Accelerating infra push amid weak economic print: Premier Li Keqiang at his meeting with key local government officials, as well as China’s NDRC at its monthly meeting (both on 16 August), asked for faster construction of infrastructure projects from 3Q22, in response to China’s sluggish July data (released on 15 August). The above-mentioned pro-growth messages are worth highlighting, as they are in contrast to prior concerns over cutbacks in infra stimulus per read-throughs from the Politburo mid-year assessment. YTD infra-activity has clearly accelerated, evident from July’s infra-FAI growth, +9.1% Y/Y (vs +7.1% in 1H22 and +0.4% in 2021), while the forward-looking indicators suggest an acceleration in activity in coming months, given robust infra new project starts (+23% Y/Y YTD) and order flow reported by E&C contractors (average +20% Y/Y in 1H22).

Power rationing to boost coal transportation capabilities: In addition, we note power rationing in south-western parts of China, including Sichuan, has reignited concerns over large-scale power shortages like those that occurred in 4Q21; in our view, this underscores the importance of bolstering domestic coal production as well as coal transportation.

  • Premier Li Keqiang said China will step up policy support for the economy at the meeting held on 16 August with senior officials from six major provinces, namely Guangdong, Jiangsu, Zhejiang, Shandong, Henan, and Sichuan, which account for >40% of the country’s economy. Premier Li vowed to ‘reasonably’ step up policy support to stabilize employment, prices and ensure economic growth, asking to bolster pro-growth measures after July’s data showed worrying consumption and output trends, amid recurring mobility curbs and the ongoing property activity slump.
  • NDRC asked (16 August) to speed up issuance and usage of local government special bonds to stimulate investment, besides accelerating project rollout. This year’s quota of Rmb3.45 trillion of special bonds for project construction has almost been fully issued by end-July. NDRC has asked local governments to submit the third tranche of projects for approval, to be funded by special LGB issuance.
  • Infra-FAI remains the bright spot in July, as well as for the near term. Infra FAI growth ticked up further in July (9.1% Y/Y, vs +7.1% Y/Y in 1H22). This contrasts with the slump seen with domestic consumption and IP, as well as other FAI activity, including: 1) manufacturing FAI, which saw growth ease modestly in July (7.5% Y/Y); and 2) real estate FAI, which weakened further, falling 12.1% Y/Y, amid further weakness in property market activity.
  • China to ramp up domestic coal supply amid power shortages, with beneficiaries in our coverage including Daqin Railway, CRRC and ZZCRRC. A few provinces (including Sichuan, Zhejiang, and Jiangsu, etc.) have introduced power-rationing measures since early August as high temperatures stretched the local power grid. Specifically, Sichuan is asking some local factories to halt their operations temporarily to alleviate power shortages, which comes as heatwaves boost power demand that coincided with weak hydropower generation. Against this backdrop, NDRC said on 16 August that China will ramp up coal supply for power generation, as high temperatures and a quickened pace of economic recovery have pushed national demand for electricity higher.
  • Daqin Railway, as the only listed coal-dedicated rail operator, looks well-positioned to benefit from these trends, given its access to China’s higher-quality key coal produced regions.
  • We also note CRC’s train procurement activity has seen a notable pick-up on the freight train side. CRC’s procurement of freight locomotives has reached 540 units YTD, much higher than 2020/2021’s full-year levels at 389/317 units, respectively. We see both CRRC (the monopolistic train maker) and ZZCRRC (leading train equipment producer) as beneficiaries.