Monday, May 18, 2015

The shifting Chinese foreign investments strategy

Much of the "Chinese investments" in Latin America and Africa have come as infrastructure (mostly transportation) project lending secured against long-term commodity supply contracts. Finalized during the long-period of commodities super-cycle, these projects were considered mutually beneficial contracts for both sides. Now that commodity prices have been falling, there is growing concern in China, best exemplified by the case of Venezuela where China has lend more than $50 bn against oil supply contracts, about the returns from these investments. 

As FT reports, it has prompted a re-assessment of this strategy,   
International rail contracts are a political priority for Beijing, which sees exports as a solution to China’s burdensome overcapacity in steel, rail, construction and engineering services as the economy slows. Chinese-built rail projects have been proposed for Thailand, Indonesia and central Asia. A rail programme fits Beijing’s preference for government-to-government infrastructure deals that can be allocated to state-owned companies, which remain wary of complex Latin American tax and labour laws. China engineered a merger in its two state-owned rail companies late last year to prevent them from undercutting each other in international tenders.
In simple terms, through government-to-government contracting, the Chinese engineering firms will build massive rail projects quickly using Chinese money (and also, mostly Chinese workers) borrowed by the host government. For the host country, it is a form of 'plug-and-play' infrastructure investment, having to merely show the site (and make repayments, of course), and have the project delivered in quick time, a contrast to the long-delayed and poor quality infrastructure projects that have been commonplace in the country's history. For China, if the previous strategy was about accessing secure supplies of raw materials to feed the insatiable appetite of its economy, the current one is to clean up the dregs of this orgy make up for fast declining domestic demand. It is about finding an outlet for the massive excess capacity that has been built up in steel, cement, and capital equipment (BTG, renewable generation equipment, high speed rail, etc). 

When countries court foreign investment, they primarily look for foreign businesses to come and establish manufacturing facilities, transfer technology, introduce best practices, create jobs, and bring in foreign equity capital. Does Chinese investment qualify as foreign investment on any of these parameters?  Not if the Chinese have their way.

But there is an undeniable opportunity for other countries if they can leverage the Chinese compulsions to their benefit. One way would be to facilitate the process of making it easier for Chinese firms to compete for domestic construction contracts. Given that the larger Chinese construction firms are world-class in their speed and quality of execution and does it cheaper than anyone else, its benefits are immense. Another option would be to let the Chinese over-capacity subsidize your economy, by importing cheap steel and equipments. But this would run afoul of local producers. The third option of Chinese lending to domestic corporates, which may be the least preferred, may also be the most forthcoming.

In any case, the host governments would have to drive a hard bargain to make such investment partnerships mutually beneficial. Else, the Chinese would leave you with plenty of trophy projects of limited utility, large debts, and bruised local industry.

1 comment:

jagannath rutwik said...

Woah, this should be the once Hyd Collector's blog. You know, after reading in a Telugu newspaper about your departure to the US a couple of years ago while i was still a student, I always wondered where would you be. It's great knowing you're up here somewhere on the net. I daily say to my dad that I'll be Natarajan one day and go the HKS. Just curious, did you become a full-time blogger or anything these days? You're one disciplined blogger. I'm so happy talking to you. (well, not talking exactly, but still...). Thnx so much.