Tuesday, December 2, 2014

The Chinese and Japanese investment rush

In the past two months, the Chinese President Mr Xi Jinping and the Japanese PM Mr Shinzo Abe have promised investments worth $20 bn and $35 bn respectively over the next five years. In the aftermath, Chinese and Japanese investors have been swarming across the country, scouting investment opportunities. States like Andhra Pradesh have been aggressively courting these investors. A few observations.

1. The Chinese investment push is led by provincial governments, who have secured lending commitments aimed at India from the China Development Bank. In typical Chinese style, they are ready to deploy funds immediately and get started with investments. The Japanese investment push is led by its large trading houses, zaibatsus, who too have secured commitments from the country's overseas assistance and lending agencies JICA and JBIC respectively.

2. Investments come either in the form of government-to-government loans to help build infrastructure assets - high-speed rail is at the top of list for both countries - or by businesses to establish manufacturing and other facilities. Both countries, especially the Chinese, prefer loans. In fact, the Chinese provincial delegations have been expressing their intent to lend at the "most concessional rates" to governments, though there is considerable opacity about the terms of such lending.

Further, in both cases, loans are conditional on procuring their respective national firms, mostly through nomination. This means a go by to the conventional global competitive bidding that is the norm for awarding large public projects in India. In any case, only a small proportion of the massive investments that have been committed by the leadership of both countries can be realized through nominated public procurement.

3. The traditional and sustainable route of private capital investing in manufacturing and other facilities is a distant secondary prong for both countries. However, investors from both countries express willingness to invest in large development/economic zones if the state governments allot land to them. The JBIC financed Delhi-Mumbai Industrial Corridor (DMIC) is a case in point. But there are limits to such investments and may not be desirable, especially if these investment zones come with large and prolonged fiscal concessions.

4. All the hype around these investment commitments should have opened up several large private-to-private investment partnership opportunities for Indian firms with those from China and Japan. However, such partnership announcements have been conspicuously missing in action. What is holding back Indian businesses from reaching out and establishing partnerships? For example, since Japanese investors have announced investment commitments in power generation, where are the JVs in local manufacturing of power generation equipments (BTG)?

5. Given their massive foreign exchange surpluses, currently invested in low yielding US Treasuries, both countries naturally view India as a large destination to invest their swelling surpluses at far more attractive returns. In turn, India has massive infrastructure and industrial investment demand which can be whetted only through large foreign capital inflows. There appears a great potential for mutually beneficial partnerships, though the fiscal space available with central and, especially, state governments for absorbing large volumes of loans may be limited.

All this raises several questions. Are central and state governments willing to preferentially nominate Chinese or Japanese firms for large public projects? Is it desirable to compromise on quality just to access the less demanding capital that accompanies Chinese and Japanese firms? Do state governments have the fiscal space to take loans to finance such large projects? Assuming a relatively stronger renminbi in the years ahead, do state governments have the ability to bear the forex risks associated with large exposures in projects (like HSR) where revenues are in rupees? Given the likely upward trajectory of interest rates globally and in both countries in the years ahead, how affordable are such loans? What is the likely cumulative cost of capital, when accounting for these risks?

What can be done to make it attractive for both investors to assume risks and invest in manufacturing and other industrial facilities in India? What can be done to promote private-to-private investment partnerships between business entities in both countries? What can be done to encourage investors from both countries to establish manufacturing facilities where Indian governments procure directly from Chinese and Japanese firms? What can be done to leverage Chinese and Japanese investment loans towards their JVs with Indian firms?  More ideally, can Indian firms, in some partnership with their firms, access this capital to establish industrial facilities here? Are the Chinese investors willing to set aside their propensity to in-source their labor for their projects? What is Indian state's economic diplomacy doing to facilitate partnerships and address concerns?

Answers to some or all of these questions, and its mutual appreciation, will give a more sustainable push to such investment partnerships. In its absence, such hype is likely to remain just that. 

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