Unexpected Setbacks, Emerging Challenges on the Sixth Anniversary of BRI

The Belt and Road Initiative (BRI) was proposed by Chinese leadership more than six years ago, and today the projects it is inspired globally have made a big impact on many countries. There has been a lot of money spent and lent, and also tremendous controversy generated in some nations.

China designed the BRI to work on many different levels. The most important concept that drives the BRI is the internationalization of the Chinese economy. China was closed to the outside world for many decades after the communist revolution under Mao Tse-tung, and the BRI is a program that illustrates how powerful China has become on the world stage.

According to China, the BRI serves to help the people of China to live the “Chinese Dream” of prosperity. For the rest of the world, the BRI helps the global village to build a “community with a shared future for mankind”, at least according to Chinese-approved publications.

A World With Beijing at its Center

The Chinese government makes no secret of the authoritarian control of its nation, and the recent construction of internment camps for the ethnic minority Uyghur population in the Xinjiang province of China is a graphic demonstration of how Beijing ultimately deals with any sort of dissent.

China paints a far different picture of its politics when the BRI is discussed, though the same themes play out no matter where BRI development money is spent. There is no doubt that some viable infrastructure is being built with Chinese money, labor, and state-owned companies, but the effects of this grand program on local populations vary.

When China talks about the BRI, it sees the goals of the program on four levels.

The first and second levels are designed to further China’s diplomatic mission under Xi Jinping, who has cemented his position in the Chinese hierarchy for his natural life. The third level of the BRI is to create an active role for China in global governance. The fourth is said to be altruistic and is the main platform for Chinese aid to flow to the needy of the world.

As balanced as these goals may seem for a powerful nation on the rise, the actual implementation of BRI programs has been fraught with corruption. The BRI has also exported a Chinese labor force to many points of the globe, and also saddled small nations with enormous debts.

A Big Win for China

China has signed a staggering number of agreements in the course of the BRI opening six years. In total, 195 documents with 136 countries and 30 international organizations have been signed within the BRI framework. The United Nations has also passed resolutions that support some of the BRI’s projects, although there has been push-back from other global powers, as well as some BRI ‘partner’ nations.

For China, the increased power it is accumulating is all part of its new role as a global power broker. China sees itself as a force for good in global governance, and it is using economic means to open the door to a much more important role in world trade.

When a nation decides to enter a partnership with China in the BRI, the likelihood is that they will end up with large debts, a Chinese state-owned company building all the key infrastructure in the project, and a large Chinese labor force in their nation.

The equipment and material for the project will also be imported from China to the greatest extent that is possible, which means more money flowing back to Chinese state-owned banks, and decades of reliance on China for parts and maintenance.

China has used numerous methods to secure these agreements, including corrupt deals that saw large amounts of money siphoned off BRI projects by wildly corrupt politicians, as was the case in the 1MDB scandal in Malaysia.

The exposure of the corruption in Malaysia led to the fall of the government that created the original agreements, and a renegotiation of the contracts that led to somewhat better terms for the Malaysian people. China sees the BRI as a way to increase its international political reach, but it has also created a terrible image of corruption and one-sided deals with opportunistic politicians in some of the world’s poorest nations.

Challenging The Chinese Century

The emergence of China as a manufacturing powerhouse was met with some enthusiasm and loads of direct investment from other global economic centers, but the rise of China as a force for global governance is creating worries in the same powerful economic zones.

The United States and the Western media have voiced concerns over the corruption that the BRI has seemingly supported in some areas, and how the debts that have been incurred could lead to China taking over large amounts of valuable property globally.

These concerns have been shared by many local populations, as many of the governments that cut deals with the Chinese government didn’t give their population a chance to challenge the investments that could displace local people, and destroy their local natural resources.

The ongoing trade war between the US and China may be one way that the USA is working to hinder the advance of Chinese BRI development, and there have been many local-level protests in areas where Chinese development is taking place.

Bringing the BRI Back to its Values

The Chinese government set some high goals for the BRI. However, in practice, the BRI seems like a one-way street that will help China to expand both its economy and global role as a superpower. The rampant corruption in many BRI projects can’t be undone, and the use of predatory debt agreements that put client nations into an unsustainable position should be seen for what it is.

