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Here's why analysts are not so upbeat about China's new megacity

China will create a new special economic zone outside Beijing similar to those established in Shenzhen and Shanghai, the government said, in a bid to boost flagging growth and reduce the strain on the capital. The Xiongan New Area covers the Xiong (above), Anxin and Rongcheng counties.
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China will create a new special economic zone outside Beijing similar to those established in Shenzhen and Shanghai, the government said, in a bid to boost flagging growth and reduce the strain on the capital. The Xiongan New Area covers the Xiong (above), Anxin and Rongcheng counties.

The Chinese government's announcement to build a new economic zone on the outskirts of Beijing spurred sudden interest in property investment in the region, but analysts are less upbeat about the overall contribution from the new megacity.

"There are some direct beneficiaries due to their meaningful exposure to the area, but the net impact nationwide should be quite small by our estimate," wrote strategists at the Bank of America Merrill Lynch in a note released on Wednesday.

While analysts expect a boost to infrastructure investment in what is now still a sleepy backwater, the focus on the Xiongan New Area, which will take on some functions of the capital city, will also be at the expense of other cities.

"In our view, the Xiongan New Area is designed to address some specific issues that Beijing faces and it does not herald another round of massive infrastructure build out in China. Given the government's desire to control debt growth, we expect the investment amount earmarked for Xiongan New Area could be diverted from elsewhere mostly," they added, singling out the Beijing-Tianjing-Hebei project as a possible loser of development opportunities to Xiongan.

Calculations from Citi Research also found that the construction of the city would require just a minuscule proportion of the world's total crude steel production.

Analysts at Nomura are just as lukewarm about the new economic zone.

Nomura analysts Yang Zhao and Wendy Chen said they expect the project to spur slightly stronger growth in fixed asset investment, particularly in infrastructure and property investment.

They estimate that direct incremental annual infrastructure and property investment could be around CNY500 billion ($72.5 billion) in the next five years, translating to 0.3-0.6 percent of GDP.

"However, the net impact could be smaller as faster investment in Xiongan may be accompanied by slower investment in Beijing than would otherwise have been the case," they added in a note released on Wednesday.

The project's impact on economic growth may also be limited due to its high dependence on monetary policy, which is likely to remain overall prudent to curb asset bubbles and financial risks, crowding out other or private investment expenditure.

"However monetary policy plays out, we doubt it is likely to be loose for long, and the faster growth in Xiongan will have to crowd out financing and slower growth elsewhere," the Nomura analysts added.

The Xiongan development, meant to spur growth in the region hit by layoffs in the heavy industry sector, is already becoming too hot to handle.

Hours after the announcement at the weekend, Xiongan experienced a property rush with investors and speculators pouring in, prompting a surge in housing prices and spurring a crackdown by local authorities as they forced property agencies in the area to shut temporarily, local media reported.

Authorities are generally keeping property purchasing policies loose in third and fourth-tier cities to encourage migrations in these areas. Three counties covered by Xiongan New Area are located in the third tier city of Baoding.

According to a report released Thursday about China's supply-side structural reforms, the Economist Intelligence Unit estimated that tier-three cities in China are the only ones that saw a rise in on-year net migration inflows in 2016.

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