The economic growth of China owes much to the development of export markets and routes. Ambitious projects such as Belt and Road aim to further facilitate trade across Asia, Africa and Europe. Yet despite investment in infrastructure overseas and massive investment in rail, road and air in China, local businesses have become increasingly concerned that infrastructure is constraining their growth.
Commentators suggest that China will feel the greatest economic effect from the blows and counter blows of the global trade war.[i]
However, it appears that the confidence of business leaders in the world’s second largest economy is unscathed and is, in fact, on the up. Research conducted by Grant Thornton shows that it is confidence among American business leaders that has fallen, down from net 89% in Q1 2018 to 78% in Q2. Conversely in China the swing has been positive to a point where confidence among business leaders is now above the US, at net 79%.
Fundamentally, the economy is in good shape. China’s GDP growth for the second-quarter was 6.7%, only marginally down on the same period in 2017.[ii] Consumers too have seen a boost in real earnings growth through 2017-2018 and trade performance is good.
China’s investment to facilitate trade is evident in its ambitious campaign of overseas infrastructure investment commonly referred to as Belt and Road. The aim? To create a modern version of the Silk Road, a trade route connecting East to West. Chinese investment in ports, roads and bridges seeks to expand networks connecting Asia, Africa and Europe. The level of investment is estimated by ratings agency Fitch to be in the region of US$900bn. McKinsey believes that the plan could involve up to 65% of the world’s population and help to eventually move a quarter of its goods and services.
Closer to home, Chinese business leaders report growing concerns over their local infrastructure. Transport infrastructure is now cited by nearly a quarter of businesses (23%) as a constraint on growth. At the start of 2017 only 10% thought it an issue. The concern has been creeping upwards ever since.
Investment in physical infrastructure is taking place at an almost dizzying pace. By 2020 China is expected to have over 240 airports – in 2010 it had 175. Road, rail and sea freight are also experiencing large scale expansion.[iii] But Grant Thornton’s research raises questions. Despite frantic levels of investment, will the delivery of this infrastructure meet the demands created by the economy’s rapid growth?
“We’re used to reading and being amazed by China’s infrastructure expansion,” says Jonathan Geldart, Executive director – markets development (Greater China) at Grant Thornton International Ltd. “From power stations to airports, the country’s appetite for these projects and their quick delivery has impressed. Our findings are certainly counterintuitive. Where we thought this expansion would satisfy businesses, a growing proportion instead say that infrastructure constraints now hamper their own growth.”
The concerns are not constrained to physical connectivity. China now ranks third out of 35 economies surveyed for companies saying information and communications infrastructure (ICT) is a constraint. Only the Philippines and India rate the issue more highly.
China’s Ministry for Transport reported that transport infrastructure investment in 2018 would match the previous year.[iv] Government data shows that 2.12 trillion yuan (US$323 billion) was invested in the first 11 months of 2017. Planned investments for the current year include 5,000 km of new expressways, the renovation of 216,000 of roads and a 15% increase in the capacity of its ports. Investment remains ambitious.
China’s desire to rebalance its economy to have greater focus on domestic consumption is a topic of much discussion. Key to this important transition will be the ability of consumers to shop. The trend towards online shopping and home delivery means that making this easy for consumers is vital.
“The push to rely more on consumers to sustain and boost growth is well underway. It’s a transformation that relies on people buying goods and services, often online. Delivery is therefore important - as is the ability to ship components around the country. Businesses believe this has become more difficult,” explains Jonathan.
China’s investment in infrastructure is massive. But is it enough? Clearly there will be regional variations in the quality of infrastructure, with some areas benefiting more quickly than others from the investment. “Infrastructure is one of those facilities you only notice when it goes wrong or starts to hinder your progress.” Jonathan says. “What’s important is that infrastructure doesn’t become a thorn in the side of the Chinese economy.”
Infrastructure projects can become bottlenecks for goods and services, so it is important that Chinese business owners help planners to pinpoint the issues early. Doing so will not only benefit the flow of goods and services but also the wider economy.
For further insights from our Q2 IBR survey click on the links below.
[i] Source: Financial Times 2018
[ii] Source: CNBC 2018
[iii] Source: McKinsey 2013
[iv] Source: Reuters 2017