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Understanding China's 'new infrastructure' and investment efforts

July 15 2020
by Dan Thompson, Jia Lyn Low


Introduction


The compounded impact of the COVID-19 outbreak, trade war with the US and slowing economy has severely impacted the economic outlook for China. Amid the flurry of plans unveiled to revive the economy is the term 'new infrastructure,' which is used by the country's leaders to consolidate investment efforts in infrastructure related to the digital economy, such as cloud computing, datacenters, IoT and smart solutions built on existing infrastructure. Urged by China's leaders, many local governments have introduced the term into their own development plans during announcements to aid in the recovery of the local economy. Beyond that, the tech industry, among others, has been quick to respond to government appeals, with tech giants like Baidu, Alibaba and Tencent pledging almost $1 trillion in investment efforts.

The 451 Take

By directing attention to new infrastructure-related investments, China is looking to position itself as a high tech powerhouse while signaling the government's priority of transforming the country in the post-coronavirus era. On top of government investments, industry's response has been extremely positive, as evidenced by the roughly $1 trillion in investments pledged by the tech giants such as Alibaba. While there is limited information divulged on how the country is going to direct its resources and stimulus other than the industries involved, the plan is expected to encourage the transformation of traditional infrastructure while countering the short-term economic impact of COVID-19, and provides room for China to unleash its growth potential in the long term, such as helping the country consolidate its position in certain high tech areas like 5G.

China's economy


Since China's gradual economic reform begun over four decades ago in 1978, during a time when it was falling behind rising Asian economies like Japan, South Korea and Taiwan, the economy has transitioned from a state-dominated one to a mixed one. Its impressive growth over the years has declined, however, for the better part of the past decade, from 15.3% GDP growth in 2010 to 6.1% in 2019, the weakest we have witnessed in 29 years. A large part of the contraction is due to a combination of the US-China trade war, weakening domestic economy (from production to retail sales) and global economic slowdown.

When the COVID-19 outbreak began to take center stage in Q1 2020, the Chinese economy took a large hit, declining further to a year-over-year contraction of 6.8%. Adding to earlier troubles, it heightened pressure on the state to expand growth amid job losses and social instability. To ensure economic and social revival, economic policies were put in place, including flexible monetary and proactive fiscal measures such as liquidity injections, tax and levy relief, and accelerating infrastructure investments.

What is new infrastructure?


First appearing at the central government level in 2018, the Central Economic Work Conference introduced the term 'new infrastructure' when proposing the key tasks to focus on nationally in 2019. It then started to gain traction last April when Wu Hao, the Head of the National Development and Reform Commission, used and clarified the term at a press conference. He clarified that, "New infrastructure is led by new development concepts, driven by technological innovation and based on information networks to fulfil the needs to high-quality development." It covers information-based infrastructure such as 5G and IoT, converged infrastructure like big data and AI, and innovative infrastructure that supports scientific research and technology development.

Datacenters also fall under the new infrastructure umbrella, together with cloud computing and blockchain, in which these industries act as growth drivers for future network and digital development. This sounds similar to the country's 'Made in China' 2025 plan, but the key difference is that new infrastructure focuses on high tech deployment, without specifying the origin of the technology, whereas the Made in China 2025 policy was created to reduce the nation's reliance on foreign supply chains.

The government has been proactive when it comes to infrastructure investment, with a renewed focus and emphasis on IT-related investments, as the country is expecting more than 27 trillion yuan ($3.8 trillion) in new infrastructure investments from 2020-25. At the provincial level, over 20 regions have included new infrastructure in their plans and reports, such as Shanghai's expectation to spend $270bn over the next three years and the Yunnan province's 589-billion-yuan investment for 2020 alone. Local governments are expected to encourage new infrastructure investments via the issuance of special bonds, public-private partnerships and credit supports. While there are no specific plans and guidance provided, the commitment to transform traditional infrastructures through economic stimulus is expected to aid China in its recovery from COVID-19.

Commercial backing


Heeding the state's call to push and accelerate investment in new infrastructure, the following are some of the contributions pledged:

  • Tencent Holdings: 500 billion yuan ($70.5bn) spread over the next five years in cloud computing, AI, datacenters, supercomputer centers and quantum computing. Also pledged to strengthen the development of its industrial internet base, innovation centers and industrial parks.

  • Alibaba Group: 200 billion yuan spread over the next three years in cloud, datacenters, semiconductor development and operating systems.

  • Baidu: Expected to have five million intelligent cloud servers by 2030 and to train five million AI experts over the next five years.

  • Huawei: $200m investment to support third-party developers that use its computing offerings, part of a broader $1.5bn package the company announced in 2019 to build an ecosystem of developers.

  • JD: Created a new cloud and AI business unit.

  • China Unicom and China Telecom: Combined $25bn 5G base station deployment projects to accelerate the construction of 5G network infrastructure to finish 250,000 5G base stations across the country by the end of Q3 2020.

  • State Grid: 24.7-billion-yuan investment and strategic cooperation agreements with tech giants in digital infrastructure in the energy sector, such as big datacenters, industrial internet, 5G networks and AI.