While it is possible for China to use responsible lending practices, stamp out corruption at the highest levels, and open up BRI projects to other nations, none of these things are likely to happen at scale. The BRI was and is designed to expand Chinese power, and actions taken by China are well within the scope of the actual goals that are driving the BRI.

As China works to expand its influence, it is likely to face increasing pressure for other global powers, as well as the disenfranchised populations in the nations where BRI projects are enriching the powerful few at the top, and a host of native Chinese who flock to BRI projects to work and start new businesses.

The BRI is clearly the most ambitious global infrastructure project since the end of the Second World War, and it may succeed in changing the global power balance. The road to that new world will likely be a rough one, and will undoubtedly be marred by tremendous corruption, human rights abuses, and catastrophic damage to the environment.

China-Bangladesh To Build Dhaka’s Mega New Town Project Called Purbachal

China Invests Heavily in Bangladesh-Boosts Electrical Grid, Smart City Project

China will be influential in building the first smart city in Bangladesh, called Purbachal. The project is located near the Bangladeshi capital of Dhaka and occupies 6,150 acres. Purbachal is a part of the more than $10 billion USD worth of Chinese investments in Bangladesh, which are adding both infrastructure and jobs to the economy.

According to Chinese state news agency Xinhua, The new city is “…the biggest planned township in Bangladesh, with many mega infrastructures including an international exhibition center under construction by another Chinese firm.”

The news agency went on to comment, “A Chinese and Bangladeshi joint venture has signed a deal with the Bangladeshi government to implement a mega water project in Dhaka’s Purbachal new township under the country’s Public Private Partnership (PPP) initiative.”

In order to supply Purbachal with water, the Meghna river will be partially diverted. The water aspect of Purbachal is a massive infrastructure project in its own right and will affect the watershed of the Meghna river. China is backing a number of massive projects in Bangladesh, some of which have been unpopular with the local population.

China Making Big Investments in Bangladesh

As a part of the Belt and Road Initiative (BRI, or One Belt One Road ‘OBOR’) China is building global infrastructure on perhaps the largest scale in recorded history. In Bangladesh, China has helped to bring Bangladesh’s total electrical output to a projected 23,222 megawatts (MW) by the end of the calendar year.

Other Chinese investments in Bangladesh include the Payra Power Plant, the 8th China Bangladesh Friendship Bridge, the Chinese Economic and Industrial Zone, and the International Exhibition Center. Xinhua reported that the Payra coal-fired power plant will add 660 MW of electrical power to the Bangladeshi grid starting in 2020, in its first phase.

Xinhua added that the Chinese United Water Corporation will be developing the infrastructure to supply water with Bangladeshi company Delcot Water Limited, in a deal called, “Development of Water Distribution and Supply Facilities at Purbachal New Town through Public-Private Partnership.” The PPP is the first one in the history of Bangladesh.

Cutting Edge Technology Meets Local Problems

In addition to established technology, like coal-fired power plants, China has also committed to installing as much as 500 megawatts of renewable power by 2023. The renewable power projects are expected to cost as much as $400 million USD, which is less than 5% of the total outlay for Bangladeshi development at this point.

Earlier this year a $2.5 billion USD power plant that is under construction in Bangladesh was marred by violence that left at least one Chinese worker dead. The project is being managed by the Bangladesh-China Power Co Ltd (BCPCL), and in addition to the loss of life, major equipment was removed from the construction site during the incident.

Like many projects that China invests in, many Chinese workers are brought into the nation, and relationships with the local population are sometimes strained. The power plant is a 50:50 joint investment between Bangladesh and China and is expected to come online in 2020.

China is also helping Bangladesh to build a permanent submarine base at Cox’s Bazar. Construction is scheduled to begin by the end of 2019 and will be undertaken by Chinese firms. Bangladesh has two Chinese-built Ming-Class (Type 035G) submarines, which entered service recently, in 2017.

The Chinese Investment in Latin America Mega-Projects

Chinese Investment in Latin American Construction Continues to Expand

China is building infrastructure all over the world as a part of its Belt and Road Initiative (BRI). Latin America is a huge beneficiary of Chinese spending. There are at least 59 major projects underway in Latin America that are backed by Chinese funds, amounting to more than $85 billion USD.

