The national urban work conference to kick off

The national urban work conference will unveil soon. It will focus on stabilizing growth as well as emphasizing urban construction, particularly urban planning, urban infrastructure construction and urban utility operation.

Various measures are taken to stabilize growth

“It is urgent to make greater efforts in the fourth quarter to stabilize growth,” Essence Securities is in the view that supposing the growth rate of industrial added value in the fourth quarter remains constant in the fourth quarter, GDP growth rate in the fourth quarter will drop to 6.8 percent, which is significantly lower than the target. Investment in infrastructure is a variable which the government can control when stabilizing growth. Urban infrastructure investment projects, including urban rail transit, comprehensive underground drainage system and sponge city, will play an important role in stabilizing growth.

Statistics show that in 2014, the National Development and Reform Commission (NDRC) approved investments totaled approximately 1.56 trillion yuan in infrastructure construction sector; in 2015, the NDRC has approved over 2.3 trillion yuan investment for railway, rail transit and airport projects. Besides, various provinces has set out in their “two sessions” government work reports infrastructure investment projects concerning the “Belt and Road” initiatives with a total amount of 1.04 trillion yuan. With the addition of nearly 1.6 trillion yuan of railway and express way related infrastructure construction approved in 2014, and “seven major projects package” disclosed at the end of 2014, the aggregate investment has exceeded 10 tillion yuan.

On Dec. 9, the NDRC and the Ministry of Housing and Urban-Rural Development (MOHURD) have jointly issued guideline on paid use system of urban comprehensive underground drainage system, aiming to mobilize social capital and promote the development of urban comprehensive underground drainage system. Since 2014, the State Council, the MOHURD have issued quite a few policy documents on the construction of underground pipeline network and comprehensive underground drainage system, providing policy guidance for urban pipeline network construction planning, pilot cities, the construction of project library and financial support.

In 2015, the MOHURD and the Ministry of Finance jointly conducted comprehensive underground drainage system pilot work, and selected 10 pilot cities such as Baotou city, Inner Mongolia. The target is to build 389 kilometers of comprehensive underground drainage system within three years, with total investment of 35.1 billion yuan.

In November, the General Office of the State Council has issued guidance on promoting the construction of sponge city, which expressly requires 20 percent or above of urban built-up area to achieve the target by 2020, and 80 percent or above of urban built-up area to achieve the target by 2030. The MOHURD previously announced the plan of investing 86.5 billion yuan within three years to build 16 pilots “sponge cities”.
Zhongtai Securities believes that according the bottom-line logic, the GDP growth rate should be above 6.5 percent. In corresponding, growth rate of infrastructure investment should be above 21.63 percent, representing total scale of infrastructure investment of 16.4 trillion yuan. It is expected that various measures will continue to be introduced at the year end.

Urban infrastructure construction to see massive investment

“Under the background of supply side reform, stabilizing growth will further combine with economic structural adjustment and reform enhancement, focusing on urban underground drainage system and sponge city (rainfall flood management),” according to analysts.

Up to now, the total length of urban drainage pipelines in the whole country is around 500,000 km, but that of underground ones is less than 1,000 km; therefore, underground drainage pipelines have a huge space for long-term investment based on their construction cost of over 100 million yuan per km. There will be a total investment of around 800 billion yuan, with annual average scale of 150 billion yuan, provided that ten cities and regions among the nation’s 31 provinces and cities will complete underground pipeline construction in 2020 with construction mileage of 800 km for each province or city and construction cost of 100 million yuan per km.

“Sponge city construction will undoubtedly drive a new wave of urban construction.” Based on measurement and calculation of Shenwan Hongyuan Securities (000166.SZ) and in line with the target for sponge city construction set by the State Council, urban construction areas in the whole country recorded 47,800 sq.km by the end of 2013 with an investment of 150 million yuan per sq.km; there will be an investment of 5.7 trillion yuan in 2030 with an investment of 1.4 trillion yuan in 2020 for static estimation, conservatively provided that the pilot cities have an investment of 190 million yuan per sq.km.

PPP model to become main force

PPP model will become the main force under the great support from policies. Data shows that 28 provinces issued recommended PPP projects up to May, and 1,042 projects with a total investment of over 1.9 trillion yuan have been approved through the review, with average investment of round 1.58 billion yuan for each project. The Ministry of Finance (MOF) in May issued the second batch of 206 PPP projects cooperated by the government and social capital, with a total investment of 658.9 billion yuan. In line with statistics of Cinda Securities, investment amount for traffic facilities accounts for the largest part of the total investment for PPP projects, reaching 60 percent, which is related to huge costs of traffic facilities; the second is for public facilities.

The central and local governments recently establish the PPP funds one by one. For example, the MOF jointly with ten institutions including China Construction Bank Corporation (00939.HK; 601939.SH) built up a PPP fund of 180 billion yuan on Sep. 30. Usually, these PPP funds are jointly established by the government, commercial banks, investment institutions and social capital and etc. to provide financing for the PPP projects, and will become the significant forces to push these projects. 

According to Guotai Junan Securities Co., Ltd. (601211.SH), under the background of greater pressure on the growth, PPP model will become a favorable measure to deal with the problems between stabilizing growth & infrastructure expansion and controlling the debt of local governments. As the priority to be encouraged and developed, the PPP model has been covered by most of policies and regulations issued in 2015 and related to infrastructure construction. Along with the gradual issuance of the second wave of PPP projects by the MOF, PPP model will see wide space for development.