastructure may be the direction with the greatest long-term flexibility.

Two recent blockbuster meetings have highlighted the importance of infrastructure in China's economy this year.On April 26th, General Secretary Xi Jinping presided over the 11th meeting of the Central Financial and Economic Committee to study the issue of comprehensively strengthening infrastructure construction. The meeting discussed the important significance of comprehensively strengthening infrastructure construction, with emphasis on five major areas. Subsequently, on April 29, the political Bureau of the CPC Central Committee held a meeting and proposed that "all-out efforts should be made to expand domestic demand, give play to the key role of effective investment, strengthen the protection of land, energy use, and environmental impact assessment, and comprehensively strengthen infrastructure construction." and put it at the top of the draft. Considering the current domestic and external economic environment, infrastructure development has become the core focus of this year's stable growth policy.

Infrastructure investment is expected to maintain a high growth rate of more than 10% in the first half of the year.In the fourth quarter of last year and the first quarter of this year, new bond issuance by local governments increased sharply by 2.1 trillion compared with the same period last year, and the proportion spent on infrastructure increased to 68 per cent.

From the perspective of local new debt (general debt plus special debt), it is estimated that from the fourth quarter of last year to the first quarter of this year, the amount of new debt invested in infrastructure increased by nearly 1.9 trillion compared with the same period last year. This has been well verified by the fact that the growth rate of infrastructure investment exceeded 10% in the first quarter, and the large increase in special debt made up for the gap in urban investment financing. Although the April epidemic may slow down the pace of infrastructure investment in a single month, as the domestic epidemic gradually improves from May to June, from a financial point of view, it is a high probability that infrastructure investment will grow by more than 10% in the first half of the year.

The relaxation of the margin of urban investment and financing + a low base is the support of infrastructure in the second half of the year, and infrastructure investment in the second half of the year is also expected to impact the growth level of 10%.The financing constraints of urban investment in the past few years are indeed the biggest obstacle to infrastructure investment. This phenomenon became more prominent in the third quarter after the 15th article in the middle of last year, when infrastructure investment grew almost zero (two-year average) despite the large amount of new special bonds issued. According to our estimates, in the quarter after the introduction of the 15th document last year, the capital from urban investment decreased by more than 150 billion yuan a month compared with the same period last year.

However, from the "Article 23" of the Central Bank to the 11th meeting of the Central Financial and Economic Committee, the expression of urban investment has changed marginally, and urban investment and financing may enter a relatively loose cycle this year. Assuming that the infrastructure financing increase of broad urban investment in the second half of this year can return to the level of the second half of 2020, then the growth rate of infrastructure investment in the second half of this year is also expected to hit 10 per cent.

This year, there are several key directions for the combination of new and old infrastructure investment:

First, the focus of special debt is on transportation, municipal and industrial parks.Among the three major areas in which special bonds are invested, the proportion of bonds issued by transport infrastructure, municipalities and industrial parks has all expanded since the fourth quarter of last year, while the proportion of affordable housing projects has declined. This is also in line with the "opinions on promoting urbanization with county towns as an important carrier" recently issued by the State Council. From the perspective of special debt, we think that transportation infrastructure and urban infrastructure investment may be the more flexible direction this year.

Second, the short-term flexibility of water conservancy investment is large, and the space for the whole year is relatively limited.At the beginning of the year, the National standing Committee made it clear that the relevant procedures should be simplified for projects listed in the planning and conditions, especially the implementation of major water conservancy projects that had been demonstrated for many years. According to Wei Shanzhong, vice minister of water resources, water conservancy-related investment is expected to be about 800 billion yuan in 2022. 800 billion of water conservancy investment corresponds to an annual growth rate of 5.6 per cent. Although the growth rate is not high, it is ahead of the pace-water conservancy investment increased by 10 per cent in the first quarter of this year compared with the same period last year.

Third, investment in new energy and power systems is timely.The power generation installed capacity corresponding to the "14th five-year Plan" target needs to achieve an average annual growth rate of 6.4%. In order to achieve the dual-carbon target, it is also necessary to speed up the increase in the proportion of new energy. With the rapid growth of national electricity consumption and maximum power load, higher requirements have been put forward for power supply protection. It is expected that photovoltaic, wind power and other new energy investment and power grid investment are expected to maintain a high growth level.

Fourth, digital infrastructure may be the most flexible direction in the long term.The government attaches great importance to the development of digital technology and digital economy. Judging from the expected development indicators of the digital economy in the 14th five-year Plan, the added value of the core industries of China's digital economy accounted for 7.8 percent of GDP in 2020, and it is estimated in the 14th five-year Plan that this proportion will increase to 10 percent by 2025. The scale of the software and information technology service industry has nearly doubled, and the popularization rate of industrial Internet platform applications has increased by two times. The three-year Action Plan for the Development of the New data Center (2021-2023) requires that the average annual growth rate of the rack size of the national data center will be maintained at about 20% by the end of 2023. This means that long-term investment in digital infrastructure may need to grow faster than in other areas.

Risk factors: uncertainty of domestic epidemic situation; credit risk event; change of urban investment and financing policy.