A recent data set released by GlobalData shows that China is making Latin American projects a priority, and the report speculates that the BRI is behind the renewed push by Chinese companies to find local partners for infrastructure projects.

China is arriving in Latin America at the right time, as the ongoing Odebrecht corruption scandal has left numerous projects in need of new construction companies. Odebrecht is a Brazilian company that has been effectively shut down due to massive corruption that spanned the company’s entire operational area.

New Ways for China to Grow

Dariana Tani, who is an economist at GlobalData, expands on the themes in play:

“With diplomatic and economic relations between Latin America and the US more uncertain than ever, many governments across the region see Chinese infrastructure investment as a great alternative to existing traditional financing, in particular, because it does not require the arduous social and time-consuming environmental procedures that usually accompany the World Bank and the Inter-American Development Bank projects…Also, with the recent incorporation of several Latin American countries into the BRI, China’s influence in the region is further strengthening.”

Latin America has numerous natural resources that China needs access to. The Southern Cone, comprised of Argentina, Uruguay, and Chile are major producers of grains and metals, and Brazil is one of the biggest exporters of staple food crops in the world.

Nations in South America have traditionally been allies of the United States, but that has changed over the past two decades. The fall of Odebrecht has left a massive gap in the Latin American construction industry that looks like a perfect fit for a China on the rise.

Concerned Local Populations

While China has had no trouble locking in new construction projects, the local population in some areas where China is developing new infrastructure has concerns over how their rights are being protected.

GlobalData’s economist Tani commented, “Local backlash against the lack of adequate environmental assessments and labor concerns are some of the main challenges facing Chinese-funded infrastructure projects in the region. For instance, China’s reluctance to require reasonable standards for its BRI-related projects and loans has encouraged more corruption and debt in the region, as well as led local governments to pursue economically and environmentally unsustainable or non-viable projects.”

At a state level, the messages towards Chinese involvement in Latin American construction is mixed. The new president of Brazil, Jair Bolsonaro, thinks that China is ‘buying up’ Brazil. On the other hand, he also announced that he would like to see China invest more money in Brazilian infrastructure projects, as long as they are developed within the nation’s existing laws, and create jobs for the local population.

Like most governments, Brazil would like to see more money flowing into the nation, and supporting its development. China is well placed to fill this role and wants to have preferential access to Latin American resources, as well as closer political ties to influential Latin American countries, like Argentina, Brazil, and Mexico.

Chinese Influence Grows as Result of Belt and Road Investment

The Belt and Road Initiative (BRI) is reported to be the most costly global infrastructure build-out in human history. China is building what they see as the new Silk Road. Numerous high-tech transportation projects are currently underway, and Chinese banks, construction companies, and citizens are working to make Beijing’s dreams a reality.

While the ideas behind the BRI are noble, the implementation of the projects has been met with criticism. Other global powers, most notably the USA, have expressed concern over the scope of the BRI, while some nations who China has invested in are working to keep the deals fair for all involved.

Building Better Infrastructure

There are many places in the world that have a hard time attracting investment capital from traditional sources. Despite being Indonesia’s fourth-largest city, Bandung has limited access to the nation’s capital, Jakarta. Currently, the trip from Bandung to Jakarta takes five hours by road, but a new Chinese-basked $6 billion USD high-speed rail project will cut that time down to less than an hour.

According to Xiao Songxin (via a translator), who is leading the consortium Chinese and of Indonesian and interests behind the new rail line, “The two countries’ companies can complement each other, support each other, and develop together. It’s fundamentally a win-win project.”

The new rail line from Bandung to Jakarta is a small part of a much larger push to create a new network of Chinese-controlled infrastructure that spans from Siberia to Rotterdam. While the nations that host the new projects are given some say in their development, large amounts of debt are used to keep the projects in China’s pocket.

China’s New Global Market

While nations like Indonesia take on massive amounts of debt, China’s state-owned companies are getting most of the rewards from the BRI projects. The construction companies that build many of the BRI projects are Chinese and bring a managerial class with them to train some local workers, who are kept in subordinate roles.

There is no doubt that places like Bandung could take advantage of new transportation options, but servicing the debt load that China has extended to Indonesia may prove challenging.

In other nations, China has insisted that local laws are changed to protect its investment, and if debt repayments aren’t made, China will be able to take possession of infrastructure that Chinese companies built with Chinese labor.

