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  • Jul 9, 2014
  • Updated: 11:01pm
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PUBLISHED : Wednesday, 04 December, 2013, 8:09pm
UPDATED : Thursday, 05 December, 2013, 2:47am

China will benefit from investing in others' infrastructure development

Hu Shuli says keeping investment strictly on a business basis, bound by market rules, must be the foundation of its 'going out' strategy

BIO

Hu Shuli is editor-in-chief of Caixin Media Company, editor-in-chief of the weekly magazine Century Weekly, executive editor-in-chief of the monthly journal China Reform and dean of the School of Communication and Design at Sun Yat-sen University. She founded CAIJING magazine, a business and finance review, in 1998.
 

Premier Li Keqiang's promotion of China's high-speed-rail expertise during his trip late last month to central and eastern Europe has drawn a lot of attention at home, with some linking it to "panda diplomacy". Li's move is no such thing. Instead, it reflects Beijing's intention to use infrastructure development as a foundation of its "going out" strategy.

The export of a Chinese competitive advantage to the global market serves the needs of the economy, not foreign policy. In marketing its strength in infrastructure development, China must not shy away from talking strictly business.

Its involvement in developing high-speed rail in developing Asia isn’t ‘panda diplomacy

Both Li and President Xi Jinping have been paving the way. At the Asia-Pacific Economic Co-operation forum in early October, for example, Xi proposed the setting up of an Asian infrastructure bank that would use Chinese funds and expertise to meet infrastructure needs elsewhere in the region.

This "going out" strategy can kill several birds with one stone: it alleviates the problem of China's excess capacity by providing needed infrastructure for others; at the same time, it can restructure China's trade imbalance, contribute to the building of a new global financial system and spur the renminbi's internationalisation.

Thirty-five years after the introduction of economic reforms, China has accumulated vast experience in infrastructure development in diverse environments, not just in railways, but also in roads, airports, power plants and so on.

China may still be urbanising, but most regions apart from its west already enjoy good basic infrastructure. Thus, the building frenzy should be peaking. Yet it isn't. The overdevelopment of its high-speed rail system, for example, has political leaders and scholars rightly worried.

The financial crisis of 2008 only exacerbated the ills of excess capacity. Overcapacity is evident not just in overinvestment in the steel and cement industries, but also in construction, particularly for high-speed rail. This structural problem cannot be solved merely by increasing domestic demand; rather, China must look to the overseas markets to channel this overcapacity.

Some scholars suggested before the global financial crisis that China should have its own "Marshall Plan" to make full use of its foreign exchange reserves, by extending loans to developing countries for infrastructure projects that in turn create demand for Chinese companies. An Asian infrastructure bank would meet these objectives.

There's no doubt Asia's developing economies need to improve their energy, communications technology and transport infrastructure. The Asian Development Bank estimated that 32 of its members would need to invest US$8.2 trillion in their infrastructure in the decade to 2020, an average of over US$800 billion a year. As things stand, there is a shortfall of some US$600 billion a year. Here's where an Asian infrastructure bank could help. China would have little trouble funding it. More importantly, decision-makers must clarify the rules of its operation, including on loans and repayment.

Currently, 80 per cent of the projects won by Chinese companies are located in the region's resource-rich developing economies. Most of these companies are state-owned giants, and the projects are financed by state-owned funds. Examples abound of companies struggling to adapt to local conditions. Furthermore, in order to secure the contract, some companies underbid the competition only to run into problems later on, resulting in work delays and poor post-construction management.

It's clear China's "going out" strategy cannot be based on old models of operation. Even if such infrastructure projects are for now guided by the state, their actual operation must abide by the laws of the market. China could take a leaf from Japan's book, and invite private capital to help make these overseas-bound companies more diversified and globalised.

China must avoid two outcomes. One, its involvement in developing high-speed rail in developing Asia isn't "panda diplomacy", for it is different in substance to China's help in Africa's rail development in the 1950s. Two, it cannot replicate the inefficient development model advocated by ex-railways minister Liu Zhijun .

In this transformation, the government's role is critical. Aside from policy support, it must simplify its administrative procedures, enable competition, and encourage only efficient, technically good companies to "go out"; it must also encourage financial innovation and international compliance.

Chinese companies that leave the comfort of their home base open themselves to international competition, and reform is inevitable.

As party leaders concluded at the end of their third plenum, this relies on the "free movement of factors of production, the efficient allocation of resources and a highly integrated market". Government paternalism has to end one day.

This article is provided by Caixin Media, and the Chinese version of it was first published in Century Weekly magazine. www.caing.com

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Credit must be given to Hongbing Song, the Chinese writer of Currency Wars. The Chinese readers are highly recommended to read the 4th edition of this book (first print: 1 April, 2013). If you don't have time, just read p.405-p.408.
You may think this writer is full of conspiracy theories. But my feeling is that he writes better and better over time.
Unfortunately, it seems that no English translation of the book is available in the amazon website.
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Hong Kong is arguably the best city in Asia in which to set up the Asian infrastructure bank. China’s excessive US$ reserves could be lent out directly to the other Asian neighbours through the bank, instead of China all buying the US treasuries and thereby lending money to the US military to enable her to encircle us.
This can develop Hong Kong into Asia’s loan centre, potentially rivalling London and New York as the world’s main global financial centre. Shanghai and Singapore will be left far behind.
The bank also supplements the suggested Islamic bond market which ‘tap(s) investors in the Middle East and elsewhere who may seek opportunities in the mainland market, Financial Secretary John Tsang Chun-wah said.’
 
 
 
 
 

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