More Megaprojects? What China’s Rebalancing Means for Asia

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More Megaprojects? What China’s Rebalancing Means for Asia

China’s growth may be slowing, but that doesn’t mean its economic presence in Asia will diminish.

The China boom has changed far more than China itself: its impact has been felt right across the global system, from the wealthiest states to the poorest.

But for China’s neighbors, there has been a particular implication—an opportunity for relatively poor economies to develop themselves, to a greater or lesser extent, in China’s own image.

The megaproject is the pièce de résistance of the Chinese development model: huge dams, high-speed rail networks, highways, mines, ports—anything so long as it’s big enough to resonate with vision and prowess. China has given other countries in the region, especially those in developing South and Southeast Asia, the chance to have their own impressive Chinese-style infrastructure or to tap once-unreachable resources by providing the money, the expertise, and in many cases the labor needed to deliver projects way beyond the capacity of the recipient countries.

Chinese companies, usually deep-pocketed state-owned enterprises (SOEs), have naturally been involved in hundreds of regional projects that don’t merit the “mega” tag. But the really big projects—the ones that no other investor had the ambition or the capital to undertake—have mattered the most. These have tended to go ahead in places where China has a strategic interest: locations that offer access to critical resources, where new infrastructure can help spur development of China’s own western interior, or where China can develop an extraterritorial west coast via projects in Myanmar and Pakistan, for example. It’s the familiar “win-win” approach, at least in theory: China achieves its regional objectives, while its partners acquire infrastructure and revenue which they would not otherwise have been able to obtain.

And these near-abroad investments differ significantly from China’s investment model in developed economies. While China has certainly invested heavily in Europe and the U.S., its activity there has been corporate in nature: acquiring companies, or stakes in companies, that offer value. In contrast, there are often multiple facets to China’s regional ventures, which may include:

  • Boosting energy security
  • Securing access to raw materials
  • Generating profits
  • “Diplomacy projects” that boost China’s prestige or buy influence with the local regime (but which may well entail a financial loss)
  • Funding projects as a way of generating business for Chinese companies
  • Opening up future markets for Chinese goods
  • Boosting bilateral trade in general
  • Helping to develop China’s western interior by improving links with contiguous states
  • Long-term strategic advantages, possibly including military access to key facilities

(Detailed studies on the motivation behind China’s regional investments are available here, here, here, and here).

However, China’s newfound status as developing Asia’s paymaster, architect and master-builder may already be set to change. The country is at a crossroads as it abandons its old export-led economic model in the hope of achieving a more “balanced” economy. There are many ifs and buts. Though the broad strokes of the government’s new-look “Likonomics” have already been widely discussed, little official detail about Beijing’s new blueprint will emerge until the Third Plenum of the CCP’s Central Committee, which is due in November.

These deliberations could have important implications for China’s regional partners. Will the new economic model seek to expand, curtail or in some way evolve Beijing’s regional investment activities? Or, if the rebalancing of the Chinese economy becomes a crisis rather than a well-managed transition, as some are predicting, will Chinese SOEs even have the cash and the confidence to sustain their ambitious regional interests?

China’s Regional Megaprojects

The buzz surrounding China’s regional megaprojects obscures the fact that there are other big investors in most of the frontier economies. In 2011, China did overtake the United States to become the third biggest provider of foreign direct investment (FDI) to ASEAN, for example, but it still lags some way behind Japan and the EU. It’s important to realize, however, that Singapore—as the region’s financial hub—still soaks up most of ASEAN’s incoming FDI, and especially inflows from Europe, Japan and the U.S.

By contrast, most of China’s forays into Southeast Asia have been in riskier places like Cambodia, Laos and Myanmar; in fact, China is the biggest investor in these three countries (though its position in Myanmar may be slipping). Similarly, the biggest Chinese initiatives in South Asia have been in places like Bangladesh, Nepal, Pakistan and Sri Lanka, which are not necessarily seen as the region’s hottest properties by other investors. In 2011, China invested $74.6bn overseas—most of it in Asia, and most of that in the countries detailed below:

Cambodia & Laos: China has poured investment into the two Southeast Asian countries as it attempts to boost economic interaction between the Greater Mekong Sub-region and Yunnan province. China is funding or part-funding half of the 63 dams planned along Laos’ Mekong waterways (though not the controversial Xayaburi mega-dam) and is also discussing financing for a $7.2 billion high-speed rail link between Vientiane and Kunming. Another proposed high-speed rail link would connect Kunming with the Cambodian capital Phnom Penh, adding to the $9.17bn which China had already invested in Cambodia as of early 2013. As in Laos, most of this money has been sunk into hydroelectric facilities, transport projects, real estate and tourism infrastructure.

Myanmar: Many of China’s most ambitious projects here are associated with the new Kyaukpyu Special Economic Zone (SEZ), situated near the Shwe oil and gas fields in the Bay of Bengal. China National Petroleum Corp (CNPC)—one of China’s biggest SOEs—has funded the construction of a deep water port and oil and gas terminal, and was a key investor in two new parallel pipelines connecting Kyaukpyu with Kunming; CNPC also operates the pipelines. While CNPC started pumping gas in July, the development of the SEZ is far from complete, and China’s investment in Kyaukpyu could ultimately run into the tens of billions of dollars. Factor in the $20bn that China is preparing to spend on the Kunming-Kyaukpyu railway (to be built by China Railway Engineering), as well as the proposed Chinese-built Mandalay-Kyaukpyu highway, and the scale of Beijing’s commitments in Myanmar becomes apparent. Of course, some high-profile projects have stalled: these include the Myitsone Dam, a $3.6bn China Power Investment Corp project, and the Letpadaung Copper Mine, a $1bn project being overseen by Norinco subsidiary Wanbao Mining Copper Ltd. However, while China Inc now faces both political blowback in Myanmar and also stiff competition from other would-be investors, it is still finding opportunities: China was part of a consortium that recently won a tender to revamp Yangon airport, for example.

