Infrastructure development remains a top priority for China’s government. In recent years, the government has used substantial infrastructure spending to hedge against flagging economic growth – in late 2012 it gave the green light to a raft of infrastructure projects valued at over £150bn. While the bulk of funding will come from state-owned banks and bond sales, there are also opportunities for foreign private and corporate investment. Furthermore, the stimulus will generate business for the infrastructure sector on a national and international level. Despite the opportunities, however, there are a number of risks for foreign entities investing and doing business in China.
In the past 18 months, the Chinese government has focused on internal development, in line with the country’s 12th Five Year Plan. Approved in November 2011, the Plan marks a turning point in the country’s development, with a focus on sustainable growth. To achieve this, the government must make more efficient use of the country’s resources, stimulate internal demand, speed up urbanisation, and modernise Chinese society. “The rapid growth in economic infrastructure to support the double digit annual GDP growth in the last decade is being balanced by a greater emphasis on quality of life for the general population and long term sustainable growth for the economy as a whole,” says Stephen Ip, Lead Partner of Government & Infrastructure at KPMG Advisory (China) Limited. “Urbanisation is the key opportunity and challenge for infrastructure development in China. The country’s new leadership is seeking to map out an improved model of urbanisation that can address development of the interior and western areas and the massive numbers of people who will move from rural areas to towns and cities in the coming decades.”
Indeed, over half of China’s population – 681 million people – now live in urban areas and, with the UN forecasting further growth of 25 percent by 2050, the country’s cities could be host to well over 900 million inhabitants. As urban areas are developed and cities expand, there is an urgent demand for better infrastructure to cope with this internal migration. Achieving sustainable growth, however, will also rely on China tackling the challenges of pollution, intensive energy use and resource depletion. As such, greener development, environmental protection, clean energy and sustainability are now much higher on the agenda, and the government is striving to reach key targets set out by the 12th Five Year Plan.
In recent years, China’s infrastructure development has also encompassed a seemingly endless stream of outbound activity, with investment increasing tenfold in the decade from 2001 to 2011, rising from approximately $7bn to $74bn. Although the main focus may now be on internal projects, this activity continues unabated. Indeed, outbound investment is a key policy of the Chinese government, explains Terence Wong, a partner at Hogan Lovells. “One interesting trend is that in addition to focusing on infrastructure development inside China, in the last 12 months many Chinese companies, experienced in the Chinese infrastructure market, have been encouraged by the Chinese policy of ‘Going Outside’ to undertake increasing numbers of infrastructure projects in regions across Asia, the Middle East, Africa, South America, and even in developed countries such as the UK, parts of Europe, and in the US.” As China moves closer to becoming the world’s largest economy, growth and development will remain a key concern. To maintain future growth, enhancing infrastructure such as power, water, transport, communications, education and healthcare will prove essential. As well as proving economically lucrative, outbound investment exposes Chinese firms to high quality production facilities and business practices. It also gives firms the opportunity to examine new research and development techniques – particularly pertinent as these firms are keen to advance strategic thinking around product development and retirement cycles.
In September 2012, as part of the 12th Five Year Plan, the National Development and Reform Commission (NDRC) gave approval to 60 major infrastructure projects with a combined value of over $150bn. These included 10 environmental protection projects, of which nine were initiated in Western China; seven port construction and channel reconstruction projects, largely focused on the east of the country; 13 highway construction projects evenly dispersed throughout the country; and 25 rail transit and intercity railway projects, again with a main focus on the east. “Transport infrastructure – roads and railways in particular – is still the biggest area of investment due to the sheer scale of networks being enhanced in rural areas and the continued build-out of the expressway system, linking all major cities,” says Mr Ip. “High speed rail development is recovering following the Wenzhou rail accident in July 2011 and city metro projects are moving ahead nationwide. Water related projects – such as wastewater treatment, water recycling, desalination, and so on – are also key areas of focus given water scarcity issues in China.” The country also continues to develop non-fossil fuel energy generation capacity to counter its overreliance on coal and to reduce carbon dioxide emissions.
In regional terms, given that coastal cities such as Beijing, Shanghai and Shenzhen are reasonably well developed, and that certain inland cities are becoming increasingly developed, the Chinese government has begun to turn its focus toward cities in mid and western China. The government’s ‘Great Western Development Strategy’, for instance, focuses on the improvement of major western cities in the next five to 10 years. In addition, the interior provinces of Inner Mongolia, Shaanxi and Gansu, though rich in natural resources, require the transport links needed to exploit these resources, and environmental protections to counter the effects of their exploitation. Such projects are now being delivered.