Page 334 - 2021 White Paper

1 White Paper on the Business Environment in China
2.5 Construction and Real Estate
Key Take-Aways
• The most reported impact arising from
COVID-19 is the acute shortage of labor.
• China builds two billion square meters of
new floorspace each year – if laid out over a single local governments borrowing a record amount
story, that would cover 1.3 times the size of the
entire footprint of London.
• Almost half of the world’s construction will
take place in China this decade.
• The central government has set a goal of
having 70% of new buildings green-certified by
2022.
• China’s property developers are among the
biggest junk bond issuers in Asia.
Covid-19 Repercussions
Officials reported the first case of COVID-19
in Wuhan City in Hubei Province and the city
was placed under lockdown by the Chinese
Government on 23 January 2020, with other
provinces following within days. The seven-day
long Lunar New Year holiday was extended to
9 February 2020 in an attempt to contain the
outbreak. There were 66 cities in China which
were placed into lockdown for a period ranging
from 50 to 76 days. The most reported impact
arising from COVID-19 is the acute shortage of
labor. China’s construction industry is heavily
dependent on rural migrant workers, as 54
million rural migrant workers are working in the
construction industry. Migrant workers who had
returned to their hometowns for the Lunar New
Year holiday were unable to return to worksites
after the lockdown. In a survey conducted by
the China Construction Industry Association
published in April 2020, 90.55% of respondents
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said progress was negatively affected and
66.04% reported a shortage of labor (FTI).
Background
China is returning to its stimulus playbook, with
to spend on infrastructure this year to drag the
economy out of its coronavirus- induced slump.
In past stimulus cycles -- such as after the global
financial crisis -- China splurged on roads, airports,
and railways, and racked up huge debt. For the past
few years, much of this spending has been funded
by bonds tied to projects that are meant to make
enough money to repay the debt. The problem
is that much of the money looks to be going to
build the same kind of construction projects as in
past years, which struggle to generate sufficient
revenue and end up adding to the debt of local
governments. The effect of this spending has also
been slow to appear, with infrastructure investment
at the end of July still below where it was the same
time in 2019. The central government wants the
local administration to speed up bond issuance
and granted them large quotas; however, it takes
time to start a project and to spend the money
and it’ll take a while for the effects to appear. Local
governments had to sell 3.75 trillion RMB (US$550
billion) worth of so-called “special bonds” by the
end of the year, with 2.27 trillion RMB issued by
the end of July. That’s was more than in the whole
of 2019. Almost 30% of the money through the
end of July is earmarked for industrial parks, town
construction and infrastructure, while another
20% is going to be spent on transport, logistics
and energy projects. It’s getting more difficult for
local governments to find qualified and profitable
projects to use this money. That’s why the funds
were also used to finance land reserve and shanty
town projects in 2019. Local governments grappled
in the past to find profitable projects to use this
money, with a lot of the borrowing in 2018 used