The equipment and raw materials for BRI projects are also coming from China. China has become a world leader in high-speed rail technology, and when Chinese companies build a new rail line, they use Chinese made components, and rail from Chinese steel manufacturers, like state-owned Baosteel.

A Closed Loop, Ending in China

Baosteel is responsible for producing as much steel as the USA on an annual basis. In fact, the company produces so much steel it has a hard time finding a market for its products domestically. The BRI provides a perfect outlet for Chinese overcapacity, while at the same time giving China de-facto control over the largest infrastructure network ever built.

Huang Weiliang works at Baosteel, where he directs strategic planning and technology. He commented that (via a translator),

“For the steel industry, the Belt and Road Initiative will generate direct demand for steel products. With the economic development in those Belt and Road countries, their people’s living standards will improve, and thus the demands for durable consumer goods will increase.”

The problem is that in many nations, like Cambodia, the money from new Chinese projects hasn’t helped many in the local population. The same dynamic recently became public in Malaysia, where the now infamous 1MDB scandal has embroiled the Malaysian Government and many international banks.

The head of the office in the Chinese Ministry that oversees the Belt and Road Initiative, Xiao Weiming, told US media that (via translation),

“We encourage Chinese companies to go out of China to enhance their production capability. In return, we can use the increased government revenue to improve the income level of some poor areas. This is important.”

In Kuantan, Malaysia this goal of Chinese companies expanding overseas turned into a nightmare for anyone involved in the construction of an industrial park and port. The former Malaysian Prime Minister is facing criminal charges that are related to his alleged embezzlement of Chinese development funds, and banks like Goldman Sachs have been subpoenaed over the same potentially illegal acts.

Mahathir Mohamad, 92, the Malaysian Prime Minister (PM) from 1981 to 2003 came out of retirement to oust former PM Najib Razak, and renegotiate numerous BRI projects that span Malaysia, many of which he described as “predatory”.

Prime Minister Mahathir Mohamad commented,

“Everything (for BRI projects) is imported, mostly from China. Workers were from China. All of the parts and the materials were from China. And the payment for the contracts were also to be made in China. That means that Malaysia doesn’t get any benefit at all…When you start borrowing huge sums of money and asking foreign countries to develop, and then you cannot pay, then, obviously you’re going to lose that part of the country.”

China has made deals for the BRI across the planet, and many of them use debt to ensure that China will win no matter what happens. If a country is able to pay, China will still have access to the infrastructure, and revenues from maintenance and support services, if the country defaults, China will own the infrastructure outright.

Sri Lanka has already opted to turn over a BRI project to China when the debt became unsustainable, and Kenya has ceded its sovereignty over East Africa’s largest port for access to Chinese development funds.

Concern Over the BRI Grows

Senior leadership in the USA has been voicing concern over the BRI, and what some view as corrupt dealings with poor nations. US Vice-President Mike Pence stated,

“We don’t drown our partners in a sea of debt. We don’t coerce or compromise your independence. The United States deals openly, fairly. We do not offer a constricting belt or a one-way road.”

The 1MDB scandal isn’t the only situation where Chinese-backed companies have found themselves accused of corruption. The US alleges that the China Communications Construction Company, a state-owned company, has been involved in corrupt dealings in at-least four nations.

The US is also worried that China may be building a series of international ports that could one day be used for its budding Naval fleet.

Last year Secretary of State Mike Pompeo stated,

“When China shows up with bribes to senior leaders in countries, in exchange for infrastructure projects, then this idea of a treasury-run empire build is something that I think would be bad for each of those countries, and certainly presents risk to American interests.”

The US is forming a $60 billion agency that will launch this year, in hopes that it can compete with the Chinese BRI. The amount of money behind the agency has yet to be disclosed, and it may employ deals with nations like Japan to expand non-Chinese development options in emerging markets.

China is Willing to Deal

Although some of the specifics of BRI projects have been criticized, for Malaysia, Chinese development has been able to continue. The new PM was able to renegotiate some of the agreements that the previous administration had made and put Malaysia into a better position.

After the negotiations with the new Malaysian PM concluded, China was willing to reduce the price for construction by 30% and hire additional Malaysian workers. According to Prime Minister Mahathir Mohamad, who was responsible for the new agreements, “They (China) are willing to listen to our views, and, in the end, they accommodated our problems.””

