Chinadialogue (CD): How would you evaluate China’s overseas investments?
Mei Xinyu (Mei): China’s overseas investments take two forms. One is project contracting, the other direct investments.
China’s construction industry is the world’s biggest, and in 2010 it became the world’s biggest overseas contractor. In 2011, Chinese firms signed engineering contracts overseas worth US$140 billion. In 2012, that rose by more than 10% to US$156.5 billion.
Regardless, overseas investment is a requirement for China’s economic growth. Outwards expansion is now the only way to maintain the speed of economic growth and use up excess production capacity. China’s big companies also need to spread their operations across different countries and markets to balance fluctuations in income.
China is the world’s biggest resource market. Other countries need Chinese investment in order to guarantee their share of the Chinese market, and also to resolve their capital and export issues.
CD: What risks and problems do China’s overseas investments face?
Mei: One of the bigger risks is unstable political circumstances in the host nation. This has caused many investments to fail.
A classic example is Mongolia. It has large coal mines, but lacks the technology and capital to develop them, so it welcomes foreign investment.
In 2012 Chalco signed a long-term coal sales agreement with Mongolia’s ETT. Chalco provided a US$350m loan, with ETT to repay the loan by supplying coal at an agreed price. But that same year ETT executives were replaced after a change of government, and the company failed to provide the agreed quantity of coal – only half was delivered. In January 2013, Mongolia reneged on the agreement, demanding a higher price for its coal. Last year coal sales to China were stopped outright. Chalco is unlikely to earn back its original investment.
Mongolia has also lost out. It failed to understand its role in the market, and understands China even less. The price of coal in China started to drop in 2012, and half a year later Mongolia tore up the contract. Even if they start mining again they won’t be able to sell it.
Over the long-term, things have been better in South-East Asia as cultural differences are less significant, and communication is easier. The main obstacle is political pressure from the US and Europe. In Africa and Latin America the problems are more local: there are deeply rooted cultural and social traditions that won’t change easily and that means conflicts arise as projects start and progress. Turbulent political and social circumstances also threaten investor interests.
CD: In the last year or two, there’s been a debate in Chinese media about failings in environmental protection, use of local workers, and community relations; and also improper methods being used to win projects in poorly-run countries. Is that the biggest problem facing Chinese firms investing overseas?
Mei: These are issues, but shouldn’t be major concerns for the companies. Business runs by its own rules, and political issues should be considered separately.
Environmental disputes are a political matter for the host nation to resolve through higher environmental standards and tougher enforcement. Companies do have social responsibilities, but you can’t expect them to do the job of protecting the environment.
When it comes to labour, Chinese firms have experienced technical staff who can help increase efficiency. In Nigeria, for example, China built a port using its own staff. It cost 200 million yuan and took two years. It would have taken a decade and one billion yuan using local staff. Which is the government going to choose? The government wants to spend as little as possible and get both efficiency and quality.
There’s another more important issue: the places China invests in are usually not stable or safe. Less contact can protect Chinese workers.
As for winning project contracts via improper methods, that’s not something investors can solve. Companies adapt to the local rules. And anyway, the political traditions of the former European and US colonies were created by Western countries; they set the rules of the game. It’s a political matter, and it’s unreasonable and unrealistic to expect foreign companies to resolve it.
If these problems are to be solved the host nation needs to set some basic standards to regulate investment.
CD: Is there a need for changes to China’s overseas investment policies and strategy?
Mei: Two changes are needed. First, relax market controls, so the market can develop more freely. Second, improve protection of overseas investments through bilateral or multilateral agreements. And in extreme cases, do not rule out the use of force to protect the assets of Chinese companies.