Infrastructure investment on the mainland has seen healthy annual growth rates of 20 percent over the past five years. And not only is this sustainable for the remainder of 2010, but also beyond.

Thus far, infrastructure investment has been supported by fixed-asset investment (FAI) growth in the private sector, in the western provinces, and by tertiary industries and sectors with higher profit margins.

Firstly, FAI in the private sector has become a driver of growth. Overall FAI growth has slowed since the beginning of 2010 due to reduced investment by the Central Government, with the August figure standing at 11.4 percent. However, FAI in the private sector remained strong at 34.4 percent year-on-year (YoY) in the same month, reflecting the crowding-in effect.

FAI in western provinces have also seen stronger growth. While FAI growth in top-tier cities saw slow and even negative growth, such as Beijing's 6.46 percent and Shanghai's -6.38 percent YoY in August, FAI in many western provinces recorded more than 30 percent growth YoY during the same period.

Tertiary industries outperformed primary industries in terms of FAI growth, posting a growth rate of over 27 percent YoY in August. Meanwhile, primary industries posted a growth rate of only 18.6 percent YoY, down sharply from the 60.4 percent rise a year earlier, reflecting the Central Government's efforts to channel more investment to value-added industries.

FAI in sectors with higher profit margins showed relative strength, with significant growth seen in the medical and pharmaceutical products sectors as well as in the communication, computer and other electronic equipment businesses.

Investment growth in manufacturing industries that enjoy high profit margins also remains sound, though it is slowing. The private sector will continue to invest in these fields, including chemical, pharmaceutical and beverage products.

FAI in tertiary industries, especially banking, insurance and air transport, remains superb. These sectors are expected to post stronger growth, benefiting from positive wealth and income effects, as well as the gradual transformation of the economy.

With the aim of easing inflationary pressure and preventing the economy from overheating, the Central Government is striving to trim down FAI growth. This seems to have been effective, judging from recently-released economic figures.

Investment in the central and western provinces is expected to continue to grow, particularly after the Central Government kicks off the nation's 12th Five-Year Plan in 2011.

Financial and airline companies will likely to benefit from FAI investment due to anticipated increases in wealth and income. Internet and network providers will also see a boost in revenue.

Increased discretionary investment by the private sector reflects business confidence in the country's economy, despite slower investment by the government.

FAI in Ningxia, Gansu, Shaanxi and Guangxi consistently grew more than 30 percent YoY in August, in line with the view that China will continue to accelerate development in the central and western regions.

FAI growth will continue to see diverging trends in top-tier cities and underdeveloped regions in the next three years.

Investment in primary industries was significantly bolstered in 2009 by the Central Government's 4 trillion yuan stimulus package introduced in 2008. But going forward, more investment is expected to be made in tertiary industries. Businesses that add value and businesses with higher profit margins will also benefit.

Chemical products, pharmaceutical and beverage sectors rank as the top three in terms of profit margins.

Banny Lam is an associate director and economist at CCB International Securities Ltd. The opinions expressed here are entirely his own.

(HK Edition 09/29/2010 page2)