Chinese officials insist that there is no preference given to Chinese companies in BRI projects, despite the fact that most of the labor and materials come from Chinese companies.

Xiao Weiming commented (via a translation),

“Chinese companies won the bidding, and other foreign companies didn’t win. And the reason is simple. Foreign companies and workers are not as hardworking as the Chinese…I cannot say it’s the Chinese government’s support. China’s financial institutions will provide financing only if they deem the projects are profitable. We do not make investments blindly. We Chinese are not stupid.”

For the moment it would appear that Chinese-backed infrastructure projects are unmatched by any other nation. Whatever the USA has planned as competition will face adversity, as many nations have already cemented ties with China. Some officials in emerging markets also point out that the US is difficult to deal with, while China has made doing deals easy.

Introduction: Boom in Chinese E-commerce

The massive boom in the Chinese e-commerce industry has been staggering. The world’s second-largest economy is home to the largest e-commerce market across the globe – at over $1 trillion in size, it is three times larger than the runner up, the United States. It’s a behemoth, and it’s only getting bigger. KPMG has predicted that by 2020, China’s e-commerce market will be larger than those of the U.S., Britain, Japan, Germany, and France – combined.

While the exponential increase in the size and strength of the Chinese e-commerce market has been a gold-mine for certain companies and investors, it’s also created a potential opportunity for those looking towards alternative investments as a source of alpha returns.

China is currently facing two problems here: first, there isn’t enough warehouse space to accommodate this surging growth in e-commerce, and second, the warehouses that are currently in operation are not modernized. The figures here are quite shocking. Although China’s e-commerce market is currently dwarfing the rest of the world, less than 20% of its warehouses are considered to be modern.

Jean-Eric Salata, the CEO, and founder of Baring Private Equity Asia has an even more extreme estimate, believing that only 2% of existing Chinese warehouses have been modernized. A modernized warehouse will have computerized tracking systems and robotics, but many of the Chinese warehouses don’t even have raised loading docks, allowing automatic unloading of truckloads onto the conveyor belt systems – this is still done manually.

In order to bring the warehousing system up to the standards required to handle China’s e-commerce market, it’s estimated that an investment of as much as $2.5 trillion will be required over the next 15 years. Part of this will need to be allocated to upgrading current warehouses, which isn’t a cheap exercise – the unit price range of a palletizing robot can run up to $15,000 and the average price of a sorting robot is in the region of $20,000.

“We’re really at an apex point now where logistics is the hottest real-estate sector in the country.”

Stuart Ross, head of industrial at JLL in China

Investments of these sorts aren’t a luxury though, they are a necessity in order to stay competitive. A predominantly automated warehouse can reduce labor costs by up to 70% and a modern sorting machine has the ability to process 40,000 items per hour, with 99.99% accuracy. This is 10 times the amount that a human-operated warehouse can get through.

Clearly recognizing that these kinds of innovations are going to be necessary for the survival of e-commerce firms heading into the future, JD.com is leading the way forward. In 2017, they built the world’s first fully automated warehouse; less than 10 humans are employed in this facility and their only function is to service the robots.

With modern consumers expecting orders to be delivered within days, sometimes even hours, it’s going to be a logistical and technological race to the consumer’s doorstep for these companies.

The e-commerce revolution has filled the bank accounts of many businessmen and investors, and filled the homes of millions of online shoppers. In an industry where an emphasis is placed on speed and efficiency, modern warehousing located as close as possible to the homes of customers will be the base requirement in order to stay competitive. This will predictably lead to a logistics real-estate revolution and the investors at the forefront of this revolution are going to be reaping incredible rewards.

Unlocking Growth Through Infrastructure: The Mila Mountain Tunnel

The Mila Mountain tunnel is yet another marvel of Chinese engineering and willpower. Built at an average elevation of 4750m, it currently holds the record for the world’s highest freeway tunnel. With important economic implications, construction of the tunnel was a priority for the Chinese leadership in their efforts to maintain the GDP growth rates that have propelled them from a largely agrarian and impoverished nation to the second largest and fastest developing economy in the world.

The tunnel itself is quite ordinary. A 5750m long stretch of two-lane freeway – you would be forgiven for being unimpressed at the sight of it. In reality, though, the tunnel is exceptionally impressive.

