Source: Global Times Published: 2017-4-13
Last week, a consortium of Chinese and Indonesian companies, including China Railway Group Ltd, signed contracts worth $4.7 billion for the engineering, procurement and construction of a high-speed rail project linking Indonesia`s Jakarta with Bandung. The deal marks a major breakthrough for China`s high-speed rail technology to go global, which is also one of the latest achievements in the Belt and Road (B&R) initiative.
In fact, since the beginning of March, Chinese enterprises have won a number of big deals under the B&R framework. For instance, China and Saudi Arabia signed deals worth $65 billion in production capacity and investment cooperation. China State Construction inked a memorandum of understanding with Australia`s BBIG for a package of infrastructure projects in Western Australia worth $3.75 billion. And China CAMC Engineering Co signed an 800 million euro ($849.64 million) contract pertaining to a biorefinery project in Finland.
As these deals were announced before a major B&R forum for international cooperation in Beijing in May, some institutions predict that more deals will come about during the meeting.
The upcoming event is just one reason behind the frequent deals. Fundamentally speaking, after years of implementation of the B&R initiative, Chinese enterprises have started gaining orders from countries along the routes. Since it was first proposed in 2013, the B&R initiative has achieved remarkable progress in connecting more than 100 countries and international organizations. As of the end of June 2016, China had already signed free trade area agreements with 11 countries along the routes and bilateral investment agreements with 56 B&R countries, according to media reports.
Some may wonder how many of these deals will become profitable and what risks they will face. It should be noted that there are three types of B&R projects. The first type is strategic ones, such as the China-Pakistan Economic Corridor. The second is policy projects which the government needs to provide a guarantee, such as the Jakarta-Bandung rail project. Strategic projects and policy projects are not necessarily profitable as they need to serve the bigger picture. While construction of the Jakarta-Bandung railway may not make money, Chinese companies will gain access to the Indonesian market through the project. Looking at the bigger picture, it is still worth it.
The third type is commercial projects, which are conducted based on market principles. While companies are profit-driven, they also face risks such as security, legal, political, economic and even moral risks.
It should also be pointed out that infrastructure construction is seen as a top priority in implementing the B&R initiative, which is conducive for central government-administered State-owned enterprises (SOEs) to go abroad. These Chinese SOEs have unique advantages in the overseas infrastructure market. First, they have rich experience in infrastructure construction. China`s topography is complicated with mountains, basins, plateaus, hills and deserts, and the country also has high population density. Theoretically, if such SOEs can implement a project in China, they can do it in any other country. Second, because of the long return cycle and limited revenue, Western private capital and companies are usually reluctant to invest in infrastructure construction, but Chinese SOEs have the ability to set their sights on the long run. Railways may not make money, but they can help create economic areas, economic corridors and industrial clusters along the lines. China has independent and complete industry chains in many aspects, which may help expand industrial clusters and thus are welcome by many countries.
In addition, Chinese SOEs that specialize in infrastructure can also help B&R route countries make up for their shortcomings in economic development. This is quite different from some Western countries who offered cooperation in the finance sector, often resulting in bubbles, hot money and speculation. Making more people benefit from improved infrastructure is considered to be one of China`s successful experiences.
It is certainly inevitable that China`s infrastructure SOEs will face challenges in going global. There are still many lessons to learn in terms of localization. In this respect, they need to be careful to hold enough respect for local standards, environment, labor and other issues. Sometimes Chinese enterprises may also see their business model squeezed in a foreign market from Western and local rivals. Some countries don`t follow a market economy and do not have a proper legal system, thus putting more pressure on Chinese SOEs.
Relevant authorities in China may organize some case studies for these infrastructure SOEs to avoid unnecessary risks. Nevertheless, it must be emphasized that SOEs in foreign countries should take a case-by-case approach instead of a one-size-fits-all.
The article was compiled based on an interview with Wang Yiwei, senior research fellow of the Chongyang Institute for Financial Studies at the Renmin University of China.