China's newest super export: global infrastructure

The building of an infrastructure juggernaut

China’s decades-long infrastructure boom has created a huge new industry. Now that industry is pushing out into the rest of the world as no Chinese industry has done in modern times.

By Joseph Catanzaro

In a walled compound on the outskirts of Libreville, the capital city of Gabon, Yang Yi pores over a map of the West-African nation. The city’s crumbling French colonial architecture and general dilapidation are testament to a failure of nation building. For decades, it has felt like a city where progress ran out of steam and staggered off to find a patch of shade.

However, things have changed in recent years, at least on the foreshore and in the central business district. Cranes have appeared above construction sites bearing logos in Chinese characters, bold branding for companies such as Yang’s employer, the state-owned China Road and Bridge Corporation (CRBC). The Chinese company is building the first overland route from Libreville, where more than half of the nation’s 1.7 million residents live, to Port-Gentil, Gabon’s second-largest city which features the country’s deepest harbour.

Hundreds of kilometres of seemingly impassable jungle and marshland stand between them, but China is making the once impossible road a reality.

“For years, Gabon has dreamed of this,” says Yang.

“Previously, the only way to get to Libreville from Port-Gentil was by boat or plane. The ships are slow and unreliable and the flight costs almost as much as flying to a neighbouring country. Our project is the most important project happening in Gabon right now.”

Kamel MellahaiIt’s a similar story across Africa, a continent long dogged by bad or non-existent infrastructure. Chinese infrastructure companies have built, or are building, everything from a US$475 million light rail network in Ethiopia’s capital, Addis Ababa, to more than 70 hydropower projects stretching across the continent, courtesy of state-owned juggernaut Sinohydro.

Africa is not the only region experiencing the Chinese infrastructure boom. For the first time in centuries, Chinese commerce is making a big push into the world outside its immediate zone of influence, from Ecuador to the UK – and infrastructure is at its centre. 

The Heritage Foundation, a US think tank, estimates China has invested more than US$500 billion abroad between 2013 and the beginning of 2016, and almost US$300 billion of that has been across three infrastructure sectors: transport, utilities and energy. 

China’s assistant minister of commerce, Zhang Xiangchen, is among those who predict the Asian nation’s outbound investment will soon surpass the amount invested domestically. Professor Rana Mitter, director of Oxford University’s China Centre, says China may have already passed that point. 

From joint ventures in nuclear power stations in the UK, to ports in Australia and telecommunications networks in Myanmar, Chinese infrastructure firms are winning tenders and contracts in a rapidly diversifying range of sectors globally. Mitter says all signs point toward this being just the beginning.

Building an infrastructure juggernaut

Addis Ababa's light rail under construction in 2014.China has experienced three decades of breakneck development, rapid economic growth and urbanisation. Between 1990 and 2015, the proportion of city-dwellers in China jumped from less than 30 per cent to more than 50 per cent, creating dozens of new cities with towering skyscrapers and huge suburbs. To connect them, China built huge networks of phone and data lines, highways, high-speed rail networks, bridges, tunnels, ports, airports, dams, pipelines, sewers, electricity lines and power plants.

Kamel Mellahai, professor of strategic management at the UK’s Warwick Business School, says this process has made China a world leader in construction, energy and transport systems. But as China was reaching this peak capability, its economy began to slow. GDP growth last year dropped to 6.9 per cent, the lowest in 25 years, leaving some infrastructure firms with more capacity than work. So many are now going abroad, in what Mellahai calls “an extraordinary surge” of outward foreign direct investment.

A number of push factors are driving this shopping spree, from the lack of domestic investment opportunities and the prospect of keeping Chinese workers employed, to a desire for safer and higher-quality strategic assets outside China. Mitter says Chinese companies, both state-owned and private, are looking to go global because it’s a strategically sound move. Many indicators suggest this investment push will continue and will also encompass firms in advanced economies as well as developing regions. 

Mitter points out the signs that the strategy has the blessing of the Chinese Government: Beijing has relaxed outbound investment regulations, built policy frameworks such as the “one belt, one road” initiative and even created a new Asian Infrastructure Investment Bank to fund them.

“The fact is the world needs Chinese investment in infrastructure.” Kamel Mellahai, Warwick Business School

Outside reaction

The growing global reach of Chinese firms has received a mixed response, raising issues of neo-colonialism in developing countries and security concerns in Western nations. ChemChina’s bid for Swiss agribusiness Syngenta provoked a flurry of media articles on the deal’s potential security risks, even after expert analysis found no real security issues.

Similar concerns were raised and dismissed when China General Nuclear Power Corporation took a one-third stake in the UK’s Hinkley Point nuclear power project. In Australia, controversy erupted over Landbridge’s Darwin Port lease, even after the Chinese company was granted approval by the Foreign Investment Review Board. Landbridge is frequently alleged to have close ties to China’s military. 

Mellahai argues all these controversies were overblown and that implications should be assessed case by case.

“The fact is the world needs Chinese investment in infrastructure,” he says. “Whether or not an investment is acceptable should depend primarily on its consequences and whether risks can be prevented or controlled.”

Mitter adds that Western nations may run greater long-term risks by blocking investment from China, where research and development on infrastructure is growing rapidly.

“Do Western countries want to cut themselves off from what might be advantageous technology?” he asks.

The quality question

Professor Linda Lim, a China strategy expert at the University of Michigan Ross School of Business, says the perceived risk of low-quality Chinese construction is largely a thing of the past. She says Chinese companies are now aware their reputation is on the line internationally. 

