China’s Infrastructure FAI Growth to Slow to Mid-Single Digits; Structural Divergence to Intensify in 2026–2027

Overview

This report is a macroeconomic outlook published by UBS, focusing on the evolution of fixed-asset investment (FAI) in China’s infrastructure sector. Drawing on actual 2025 performance, leading indicators, newly signed contract values, revenue, operating cash flow, and local government financing data, the report delivers a bottom-up forecast and structural decomposition of infrastructure investment trends for 2026–2027. Its core conclusion is that overall growth will enter a phase of moderate deceleration, while sectoral divergence intensifies—policy priorities and funding availability emerge as critical determinants.

Core views

The report notes that China’s overall infrastructure FAI declined 1% YoY in 2025; excluding utilities, the decline widened to 5%, signaling clear pressure on non-policy-mandated segments. Environmental protection (−14%), water conservancy (−6%), and public facilities (−8%) were major drags, whereas utilities (+9%) and telecom & internet (+9%) posted counter-cyclical growth—highlighting structural differentiation. Looking ahead to 2026–2027, UBS forecasts infrastructure FAI growth slowing into the mid-single-digit range: +2% in 2026E overall (only +1% excluding utilities), and +3% in 2027E (also +1% excluding utilities). By segment, 2026E forecasts show telecom & internet at +12% (highest), utilities at +4%, transportation at +6%, water conservancy at +4%, environmental protection at +4%, but public facilities at −5%; this pattern persists in 2027E, with public facilities remaining at −5% and telecom & internet sustaining +12%. This divergence reflects fiscal resource reallocation toward new infrastructure, energy security, and digital infrastructure, while investment appetite and financing capacity for traditional municipal projects weaken.

Analysis framework

The report adopts a bottom-up macroanalytical framework—not relying on a single aggregate model—but instead examining key links along the infrastructure value chain: first tracking physical activity proxies (e.g., YoY cement output, Pangyuan Rental Index) to gauge actual construction starts and intensity; second analyzing the funding side—local government financing behavior (LGFV net financing, timing and scale of special-purpose and general bond issuance)—to assess fiscal support and sustainability; third incorporating corporate-level data (newly signed contract value, revenue, operating cash flow) to verify policy transmission efficiency and micro-level responses. Cross-validation across these dimensions yields an integrated judgment on both total FAI and its structural composition. For example, sustained YoY declines in cement output since 2022 and the Pangyuan Rental Index stabilizing near 400 since 2024 confirm weak underlying demand; meanwhile, the over-RMB-110-billion special-purpose bond issuance in September 2024 explains why certain segments (e.g., transportation, utilities) maintained positive growth in 2024–2025.

Methodology notes

• Industry/Sector Analysis FrameworkSupply-demand framework

  The report examines both the demand side (GDP growth, trade environment, government spending) and supply side (funding availability, raw material costs, labor supply) of infrastructure investment

  By dissecting 'who invests' (local governments, local government financing vehicles [LGFVs], central SOEs), 'where the money comes from' (special-purpose bonds, LGFVs, bank credit), 'where it goes' (subsector allocation), and 'how effective it is' (physical indicators such as cement output and rental indices), the report constructs a complete supply-demand feedback loop—avoiding distortions arising from aggregate-only analysis

• Industry/Sector Analysis FrameworkVolume-price decomposition

  Decomposes infrastructure FAI into 'volume' (new construction area, construction area) and 'price' (construction & installation unit cost, equipment purchase price)

  For instance, the Pangyuan Rental Index serves as a proxy for construction equipment usage cost ('price'), while YoY cement output reflects physical construction intensity ('volume'); divergence between the two signals structural issues (e.g., stable 'price' but weak 'volume' post-2024)

• Macroeconomic frameworkCredit/debt cycle

  Analyzes local government financing behavior within the broader context of China’s credit cycle evolution, focusing on inflection points such as LGFV net financing turning negative and front-loaded special-purpose bond issuance

  LGFV financing registered monthly net outflows multiple times during 2023–2024, and special-purpose bond issuance concentrated in mid-year—both reflect a shift in local fiscal stance from 'expansionary' to 'balanced', serving as a core anchor for assessing medium-term infrastructure momentum

Key data

• 2025 Infrastructure FAI YoY-1%Overall growth; excluding utilities, it was -5%
• 2025 Environmental Protection Subsector FAI YoY-14%Deepest decline among eight subsectors
• 2026E Infrastructure FAI YoY2%UBS forecast; excluding utilities, 1%
• 2027E Infrastructure FAI YoY3%UBS forecast; excluding utilities, 1%
• September 2024 Special-Purpose Bond Monthly IssuanceOver RMB 11 billionAnnual peak, reflecting front-loading of fiscal stimulus
• Pangyuan Rental Index (2024–2026)Approx. 400Stable at this level since 2024, significantly below the 2019 peak of 1,700, indicating long-term decline in equipment utilization intensity

Impact & implications

This outlook implies that investment logic for infrastructure-related industries is shifting from 'aggregate-driven' to 'structure-driven': firms with policy priority (e.g., digital infrastructure, new power systems), reliable funding access (e.g., supported by special-purpose bonds or policy-based financial tools), and clear monetization models (e.g., operators, IDCs) exhibit greater certainty; whereas traditional municipal engineering firms—over-reliant on local government payments and lacking technological moats—will continue facing order shrinkage and cash flow pressure. From a macro-policy perspective, sustaining infrastructure’s stabilizing role requires further improving the precision and efficiency of special-purpose bond allocation—and exploring market-based financing supplements—while strictly controlling implicit debt.

Risks

• Macro-level investment contraction risk, affecting construction firms’ newly signed contracts and revenue
• Sharp increases in raw material and labor costs squeezing contractors’ margins
• Overseas project revenues impacted by RMB appreciation and geopolitical risks
• Persistent pressure on local government financing, leading to delayed or canceled project payments
• Policy support for environmental protection, water conservancy, and other subsectors falling short of expectations—dragging FAI recovery

What to watch

• Monthly LGFV net financing data and special-purpose bond issuance timing
• Cumulative YoY cement output and marginal changes in the Pangyuan Rental Index
• Quarterly sequential trends in newly signed contract value by infrastructure-focused central SOEs
• Local government fiscal revenue-expenditure gaps and debt ratio movements