Infrastructure projects will lift China’s economy higher in 2nd half

By Asia Unhedged

With China’s housing market making a recovery and June’s economic numbers surprising to the upside, buy-side investors in Hong Kong are feeling more confident that the economy has bottomed out.

For the second half of the year, Asia Unhedged expects to see acceleration in government-led infrastructure projects, especially the One Belt One Road economic corridor. The One Belt One Road corridor, which will stretch across Central Asia to both Europe and Africa, contains many smaller projects in the areas of coal and gas, mining, electricity, telecommunications, infrastructure, agriculture, and people-to-people exchanges that will help trade and capital flow.

And the government is putting a lot of money into these projects.

As we’ve reported before, China is birthing not one, but two development banks this year. Tuesday saw the launch of the New Development Bank by the BRICS nations (Brazil, Russia, India, China, South Africa). It will start with $50 billion. Last month, China’s baby, the Asian Investment Infrastructure Bank (AIIB), signed its articles of agreement. The AIIB will start with $100 million in capital.

Both banks will make loans to fund infrastructure and development projects, and China is sure to be running quite a few of those.

Add to that China’s key policy banks. We reported earlier that the China Development Bank (CDB) plans to invest more than $890 billion into the One Belt, One Road initiative. This money is expected to fund 900 projects involving 60 countries.

Then on Wednesday, the People’s Bank of China injected $31 billion into the CDB and Export-Import Bank of China.

As the People’s Bank of China guides the banking system’s firing power into the real economy, including bonds issued by local governments, there is no doubt in our mind that China can keep up its growth momentum even in the face of a quieter financial market. Industrial production for the second quarter grew 6.3% year over year, compared with 6.4% growth in the first quarter.

After significant growth last year, the transportation and IT segments have slowed the most this year. But we expect the One Road, One Belt initiative will spark a recovery in these two fields.

The PBOC is very supportive in its pledged supplementary lending to the CDB, mainly to be used for rail, water facilities and slum rebuilding. We expect it to support industrial production at the current levels.

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