Chinese Infrastructure Investment Increasingly Going Global
The 6th International Infrastructure Investment and Construction Forum (IIICF), organised by the China International Contractors Association (CHINCA) and held on 4-5 June 2015 in Macau, was a stepping stone in advancing China's One Belt One Road (OBOR) initiative, as well as investment in other regions. The theme of the conference was 'Regional Economic Integration Spurs Development of Infrastructure Cooperation'. Opportunities for infrastructure construction and openness to Chinese investment were the overarching topics highlighted by speakers from different countries and organisations. BMI Research, as participants of the conference, also contributed our ideas in one of the key forums regarding China's OBOR initiative, discussing opportunities, challenges, and recommendations for cooperation. Below, we highlight some key findings:
Ambitions Extend Far Beyond Asia
One of our core views for 2015 was that China's investment focus will be increasingly international, and the topics discussed during the IIICF reinforce this view. In fact, we believe China's OBOR initiative, while already a large undertaking, is but one of the many manifestations of Beijing's overall interest in investing abroad, and its focus is not limited to the countries along the proposed trade route. During many of the panel discussions, much emphasis was also placed on investment in Latin American and Caribbean states, Portuguese-speaking countries, and North America.
This highlights China's growing importance as a source of capital investment worldwide. In 2014, the total value of foreign construction contracts signed by Chinese construction companies amounted to USD192bn. Data from China's Ministry of Commerce in January also showed that Chinese investors invested in 6,128 overseas firms in 156 countries in 2014, with total outbound investment rising 14% to USD103bn. Looking at the distribution of China's investment, we see greater diversification away from traditional markets in Sub-Saharan Africa to other regions such as North America, Western Europe, and Asia, which echoes the sentiment that we gleaned from the IIICF conference.
Different Markets To Present Different Challenges
We see a divergence in challenges along the proposed trade route between emerging economies and relatively developed ones. In many emerging markets – particularly in Asia –an uncertain political, regulatory, and legal environment will be the major hindrance for infrastructure development. This issue was commonly brought up by companies and financial institutions during the panel discussions. A lack of institutional capacity to establish proper policy and legal frameworks, and insufficient talent and resources to execute projects and public private partnerships are amongst the myriad of issues highlighted in developing countries. Coupled with this is the low number of quality projects which are bankable, as infrastructure development in many of these countries may not be well planned or designed.
Consequently, we expect projects in these markets to be taken on by state-owned companies, with Chinese SOEs being more willing and capable of bearing such risks, having greater funding support from Beijing. A case in point is Pakistan's hydropower dam project (Karot dam) undertaken by Chinese state-owned firm Three Gorges Corporation, which will set a precedent for future projects. In order to fund construction of the Karot dam, China's central bank, the Silk Road Fund, and the World Bank will buy shares in China Three Gorges South Asia Investment Ltd, a subsidiary of the Three Gorges Corporation, while the Silk Road Fund, along with the Export-Import Bank of China and the China Development Bank, will issue loans to the Karot Power Company, which is in turn a subsidiary of China Three Gorges South Asia Investment.
Meanwhile, in more developed markets, particularly in Europe, where regulatory and legal frameworks are already in place, we believe a potential challenge for Chinese companies will be a mismatch in terms of standards, as various European countries have different construction requirements from those in China. Differences in the cultural and legal environments could also hinder Chinese investment. As such, we expect more partnerships or even the acquisition by Chinese firms of local firms in order to break into these new markets.
We also note that the approval of China Communication Construction Corporation (CCCC)'s acquisition of Australian construction firm John Holland (a subsidiary of Leighton Holdings, which is in turn owned by Spanish company Grupo ACS) is a step forward for Chinese construction companies to enter more developed economies, and also highlights that such future acquisitions and joint ventures will pave the way for more cross-penetration of markets between China and Europe.
Transparency And Inclusiveness Key To Unlocking Opportunities
We maintain our view that transparency and inclusiveness (on a government, corporate, and social level) will be necessary in order for the OBOR initiative to succeed. Transparency in development plans, project pipelines, and the organisational structure of vehicles such as the Asian Infrastructure Investment Bank (AIIB) will be key to fostering a cooperative spirit amongst participating countries. A more collaborative environment will also help to lower the risk of future changes in the political landscape having an impact on construction plans, as we have already seen in Sri Lanka. At the same time, inclusiveness of all stakeholders, including governments, local communities, local partners, and collaboration between financial institutions, will also help to overcome challenges and minimise risks in different markets, without which the development of the OBOR initiative would be hindered.