Infrastructure spending key to mainland economic growth

Infrastructure spending and a recovery in the property market will help the mainland economy expand modestly next year amid mild monetary easing, say top economists.

But investors should not expect a large stimulus as the country's new leaders are more likely to keep policy fundamentally unchanged.

JPMorgan economist Zhu Haibin and UBS economist Wang Tao, formerly with the International Monetary Fund, said they expected growth in fixed-asset investment to remain robust next year.

Infrastructure spending, such as railway and road projects, may grow 22 per cent next year from an estimated 16 per cent this year, according to JP Morgan's estimate.

Fixed-asset investment includes investment in manufacturing, infrastructure, construction and real estate.

Both economists are expecting the mainland economy to expand 8 per cent next year, compared with an estimated growth of 7.6 per cent this year.

Echoing their prediction of a revival in infrastructure expansion, CLSA strategist Francis Cheung said infrastructure spending would be the key driver but he raised concerns about the financing of these projects.

"Fixed-asset investment will be a drag, which will be constrained by financing," Cheung said.

"China is over-invested by 10 per cent of gross domestic product, which needs to be reduced over time," he said, suggesting further destocking down the road.

Infrastructure investment could peak by the middle of next year as the government cracked down on local government financing vehicles, he said.

Cheung expects fixed-asset investment to grow 19 per cent next year, compared with JPMorgan's estimate of 21.5 per cent.

The country's economic growth would barely meet this year's target of 7.5 per cent next year, he said.

China National Building Material, the nation's largest cement maker, was the only cyclical share he held in his portfolio, Cheung said.

Meanwhile, a key question facing the economy next year is whether policymakers would choose a more pro-reform course or press the stimulus button as the situation gets more dire. All three agree on the first option.

As the leadership understands that the scale of the 2009 stimulus caused too many negative side-effects, it was unlikely to announce another round this time, they said.

With no fundamental change in economic policy, however, there was still much room for monetary easing, they argued.

Zhu expects the central bank to lower the reserve requirement ratio two to three times next year and interest rates in the first quarter of 2014.

Wang said the interest rate cut could come next year if inflation surpassed 3.5 per cent.

As for the housing market, all three believe the worst is over as the government is unlikely to announce further measures to rein in the property market.

Home prices would increase modestly by 3 to 5 per cent next year, JPMorgan said.

Wang said sales might rise 5 to 10 per cent, without giving a specific prediction on price growth.

"We could see some easing in the property market with more relaxed buying policies in lower-tier cities, where there is a lack of supply and high demand," Cheung said.

Cheung expects below-benchmark growth for shares of mainland companies listed in Hong Kong next year despite the fact that these stocks have outperformed the Hang Seng Index since September.

The Hang Seng China Enterprises Index, or H-share index, will grow 11 per cent to 11,600 points by next year, while the benchmark Hang Seng Index will rise 12 per cent to 24,500 points, according to Cheung.

The sectors where he is overweight include consumer discretionary, health care, oil and gas, internet, property and telecommunications. He is underweight on machinery, resources and steel sectors.