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Why the South China Economy Matters to the Construction Materials Sector

When investors think of China, many consider the world’s second-largest economy as a single market. However, each region holds its unique business dynamics and cycles. South China, otherwise known as the Greater Bay Area, is thought of as one of the most promising regions in China and offers distinctive investment opportunities with its own characteristics.

The Greater Bay Area has become one of the most promising regions in China after a series of supporting policies, coupled with a healthy bottom-up private entrepreneurial environment. For example, the Guangdong province has the largest base population as well as population inflow, and holds the largest net population change above other provinces, which shows great growth potential in the future.

In our view, the development of the Greater Bay Area is a longer-term plan by the Chinese government to integrate Guangdong, Hong Kong and Macau, in addition to plans to build up more “super centres” after Beijing and Shanghai. As a result, the Greater Bay Area could attract a steady supply of younger workers that could bring higher productivity to the region—similar to Beijing in the 90s.

Naturally, this has supported demand for housing in South China. We also think it could boost infrastructure in areas such as Guangdong and Guangxi in the coming years. Counterintuitively, South China is generally lagging other regions in infrastructure, especially within the Guangdong province. Guangdong has almost the same level of land area as Beijing-Tianjin-Hebei and Shanghai-Zhejiang-Jiangsu. However, the railway length is just 44% of Beijing-Tianjin-Hebei and 71% of Shanghai-Zhejiang-Jiangsu, with the high-speed rail (HSR), just 92% and 63% respectively.1

This suggests to us that there is room for improvement for Guangdong’s infrastructure, and with it, potential investment opportunities within this sector. Guangdong is one of the richest provinces in China with lower than average debt to gross domestic product (GDP) and debt to total income2—it is largely expected that these projects will yield returns due to demand.

Following China Railway’s guidance, 38,000km of national HSR is set to be completed by 2025 and 45,000km by 2030.3 Guangdong announced it would accelerate HSR construction, especially in the remote north and western part of the province.4 Meanwhile, the Guangxi government has also announced it would implement policies to support rural and transportation infrastructure over a two-year period (2019-2021), as part of a wider movement to support and feed into the Greater Bay Area.5

Real estate and infrastructure are commonly considered as crucial elements in downstream demand for construction materials. For instance, it takes roughly 400kg-500kg of cement for one square meter of residential construction according to industry experts. Provinces such as Guangdong, which reported over 160 million tons in cement sales in FY18, are prime examples of how a lack of current infrastructure will likely drive demand for construction materials.6 With many new industries moving to Guangdong, in addition to attracting a young demographic, it is likely that we’ll see a sustained demand for cement going forward.

Bingyao Chen, PhD
Investment Analyst

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1 Sources: Wind, Mirae Asset Global Investments, December 2019.
2 Source: HSBC, September 2019.
3 Source: National Development and Reform Commission, November 2017.
4 Source: China Daily, 13 September 2021.
5 Source: The State Council, the People’s Republic of China, September 2021.
6 Source: Digital Cement, November 2019.

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