Trade and investment flows between Europe and China have had increasingly growing importance in the construction sector due to the rising demand for transport, infrastructure and development.
China’s construction industry accounts for roughly 5.7% of GDP a slight increase in the last 5 years, but a drop since 2007. As a result of aggressive international expansion to drive internationalisation and reform strategies, China’s ‘Belt and Road’ initiative has continued to drive this growth.
China has experienced a slowdown in growth over the past 3 years, yet the construction sector has experienced an increase in CAGR over the past 15 years.
SOURCE: PwC – Consumer, government, capital investment and export funding from 2001 – 2016 – China’ EPC sector has strongly contributed to GBP growth, a bright star amongst China’s traditional businesses, many sectors of which are facing slow downs in CAGR
Why is it growing?
The Chinese government has continued to invest in infrastructure through fiscal stimulus in order to propel its economic growth. This infrastructure stimulus from 2015 has been a result of China’s strategy to divest from commodities, steel and base metal investment and move to infrastructure, financed by government debt and off-budget borrowing from local governments.
Secondly, governments have waived many of the real estate regulations to allow lift credit criteria, availability and more opportunities to invest in China’s domestic real estate market.
The two policy changes have naturally resulted in a boom to the infrastructure market; both China’s domestic and international infrastructure projects.
What’s next for China’s construction industry?
It’s predicted that in the short to medium term, China’s construction sector will continue to grow as a result of key policy changes and continued aggressive M&A activity for infrastructure projects around the world. The Engineering, Procurement and Construction (EPC) industry continues to rapidly develop through innovative financing projects within the Belt and Road routes. In 2016 it’s estimated that $244tn worth of EPC was contracted overseas from China, up nearly 20% from the previous year.
That said, key challenges around management, operational and driving efficiency remain challenging as overseas construction projects are high volume low margin games.
Trade flows between China, suppliers of construction commodities, and the markets that they are investing in to build are therefore critical. Furthermore, the underlying finance structures, securing both private and public investment for the projects, and managing cash flow throughout these huge projects remains critical for success if China wants to continue boasting economic growth, driven by the EPC sector. Trade Finance Global have put together a construction finance and structured commodity finance guide for businesses undergoing EPC projects.