Prudence in engaging with China

Idon’t blame President Duterte and other top officials of both national and local government units in the Philippines for their enthusiasm in wanting to attract Chinese investments into the Philippines. The most recent example is the possible investment in the third telecom player that will compete with the existing duopoly. A recent independent study by Yuji Miura of the Japan Research Institute has highlighted the fact that China is a very large exporter of infrastructure, such as railroads and nuclear power generators, having surpassed Japan in these sectors. There is no question that Chinese technology, especially in the area of high-speed rail systems has reached world-class level. I would like the Chinese, for example, to be the ones to construct the railroad system in the island of Mindanao, a much needed public infrastructure which can only be built using the so-called “hybrid system,” with the Government as the primary promoter and the funding coming from official development assistance (ODA). We just have to make sure that we get the best possible terms if the financing will be in the form of a soft loan from China. A railway system in Mindanao will not be attractive to private investors and would be difficult to finance through a Public Private Partnership (PPP) arrangement. For the Chinese government, it will be a good investment because it can go a long way in increasing the productivity of the agribusiness sector in the Mindanao, the food belt of the Philippines. Improved food production in Mindanao will also redound to the benefit of the Chinese people who have to import significant amounts of food, especially high value fruits and vegetables, as their standards of living improve. Thus, it will not a purely philantrophic gesture on the part of the Chinese government.

It would be wise, however, for the Philippine Government to be cautious in putting all the eggs (i.e., the infrastructure projects) in the Chinese basket. As pointed out by Mr. Miura, there are critics within China itself that would want to see the country’s foreign investment strategy revised. There are those who claim that over 90% of resource development investments and mergers and acquisitions (M&A) have failed. To quote Mr. Miura, “Even infrastructure exports which were forging ahead under full sail, have started to stumble. Reasons for the overseas expansion failures include political risks, such as wars, unrest and regime changes; legal risks, such as investigations by local authorities; underdeveloped legal systems; and business environment risks, such as unexpected costs and opposition from local residents.” Although these risks are endemic to the host countries, there are reasons for failure which are inherent to China’s unique government-led approach to overseas expansion. These problems which are caused by the Chinese governmentled approach have to do with the very close ties of the corporation with the government in China, with project risk assessments usually overly optimistic; a growing sense of caution towards China; and a marked tendency toward adhoc responses. I would also add the tendency for investment decisions made by the Chinese to be to colored by political motives and may not give due regard to technical and economic efficiency.

If we consider the overseas sales-toasset ratio (calculated by dividing overseas operating revenue by overseas assets), such ratio of Chinese companies with high levels of overseas assets have been falling intermittently since 2002. This may suggest that overseas expansion has left companies with a growing accumulation of non-performing assets that do not contribute to their sales. It also has to be considered that the Chinese companies have low transnationality indices, which show their level of globalization. Although China has become the second-largest source of foreign investment in the world, Chinese companies continue to have low levels of globalization. This may be explained by the fact that Chinese investments abroad are weighted heavily towards resource development, with the aim of ensuring reliable suppliers of resources to feed the domestic markets of China.

For some time now, China has been pursuing a “Go Global” strategy. This strategy may have to be modified in the coming years because of a rapid growth in the loan balances of Chinese financial institutions and the diminishing foreign exchange reserves. The Chinese Government has allowed their state enterprises to borrow almost unlimited amounts from the banks. The Administration of Xi Jinxing may not be able to pursue aggressively as before the Go Global strategy. According to Mr. Miura, there is a great likelihood that investments in the United States may be constrained in the near future as a result of President Trump’s growing sense of caution toward China. It is also highly probable that progress under the One Belt, One Road policy will slow down because of an increasing tendency toward risk avoidance. The ambitious One Belt, One Road initiative is the means through which China intends to establish a new world order, but businesses are not necessarily moving towards the realization of the ambitions of Xi Jinping.

From these considerations, it would be prudent for government officials trying to attract funding for their respective infrastructure projects to approach the Chinese investors with some amount of caution. As President Duterte himself has been doing, it would be wise to make the Chinese compete with their counterparts from Japan, South Korea and Taiwan from Northeast Asia. These three other Northeast Asian territories have also excellent records in having built some of the most modern railway systems, toll roads, airports, telecom systems and other infrastructures during the last forty years or so. The same can be said about some of the European countries with an excellent record in infrastructure building, such as Spain, Belgium and Germany, among others. Within Asia, India may also be considered as has already been done by the Megawide group in airport terminals as well as Malaysia as in the case of the Walter Brown group in railways systems. Especially at the local government unit level, as in provinces like Batangas, Quezon and Bataan, there should be a preference for using the Private Public Partnership (PPP) model in the financing of infrastructures like airports, railway systems, seaports, water utilities and waste disposal and recycling systems. Many of these projects can be funded by local companies using the excess liquidity of our financial system at least for the next three to five years. Foreign funding is not indispensable if we know how to unlock both the talents and the finances from local sources. The moral of the lesson is “Go slow with Chinese investors.”

For comments, my email address is bernardo.villegas@uap.asia.