New figures from GlobalData have shed light on China’s crucial role in sustaining global demand in the midst of the Covid-19 pandemic.
With the pandemic fuelling uncertainty and supply chain disruption, investment fell worldwide. Of the 121 countries for which the World Bank has data, 79% reported a fall in gross capital formation in 2020. The data shows investment falling year on year by 7.5%, 10% and 11% in the EU, Latin America and South Asia, respectively.
Total spending on infrastructure-related construction projects, by contrast, grew by a moderate 2.6%, according to GlobalData, an increase of $88bn.
This increase was overwhelmingly driven by developments in China, which saw a year-on-year increase in construction investment for infrastructure of $177bn, or 1.14trn yuan (18%). Outside China, global spending on infrastructure construction shrank by 3.7%.
Except for the post-Soviet sphere, which saw modest growth of 3.5%, every region outside Asia-Pacific saw a substantial decrease in infrastructure-related construction. The largest contractions occurred in South America, which experienced a fall of $20bn (13%), as well as Central America and the Caribbean, which saw a fall of $14bn (22%).
By keeping global infrastructure spending afloat, China may have helped to avert a much broader global recession.
China’s surge in infrastructure spending went along with a $13bn increase in imports of iron and steel, helping to offset an $83bn decline in imports to the rest of the world.
Continued demand from China was crucial for some of the world’s largest developing economies. Brazil’s exports of iron and steel fell by 21% in 2020, according to UN figures, but without China would have fallen by 33%. The growth in exports to China halved the contraction in Brazil’s total exports, cutting it from 10% to 5%.
Similarly, Indonesia’s exports of iron and steel increased by 46% in 2020, but without China would have shrunk by 22%. Indonesia’s year-on-year increase in iron and steel exports to China accounted for 2.7% of its total exports in 2020.
The Chinese domestic investment boom was also vital to the recovery of Georgia, Ukraine and Armenia. For all three countries, the extra revenues gained from additional trade with China were equivalent to more than 7% of their total export revenues for 2020.
Worldwide, China’s import boom cut the global contraction in world trade by three-fifths – reducing a 16% fall in total exports to just 6.4%.
How long can China's surge last?
China’s dramatic surge in spending on infrastructure construction projects wasn’t confined to any single area, the figures from GlobalData show.
Water infrastructure saw the strongest growth, with a year-on-year increase of 24% ($13bn) – up from an average annual growth of just 6% in the three years prior. Rail infrastructure saw the weakest growth, but even this sector expanded by an impressive 15.3% ($27bn).
A $54bn increase in spending on infrastructure construction projects in the electricity and power sector accounted for 30% of the total increase, while spending on roads accounted for a further 22% ($39bn).
The pandemic is just the latest chapter in China’s growing importance for the global construction sector and associated suppliers. The country’s share of global spending on infrastructure construction projects has risen from 26% to 34% over the past five years alone.
Analysts, however, do not expect this trend to last. With China’s economy experiencing a long-term slowdown in growth, officials have grown increasingly concerned about the country’s rising debt stock.
The past decade has seen the debt pile of China’s non-financial corporations rise from 117% to 159% of GDP, according to the Bank for International Settlements, compared with 85% for the US.
In August 2020, the government set out “three red lines” – conditions that corporations would need to meet to qualify for further borrowing. Property giant Evergrande, the most heavily indebted company in the world, has since been launched into a cash flow crisis that threatens to destabilise China’s economy.
GlobalData forecasts show that the country’s share of global infrastructure spending is likely to plateau at the current 34% for the foreseeable future. If the Evergrande crisis prompts tougher action by the Chinese authorities, or even leads to a 2008-style financial collapse, China’s infrastructure spending may fall further still.
China’s stimulus to the global economy may have helped to limit the depth of the Covid-19 recession, but it has also left the world more exposed than ever to the country’s own domestic economic woes.