As a point of reference – at 4750m, the tunnel was constructed at an elevation of only 400m below Mount Everest’s base camp, which sits at 5150m. At this altitude, the effective oxygen percentage in the air is only 11.4% to 11.8%, which is almost half that of sea level.

Complex construction work at such a high altitude is an enormously challenging task. For this reason, the workers that built the tunnel, numbering in excess of 2000, had to not only be highly skilled, but physiologically able to work at such high altitudes where the oxygen was sparse and the temperatures dropped to -30 degrees Celsius. Many workers suffered altitude sickness and could only work for short intervals before taking breaks to use the oxygen facilities on site, which included 15 oxygenators, an oxygen tank, and five boilers.

The record for the world’s highest tunnel was previously held by the Punta Olimpica Tunnel, in Peru. Cutting a road through the Andes mountain range, the Punta Olimpica connects the cities of Carhuaz, San Luis and Chacas, reducing travel time between the two from 9 hours to around 2.5 hours. Whilst only 15m in altitude below the Mila Mountain tunnel, the Punta Olimpica is five times shorter at only 1,384m, compared to Mila Mountain’s 5,750m.

Currently, the title of fourth highest freeway tunnel sits with the Cho La mountain tunnel, another Chinese construction, this time connecting Sichuan Province’s capital Chengdu to the city of Nagqu in Tibet. A 7km long tunnel at an altitude of 4,378m, it’s yet another display of Chinese capacity for engineering and construction excellence.

The overarching goal of the Chinese infrastructure development frenzy is unlocking economic growth. Improved transportation networks accomplish this through time and cost savings for all road users, as well as opening up new markets to business. The Mila Mountain tunnel is no exception to this. The tunnel cuts the journey around the mountains from over 2 hours, on a road prone to landslides, ice, and blizzards, to a 10-minute drive through a weather-protected tunnel.

Additionally, the projects themselves have a positive economic impact, often directly employing thousands of workers and indirectly creating many more jobs in a spider-web economic effect.

The tunnel will also have implications for tourism in the area. The Sichuan-Tibet Highway, on which the Mila Mountain tunnel is located was labeled as “China’s most beautiful highway” by the Chinese National Geography magazine in 2005. Nyingchi alone, on the eastern side of the tunnel, hosted 3 million travelers in 2018, allowing tourism in the area to flourish and locals who could previously only make a living as farmers, make a more lucrative income in the tourism sector.

Whilst the tunnel was only completed earlier this year, the Chinese are already working on the next major transportation project in the region: the Sichuan-Tibet railway. This 1,600km railway line is expected to be completed in its entirety by 2030, with the 435km Lhasa-Nyingchi section due to be completed in 2021. This section will allow trains to travel up to 160km per hour and will reduce travel time between the two cities from 8 hours to 3 hours.

The Mila Mountain Tunnel is one of many projects that China has recently completed with the intention of continuing to unlock the enormous growth potential within the economy. With many more in the pipeline and construction already being underway on others, you can be sure that the future growth rates and investment returns within the Chinese economy aren’t going to disappoint.

White Elephants: Even China is Susceptible

White elephant – a term used to refer to an outlandishly expensive project that was expected to produce tremendous socio-economic benefits, but ended up effectively as a failure, generating nowhere near the predicted amount of social nor economic benefit.

The term has its origins in the sacred white elephants that were kept as pets by royalty in Laos. These so-called sacred white elephants cost a fortune to maintain but provided no practical use or benefit to the owner.

China has had its fair share of white elephant projects, both on home soil, and outside of its own borders. This comes as no surprise: a nation that uses construction projects to stabilize and grow their economy is bound to get it wrong some of the time.

A standout example of a Chinese white elephant project, is the Addis Ababa-Djibouti railway line, connecting the capital city of Ethiopia, to Ethiopia’s neighboring country, Djibouti. Inaugurated in January 2018, it was expected to be the shining crown of the Ethiopian transportation system but instead has been plagued by problems from inception.

Electricity shortages, poor management, and adverse incidents, including collisions with cattle, have led to far lower than expected usage, forcing Chinese state-owned insurer Sinosure, to write off $1 billion in losses on the project.

