China has unleashed a slew of infrastructure investments to mitigate the global slump in steel demand caused by the COVID-19 pandemic. These investments will stimulate steel consumption had support Chinese steelmakers who have ramped-up production despite reduced export orders.
Proactive fiscal policy through the fusion of funds to revive and support domestic manufacturing and consumption accelerated China’s economy recovery in the first half of 2020. China’s provincial governments have issued special bonds worth more than CNY2.46 trillion ($356.52bn) in Jan-July period. Of these, newly issued special bonds amounted to CNY2.26 trillion, which exceeds the amount of special bond invested last year. Local government’s have exhausted 60.4pc of CNY3.75 trillion, the annual limit set for the year. In 2019, China had issued special bonds of CNY2.15 trillion according to China’s Ministry of Finance data.
With the completion of the issuance of COVID-19 special treasury bonds, a new round of issuance of special bonds is expected in the second half of the year, which will starts in August. Most of this funding will go to infrastructure projects. By July-end, China had issued CNY1 trillion special treasury bonds for COVID-19 control, proceed of which funded 24,199 projects, mostly infrastructure.
Local governments are striving to complete their investments by the end of October. There are strict guidelines which prohibit the use of these bonds for purposes other than public welfare projects.
In H2, provincial government will promote new infrastructure building and urbanization to ease the burden of traditional infrastructure and upgrade the economy.
As of July 14, China’s special bonds worth CNY1.86 trillion funded transportation infrastructure, municipal and industrial parks and other projects such as education, medical care, and senior care. Another CNY220bn special bonds was employed for major rail transit, agriculture, water conservation and ecological protection projects.
China’s Development and Reform Commission has introduced RIETs through a pilot projects which focuses on infrastructure. Real estate investment trusts (RIETs) are companies that owns and operates income-generating real estate.This investment facilities are expensive than traditional funding but provide extended payback periods.
The pilot infrastructure REIT will fund projects including warehousing and logistics, toll roads, railways, airports, port, urban sewage and waste treatment; and water, power and gas supply projects. New infrastructure such as data center, 5G, artificial intelligence, Internet of Things, smart energy and smart city projects will also be supported through this REIT.
The positive sentiments generated through these financial stimulus packages has lifted steel demand and prices in China’s domestic market. China’s billet prices hit a six-month high, as reported by Davis Index.
China produced 91.6mn mt of crude steel in June 2020, up 4.5pc from prior June. World Steel Association has forecast that robust economic recovery in China would mitigate the reduction in global steel demand in 2020 and 2021. The recovery of steel demand would be more prominent in the second half of 2020, stated World Steel’s Short Range Outlook for 2020 and 2021. China’s steel demand is expected to increase by 1pc in 2020 and the benefit from infra projects is also likely to support steel demand in 2021.
China’s strategy to fight global economic slump through state-funded domestic consumption boost will help domestic steelmakers survive in the absence of demand from export markets. End-user demand in the domestic market is low amid a wet season and steel inventories are expected to rise but large-scale infrastructural projects could support steel demand substantial and increase consumption in the domestic market.