Govt bonds to boost China's infrastructure sector?

The anticipated faster issuance of local government bonds across China this month holds the potential to inject new vigor into the country's infrastructure sector and give flagging steel demand a lift, Chinese steel market insiders say.

"This month, we may see a jump in the issuance of bonds as the pace of the releases is still lagging behind schedule - despite the acceleration over recent months - and recently, the central government reiterated the importance of the program," a market insider based in Beijing noted.

At a press conference late last month, China's Ministry of Finance vowed to strive to complete the issuance of all newly-added local government bonds for special purposes within this month.

Over January-September, the country issued a total of Yuan 2.9 trillion ($452.9 billion) in local government bonds, of which for special-purpose bonds totalled Yuan 2.2 trillion, equivalent to 61% of the targeted amount for this year, the press conference was told.

Around 50% of the issued special-purpose bonds are to fund transportation infrastructure projects, municipal service engineering works and industrial parks construction, according to the MoF.

Chinese steel market sources generally believe the new investment being pumped into infrastructure projects will lend support to steel consumption in this area, though they doubt that the issuance will lead to any significant improvement in steel demand.

"Many infrastructure projects have been delayed due to lack of funds, so the issuance of bonds will certainly help the situation," commented an official with a Shanghai-based steel trading company. The company supplies products to building contractors including major infrastructure firms, but the official said that payments from the builders have been delayed by several weeks due to cashflow issues.

Nevertheless, "the infrastructure sector contributes only a small amount to China's total steel consumption, so it alone can hardly reverse the trend of weak demand at the moment, given the sluggish property sector," he added.

Another Shanghai-based steel analyst agreed. "Real estate development accounts for around 51% of China's steel consumption whereas the infrastructure sector only takes around 8%-9%," he said. "And currently, the falls in demand from the former are too steep to be supplemented by any rise in the latter," he told Mysteel Global.

Over this year's first three quarters, China's newly-launched property projects - an indicator directly related to this sector's steel consumption - had declined 4.5% on year to 1.5 billion sq m.

So far in November, domestic steel consumption overall has remained weak, with Mysteel's tracking of daily sales of construction steel including rebar, wire rod and bar-in-coil across 237 Chinese steel traders hovering between 145,000-165,000 tonnes/day, much lower than the more than 230,000 t/d average for the same period last year.

Written by Olivia Zhang, zhangwd@mysteel.com

This article has been published under an article exchange agreement between Mysteel Global and SteelMint.