China’s fiscal dilemma stifles infrastructure steel demand Report

Insight 13 August 2019

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Report summary

China’s fiscal system has gone through a structural change, which has made financing infrastructure more difficult. As a result, infrastructure investment growth in H1 2019 was only 4.1%, around half the level we expected. China now faces a new fiscal dilemma: it cannot cut taxes, reduce debt and increase spending in infrastructure at the same time. This is likely to have a far-reaching effect on steel and iron ore demand. Although we believe infrastructure steel demand will recover, it is unlikely to reach a level significantly above GDP growth, even with more supportive policies

Executive summary
Infrastructure steel demand below expectations
Tax cuts, lower land sales and local government debt hinder investment
- Recent tax cuts lower government income
- Slower growth in land sales
- Heavy local government debt
- The diminishing fiscal multiplier effect
- Realised investment from PPP is too small
No major growth yet despite dedicated policies
- More projects approved
- supported by more local government special-purpose bonds
What does all this mean for steel demand?

Tables and charts

This report includes 8 images and tables including:

Infrastructure investment growth (year-on-year) is far below our expectations
Infrastructure steel demand scenarios (in 2019)
Any swing in infrastructure investment growth could have a significant impact on steel and iron ore demand

VAT and land sales are major sources of government income. Both are facing challenges to grow
Government revenue and expenditure are slowing (% ch.)
The trend of land sales
China has allowed more special-purpose bonds in 2019
Monthly issue of local government special-purpose bonds