In March 2012, a military ammunition depot exploded in downtown Brazzaville, the capital of the Republic of the Congo, killing more than 260 people and levelling entire buildings in a blast radius that stretched for almost 3km. When the dust settled, one building complex just 50m from the blast remained structurally intact, sheltering a large local community living behind it from the worst of the explosion. It was an almost complete, 200-apartment compound being built by Beijing Construction Engineering Group.

“The compound acted as a shield to protect the people living on the other side,” says Nie Tieli, general manager for the company’s Congo operations. “It stood up for a reason. It was designed to withstand a magnitude eight earthquake.”

Since the blast, the company has been awarded a swag of contracts, including the tender to build what will become the tallest buildings in the Republic of the Congo, a pair of 120m towers in the capital. 

Mellahai, Mitter and Lim all believe that nations can secure good deals with Chinese investors. 

“A new competitive source of investment funds the Chinese have put forward is clearly being eagerly embraced by a lot of overseas actors and governments,” says Mellahai.

“If you sign a deal [with China] on Monday, someone might start digging your roads for you the following Tuesday.”

Who gets the jobs?

Tanker ship berthed at the port of Newcastle. Debate is growing over the long-term employment benefits of China’s projects. Mitter warns that China will need to heed the reactions of people in the nations where they build, particularly when it imports native Chinese as labour.

“Chinese investment does not necessarily bring local employment opportunities,” he says.

Lim agrees. “The way the Chinese operate is they can mobilise capital and their own labour quickly,” she says. “That’s how they can operate so fast. But that limits employment creation in the host countries.”

She notes similar concerns with South Korean firms going abroad 30 years ago. “China is the same, only bigger.”

The road being built by CRBC in Gabon employs about 300 Chinese people and 1000 locals. “Gabon has wanted and looked at this project for 20 years, but they couldn’t get it started,” says Yang.

“Companies from the US and EU did studies, but their prices were higher and they did not offer financing.” 

This underlines the importance of China’s ability to mobilise capital. The US$600 million CRBC proposal came with 95 per cent of the necessary funds financed by a 20-year, Chinese Government loan at just 2 per cent interest.

Standing on their own

With its economy in transition, China cannot afford to bankroll infrastructure firms and projects abroad forever. Lim believes that Chinese firms, such as mobile and telecommunications giant Huawei, could be ready to thrive without subsidies.

“A lot of it is sheer comparative advantage,” she says. “Huawei has a whole city full of engineers, a favourable domestic market and market scale. They could probably compete without subsidies in some things.”

Mitter says the end game for Chinese companies is not just to build the world’s infrastructure, but to eventually begin winning the lucrative service contracts to run them. Even more than the business of building infrastructure, that will enmesh China in the world of commerce far outside its borders.

One belt, one road

Rana MitterChina’s ambitious “one belt, one road” (OBOR) initiative and the new China-backed Asian Infrastructure Investment Bank (AIIB) are providing the policy framework and the funding to boost the international business of the nation’s infrastructure firms, say leading China watchers. They are less certain it will succeed in building China’s geopolitical influence and soft power.

The OBOR plan is a massive, evolving patchwork of diplomacy, China-funded infrastructure projects and free-trade areas and agreements. First floated by China’s President Xi in late 2013, it seeks to weave together some 60 of China’s trading partners in a huge economic zone, the contemporary equivalent of the Silk Road trade routes that linked Asia and the Mediterranean in ancient times. At the same time, it aims to give Chinese infrastructure companies a new way to secure international business, says Oxford University’s Professor Rana Mitter. 

It’s already won some success by helping Chinese infrastructure firms secure business abroad, he adds.

“The end game for Chinese companies is not just to build the world’s infrastructure, but to eventually begin winning the lucrative service contracts to run them.” Rana Mitter, Oxford University

Last year, China signed 51 agreements with Pakistan to develop a 3000km economic belt and trade corridor linking China’s Xinjiang region to the Pakistani port of Gwadar. The deals will upgrade the port and bring a new airport, roads, rail links, resource pipelines and a US$1.65 billion hydropower plant on the Jhelum River in Pakistan’s north-east that will be built by a subsidiary of China’s giant state-owned China Three Gorges Corporation. 

Professor Linda Lim, a China strategy expert at the University of Michigan in the US, calls OBOR “kind of old-fashioned”, but Lim believes the AIIB is much more palatable. It has attracted some 57 countries as founding members and about US$100 billion in funding. However, Mitter warns that even with this new source of funds, it’s going to be hard to meet the huge infrastructure needs of the Asia-Pacific region.

Deals from China’s infrastructure buy-up

Here are just a few of the deals signed by Chinese companies in the past two years, many joining Chinese and non-Chinese partners:
  • Landbridge buys a 99-year lease on the Port of Darwin for A$506 million from the Northern Territory Government.
  • China Merchants Group and Westpac’s Hastings Funds Management buy a 98-year lease on the Newcastle Port for A$1.75 billion.
  • China General Nuclear Power Corporation joins French-owned EDF in a proposal to develop the UK’s £18 billion Hinkley Point nuclear power project.
  • China and Algeria sign a US$3.3 billion agreement for the Shanghai Port Group to build and manage Algeria’s major seaport of Cherchell.
  • CCCI buys construction firm John Holland for about A$1.15 billion.
  • Chinese firm State Power Investment Corporation buys Pacific Hydro from fund manager IFM Investors for about A$3 billion.
  • China’s Cosco buys 67 per cent of the Piraeus Port Authority for €369 million.

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