Monday, December 22, 2014

The next wave of Chinese investments and lessons for India

A Times article highlights Xinjiang region as the target of the Chinese government's hinterland development thrust. The Communist Party proposes to develop the north-western part of the province as the country's energy hub,
Xinjiang has an estimated 21 billion tons of oil reserves, a fifth of China’s total, and major new deposits are still being found... Xinjiang is expected to produce 35 million tons of crude oil by 2020, a 23 percent increase over 2012, according to the Ministry of Land Resources. Xinjiang also has the country’s largest coal reserves, an estimated 40 percent of the national total, and the largest natural gas reserves. Those three components form an energy hat trick that China is capitalizing on to power its cities and industries...  Xinjiang is where all the growth in oil, gas and coal is going to be coming from... all the imported resources from Central Asia, oil and gas, go through Xinjiang and then get distributed from there... Xinjiang will export electricity to more populated parts of China and perhaps to Central Asia... its economy will be further bolstered by President Xi Jinping’s vision of a “New Silk Road,” an ambitious plan to rebuild the ancient trade route into a 21st-century network of transportation and trade across Xinjiang, Central Asia and Europe.
Like with all its regional development interventions, massive public investments will drive this development,
In May, Beijing said that 53 state-owned enterprises — from energy to construction to technology companies — were investing $300 billion in 685 projects in Xinjiang. The State Council, China’s cabinet, announced in June that the Xinjiang government was investing $130 billion to build infrastructure such as roads, highways and railways.
The scale of the investments being planned is staggering. If the Chinese government can raise the resources to finance these investments, that would go a long way towards sustaining the country's spectacular growth rates for the foreseeable future.

This holds important lessons for India. As the mid-term economic analysis acknowledges, at a time of strained balance sheets - corporate and household - India's quest for a higher economic growth trajectory has to be driven by public investments. The new government has announced a slew of ambitious projects - one hundred smart cities, highways construction, housing for all by 2019, diamond quadrilateral of high-speed rail (the budget allocation is inadequate for even one feasibility study), inter-linking rivers, clean Ganga river, Digital India initiative, ten Coastal Economic Regions (CERs) under the Sagar Mala Project, National Investment and Manufacturing Zones (NIMZ) under the National Manufacturing Policy etc.

But none of these projects have a credible resource mobilization plan. In fact, the investment plans for all these projects outlined in their concept reports appear motivated more by wishful thinking than any reasonable assessment of commercial viability. Accordingly, public investments committed are minuscule and limited to technical grants for project development and viability gap funding. The major share of resources for these projects are proposed from the private sector, multilateral agencies, external commercial borrowings, and public private partnerships. However, given the public good nature of most of these investments and experience from across the world, private resources are unlikely to drive such projects, especially in their initial stages. Multilateral lending is marginal to be of any significance. It is amply clear that public resources have to bear the major share of the burden.

The financing problems are exacerbated by a triple whammy of fiscally squeezed governments, debt-laden corporates (especially those in the construction and infrastructure sectors), and bruised bank balance sheets. In the circumstances, the prospects of finding the resources to sustain such ambitions appear not very promising.

Update 1 (18/01/2015)

China has embarked on its latest investment splurge. The Times writes,
In November, for instance, the powerful National Development and Reform Commission approved plans to spend nearly $115 billion on 21 supersize infrastructure projects, including new airports and high-speed rail lines... Throughout China, equally ambitious projects with multibillion-dollar price tags are already underway. The world’s largest bridge. The biggest airport. The longest gas pipeline. An $80 billion effort to divert water from the south of the country, where it is abundant, to a parched section of the north, along a route that covers more than 1,500 miles.

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