China Update: In time of trouble, go with the flow of government money China Update: In time of trouble, go with the flow of government money China Update: In time of trouble, go with the flow of government money

China Update: In time of trouble, go with the flow of government money

Macro 12 minutes to read
Redmond Wong

Chief China Strategist

Summary:  A new round of COVID outbreaks and a stringent pandemic control policy have dampened the growth outlook in China. In anticipation of the rolling out of massive infrastructure construction by the Chinese government to boost the economy, we look at the investment opportunities in the traditional an new infrastructure space. We also consider the medium-term cases for growth in hydrogen energy and cybersecurity.

China is to increase spending on infrastructure

As U.S. bond yields have moved higher than those of China and the Chinese renminbi has weakened substantially versus the U.S. dollar within a short period of time, China’s central bank’s room to manoeuvre in monetary easing is quite limited without jeopardising its goal of maintaining the relative stability of the renminbi versus the U.S. dollar, in which, energy and commodities are priced internationally.

The property sector is still in dire situation and will not be making the kind of contribution to the overall economy as in the past decade.  Exports, the key growth driver last year, will very likely to be unable to do the heavy-lifting to support the economy this year.  In April, China’s export growth decelerated to 3.9% YoY in USD terms.  Adjusting it for the rise in export prices, the real rate of growth in exports was negative in April.

The Chinese Government is set to increasingly rely on additional infrastructure spending to boost the economy.  At the Central Financial and Economic Affairs Commission meeting on April 26, President Xi Jinping called for stepping up infrastructure construction.  It is particularly noteworthy that he emphasized the need to look beyond economic returns of infrastructure projects and to consider the projects’ benefits to national security and social returns as well.  In other words, projects that have been rejected on internal rate of return and cash flow considerations may be reconsidered and launched.  He also pledged supports to local governments in getting financing for infrastructure projects.  Moreover, Xi’s call for rolling out more infrastructure construction can provide a cover for local government officials from balancing the risks between carrying out infrastructure construction and devoting time, effort and resources to pandemic control.  Without that, the assessment of political risks and rewards might tend to incentivize local government officials to focus on pandemic control at the expense of executing infrastructure projects. 

Although local governments’ budgets have been constrained substantially by the sharp fall in land sales revenues, they can tap on funding raised from the  RMB1.2 trillion special bonds issued last year and the RMB 1.4 trillion special bonds issued thus far this year to finance infrastructure projects, in addition to other supports to come their ways from the central government. 

The Central Financial and Economic Affairs Commission’s meeting on April 26, 2022 emphasized transportation, energy, and water conservancy among the traditional infrastructure projects.

On May 6, 2022, the General Offices of the Chinese Communist Party’s Central Committee and China’s State Council released a joint guideline to boost the development and urbanization of county seats throughout China’s rural areas.  The guideline calls for building industrial bases and constructing public infrastructure and services in county seats and making medical care, education, and elderly care more accessible in rural areas surrounding county seats.

New Infrastructure

In addition to traditional infrastructure, China is taking to high gear of its spending on new infrastructure.  The term “New Infrastructure” was coined in December 2018 and has been more frequently mentioned in the Chinese Government policy initiatives since the beginning of 2020 and the scope has been expanded to include industries in seven key areas: (1) 5G base stations and networks, (2) data centers, (3) Ultra High Voltage (UHV), (4) electric vehicle charging piles, (5) artificial intelligence, (6) Industrial Internet of Things, and (7) intercity rail and urban transit network.  One of the key characteristics of new infrastructure is its potential in enhancing technological innovation and improvement in productivity. 

Hydrogen Energy

When China launched its 13th Five Year Plan in 2016, fuel cell electric vehicles was first mentioned.  In November 2020, in its New Energy Vehicle Industry Development Plan 2021-2035, the State Council set out initiatives to develop a wider hydrogen energy infrastructure, in addition to fuel cell applications. 

Since 2020, the Ministry of Finance (the MoF) has been providing financial incentives for cities that launch pilot programmes to build up hydrogen energy and fuel cell vehicle industries and its supply chain. The MoF focuses on promoting the use of hydrogen energy medium to long-range and medium to heavy commercial vehicles and their related hydrogen infrastructure networks.  About 20 cities in China, including Beijing and Shanghai have launched such pilot programmes in using hydrogen energy vehicles.

China 14th Five Year Plan in 2021 reiterated the development initiatives for hydrogen energy and fuel cell vehicles.  Accordingly, in March 2022, the National Development and Reform Commission (NDRC) and the National Energy Administration jointly released a Hydrogen Energy Medium to Long-term Plan 2021-2035 (the Plan), which affirms the strategic position of hydrogen energy in China’s green transformation and set out the development goals for the hydrogen energy and fuel cell vehicle industries.

he Plan aims at establish a system and environment for the development of technologies and processes for the production, storage and transportation of hydrogen energy as well as working towards clean energy hydrogen production.  It targets to reach annual deployment of 50,000 fuel cell vehicles and build comprehensive networks of hydrogen refuel stations by 2025. 

There are three major types of technology to manufacture hydrogen.  1) grey hydrogen: using coal, petroleum or natural gas as feedstock; 2) blue hydrogen: using conventional natural gas-based process coupled with carbon capture; 3) green hydrogen: using renewable energy to produce hydrogen from water electrolysis.  The plan targets to construct a clean energy (blue and green) hydrogen production and supply system by 2030 and envision to establish a diversified hydrogen ecosystem of manufacturing, transportation and storage of renewable energy hydrogen production by 2035. 


China released the Critical Data Infrastructure Security Protection Regulation in 2021.  The regulation seeks to protect critical data from hacking and malwares that could result in damage to national security, social order or public interest.  It defines the required responsibilities of the entities that hold the critical data and penalties for those fail to comply.  In particular, it requires local governments and enterprises to be responsible for monitoring, defending, and managing cybersecurity risks in their network and information systems.  The regulation also requires local governments and enterprises to set up early warning mechanism against cybersecurity threats and vulnerabilities, to carry out defence exercises and to conduct regular checks of their information systems. 

In addition to the regulation mentioned above, China enacted the China Data Security Law in September 2021. The new law regulates data collection, processing, and transition, beyond the traditional measures of database audits and encryption. 

When China rolled out its 14th Five Year Plan, it increased its cybersecurity budget by three times from the 13th Five Year Plan.  The Ministry of Industry and Information Technology (MIIT) guided government departments and state-own enterprises with critical data to raise their cybersecurity spending to 10% of information technology spending from 3% previously. 

The new regulation, law, the enlarged national budget allocation, and the MIIT’s guidance help induce growth in demand for cybersecurity. 

Going with the flow of government money

In a turbulent global investment environment and slowing Chinese economy, we consider that it may be rewarding to go at the direction in which the Chinese government’s money is going. 

We expect that the Chinese authorities are on high gear to roll out infrastructure construction projects in transportation, energy and water conservancy and the new infrastructure areas in 5G, data centers, ultra-high voltage, EV charging piles, AI, industrial internet of things and inter-city rail and urban transit network.  It may be more fruitful to look for investment opportunities in these areas than the others that have less tailwinds behind them.

For the medium-term, we see interesting multi-year growth potentials in the areas of hydrogen energy and cybersecurity.  Monitoring companies in these industries and relevant value chains may prove to be fruitful. 


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