Bangladesh: China’s interest in Bangladesh has centered on modernizing the existing river port at Chittagong (with Dhaka pressing for China to spearhead an $8.7bn revamp) and on building a deep-water port on Sonadia island near Cox’s Bazaar – a $5bn project the Chinese are keen to take on (though there is fierce competition to secure the tender). Last year, then-Vice President Xi Jinping also expressed a willingness to invest in associated transport infrastructure, namely road and rail links between Chittagong and Kunming. If anything, it is the Bangladeshi government’s inability to process all of China’s proposals that is delaying progress, though smaller infrastructure programs are already going ahead.

Nepal: Another SOE, China Three Gorges International Corp (CTG), is building a $1.6bn hydroelectric plant in Nepal; China loaned Nepal the funds, and CTG will retain a 75 percent stake in the facility once it has been completed. Chinese firms have also invested heavily in Nepal’s transport infrastructure, and the flagship $1.9bn Lhasa-to-Kathmandu railway will ultimately plug Nepal into the northwest branch of China’s rail network.

Pakistan: Having funded the initial $200m construction phase of Gwadar port, and having assumed management of the facility in early 2013, China remains wary of bankrolling the planned second and third phases of the project due to Pakistan’s delicate security situation. However, Islamabad is desperate to draw in further Chinese investment, and is in talks with Beijing about building oil and gas pipelines to link Gwadar with Urumqi in Xinjiang – an undertaking that would require at least $1bn in Chinese investment. There are also big opportunities for Chinese firms to help fix Pakistan’s flickering electricity grid, with China International Water and Electric Corporation preparing to invest $6bn in Pakistani energy projects, and CTG already working on the $2bn Kohala hydropower scheme.

Sri Lanka: China has funded and built a series of major projects in the home constituency of President Mahinda Rajapaksa, in a move obviously designed to boost China’s clout in the South Asian country and to help secure Sri Lanka as a market for Chinese goods. Having funded the $1.5bn Hambantota deep water port, which opened in June 2012, Beijing ensured that SOE China Communications Construction Group carried out the work. Meanwhile, China Harbour Engineering Co. recently completed the new Mahinda Rajakapsa International Airport, which China also funded to the tune of $209m, with a Chinese-funded stadium and conference center having also been built on Rajapaksa’s home turf. A second Chinese-built port is now planned for the capital, Colombo, and Chinese investments in Sri Lanka may ultimately run to $50bn over the next 10 to 15 years.

Speeding Up While Slowing Down

But was this pattern of frenetic regional investment activity part of a double-digit growth era that has already drawn to a close?

It is clear that China is about to experience some severe economic pain, as the government starts to address the country’s mounting debts, industrial overcapacity, and asset bubbles, among other challenges. Some companies, perhaps even some SOEs, will close; others will receive bail-outs. Yet most economists are still confident that China can maintain healthy growth. “My view is that the government’s 7.5% growth target for 2013 is very likely to be achieved,” explains Zhuang Juzhong, deputy chief economist at the Asian Development Bank’s Economics and Research Department, citing limited government stimulus and encouraging manufacturing data.

Rajiv Biswas, the chief Asia-Pacific economist at IHS Global Insight, agrees that China is on track to post growth of around 7.5-7.8% this year. While accepting that resolving the country’s debt problems and fixing weaknesses in the financial system will be huge challenges for Beijing, Biswas estimates that there is only a one in four chance of China experiencing a hard landing within the next three years.

So whatever the Chinese economy looks like in five or ten years time, it will continue to grow—and probably at a healthy rate. And that can only mean that “more Chinese companies will go overseas to invest,” Zhuang says. China’s recent interbank credit crunch points to problems in the banking system, he explains, but does not mean that Chinese firms lack funds to invest abroad. Some SOEs are heavily indebted, of course, but many others remain cash-rich and have strong balance sheets. So even if China’s GDP growth dips, its most powerful enterprises should still have the financial muscle to keep investing regionally.

Moreover, China’s high-profile activities in the region disguise the fact that the amount it spends on ODI is still relatively low—the $74.6bn it invested in 2011 was less than 1% of GDP. So there is scope for China to do more, and in more diverse economic sectors. Chinese companies have so far been particularly active in resources, construction and infrastructure, Biswas observes. “However there will be increasing global operations by Chinese firms in other sectors in the coming decade, such as electronics, communications, banking, and autos,” he predicts. “The continued development of Chinese brands is also likely to support the further growth of Chinese multinationals globally.”

Far from curtailing corporate adventures overseas, China’s economic transition will, if anything, encourage even more of them. The investments made so far have been pathfinders and enablers. All the regional infrastructure programs detailed above have been elements of China’s strategy of moving its economy away from the old model of exporting cheap manufactures to the West and onto a new model whereby China’s periphery has better linkages with China, becomes a more developed market for Chinese goods, and can ultimately function better as part of China’s value chain. Beijing also wants less of the country’s money to be invested wastefully at home, and for more of it to be invested profitably abroad.

So any notion that China’s huge regional megaprojects were simply showy expressions of the heady days of double-digit growth can be put aside. As a regional investor, China is still just warming up.