An even bigger white elephant, this time inside of China’s own borders, was the New South China Mall, in Dongguan. Previously dubbed the South China Mall, it’s opening in 2005 was followed by over a decade of near desertion. The owners expected shoppers to number in excess of 100,000 per day and for the mall to be a pinnacle of commerce, trade, and entertainment in Dongguan.

Instead, the mall opened with less than 20% occupancy and the majority of the 1016 pre-leasing tenant agreements falling through. The following years saw no improvements in tenant occupancy nor shopper numbers – all that followed the opening was lease cancellations and the early signs of dereliction, resulting in the mall being nicknamed the ‘Ghost Mall’.

Although there have been errors made in the past, particularly in the due diligence phase of projects to ensure their economic viability and net social benefit, the Chinese have demonstrated the ability to observe and correct.

Proving that not all white elephants are destined to remain as such, particularly in the rapidly expanding Chinese economy, The South China Mall has since been re-branded as the New South China Mall and was refurbished and re-launched not once, but twice. Although it still hasn’t reached the levels of occupancy and trade that were first predicted upon its opening in 2005, it has seen an increase in both shoppers and tenants.

This turnaround was achieved through an adjustment of the mall’s strategic focus and target market, to more middle-income, rather than high-income customers. This is more suited for those living in the industrial city of Dongguan and the ghost mall is beginning to show signs of life for the first time since it was built.

As the Chinese leadership usually does, they have learned from errors of the past and self-adjusted. More caution is now being exhibited when it comes to the undertaking of large construction projects. President Xi Jinping has stated that the time of building “vanity projects” has now come to an end and they will be making way for projects that have a proven economic and social benefit.

“Beijing should ‘pay more attention to how projects connect with the development and basic interests of relevant countries.’”

The People’s Daily, mouthpiece of the CCP

This renewed investment prudence, however, is by no means a signal that infrastructure investment is under threat of being throttled. To-date this year, the National Development and Reform Commission has green-lighted $107.8 billion worth of infrastructure projects, doubling the size of their construction pipeline from the same time last year. This is all part and parcel of Beijing’s reversion to their tried and tested method of economic growth and stabilization, and they show no signs of pulling back.

Beyond Borders: Chinese Funding the Developing World’s Infrastructure

For a long time now, China has been funding the developing world’s infrastructure growth. Recently though, the underlying intentions of the Chinese have been called into question. The term ‘debt-trap diplomacy’ and ‘neo-colonialism’ have been thrown around, with many people believing that the Chinese have nefarious intentions.

On the face of it, this perception isn’t baseless. The nations that the Chinese are extending finance to are often economically weak and dependant on financial aid. For some of these smaller nations, debt to China has exceeded 15% of their total GDP. This is a concerning statistic, especially considering that approximately half of China’s lending to developing nations has been done “off-book” and hasn’t been recorded by any multilateral surveillance institutions.

The form of finance being extended to these struggling nations is loans, not aid. Often, these loans are made at market-interest rates, they don’t meet the concessionality guidelines of the International Monetary Fund and include collateral clauses to secure payment in the event of default. Their ability to extend these seemingly predatory loans originates from the fact that they are willing to fund projects that no-one else in the developed world will touch.

“We like China because they bring the red flags, not the red tape.”

A senior Pacific bureaucrat

Finally, the projects themselves are at times not up to standard. Loaning significant sums of money to economically weak nations for the construction of projects that aren’t always necessary nor built to an acceptable standard, and the debt-trap theory doesn’t seem to be so outlandish.

The most obvious example of what can be considered ‘debt-trap diplomacy’, is the Hambantota port in Sri Lanka. Described by some as the first step towards the sale of their sovereignty, Sri Lanka gave away a majority equity stake in the port to the Chinese and gave them a 99-year lease as a settlement of debts that they were unable to furnish. Most concerning is that the economic potential for Hambantota is not great, which has led to worries that China plans to use it as a military naval facility.

Although it may appear that ‘debt-trap diplomacy’ is a strategy being deployed by the Chinese, it must be remembered that appearances can be deceiving.

A study into the Chinese’s much-criticized financing of Pacific island projects, performed by the Lowy Institute, has found that China isn’t engaging in ‘problematic debt practices in the Pacific’. However, the study did conclude that although it currently isn’t a problem, the Chinese would need to reform their lending practices in order to remain in the green area. They’ve been doing exactly that.

A new IMF training center has been established with the support of the Chinese, to improve the debt management capacities of the Belt and Road Initiative (BRI) involved countries. They have also committed themselves to the G20 Operational Guidelines for Sustainable Financing and the G20 Principles for Quality Infrastructure Investment.

These G20 guidelines and principles both contain provisions relating to debt-sustainability, which include compliance with the policies of the World Bank and IMF that relate to debt-burdened developing nations.

Furthermore, a BRI debt-sustainability framework has been created by China to provide guidelines for financing BRI projects in developing countries. The framework is modeled on the best practices of the IMF and World Bank, but compliance with it is not yet an enforced requirement.

China’s road to dispelling the concerns around their developing nation debt practices and rebuilding trust in the international community will be long and will require many steps to be taken. The first of these steps, however, is already behind them and the road ahead is that much shorter. Given what China has managed to achieve in the past 60 years, it’s unlikely that these reforms will prove to be out of their reach.

Beijing’s New Airport Opens, Other Major Infrastructure Projects Underway

Beijing’s new Daxing International Airport opened recently. It is one of the biggest infrastructure projects that China completed in 2019, but there are many others that are currently under construction.

The airport is located around 50 km south of central Beijing, and it is expected to help the Beijing, Tianjin, and Hebei (also called Jing-jin-ji) grow. The new airport is around 80 km from Tianjin Municipality, and a little less than 200 km away from Shijiazhuang, which is the capital of Hebei Province.

Daxing International Airport will help Beijing Capital International Airport to cope with rising flight volumes, and also spur growth in areas that are near the Chinese capital. It is shaped like a phoenix and has been showered with praise from the Chinese government.

Building China’s Future

President Xi Jinping has used Daxing International Airport as an example of China’s growing technological prowess. The project was completed in just five years, and Xi feels that the project shows the advantages of China’s socialist system, as it demonstrates how quickly resources can be mobilized for the common good.

The Hong Kong-Zhuhai-Macao Bridge, announced by Xi less than a year ago, also shows how far Chinese engineering has come in recent years. The structure is the largest cross-sea bridge, and it opened in October of last year. It was designed to connect mainland China with the two Special Administrate Regions (SARs-Hong Kong and Macau), and cost 126.9 billion yuan (around $18 billion USD) to construct.

Much like Daxing International Airport, the Hong Kong-Zhuhai-Macao Bridge is intended to facilitate regional growth between the two SARs, and mainland China. Xi was happy to praise the builders of the bridge for overcoming obstacles and showing the national strength of China.

United in Progress

China is using mega-projects to demonstrate its commitment to creating a unified China, and connecting regions that have traditionally been less interconnected. The projects also further Xi’s goal of driving Chinese technical innovation, and developing the core technologies for sustained development.

Sunway TaihuLight is an example of this philosophy. It is China’s fastest supercomputer, and its components are all made in China. The Tianhe series and Sunway TaihuLight show that China has come into its own as a high-end chip manufacturer, and the nation plans to work to further the use of its supercomputers in scientific research.

Li Qiong, who is a researcher with the National University of Defense Technology, commented,

“We are developing the Tianhe E-Class computer, or an exascale supercomputer, which will be able to perform billions of calculations per second.” The Tianhe-3, the nation’s next-generation exascale supercomputer, will run on domestically-produced chips as well.

Chinese supercomputers ranked favorably in a semiannual list of the Top 500 supercomputers which was published earlier in 2019.

“The supercomputer has become a symbol of power, reflecting the innovative capabilities of China. Next, we will connect these supercomputing centers and share the resources nationwide,” added Mei Jianping, who is deputy director-general of the Department of High and New Technology of the Ministry of Science and Technology.

Making Connections Globally

China is using its technological progress to collaborate with other nations, and challenge itself to reach new goals. China recently successfully performed the first-ever soft landing of a spacecraft on the dark side of the moon. The Chang’e-4 was able to complete the soft landing with the help of numerous international organizations, and foreign nations.

The Five-hundred-meter Aperture Spherical Telescope (FAST), which is located in China’s Guizhou Province, is scanning the heavens for neutral hydrogen, pulsars, interstellar molecules as well as signals from the extraterrestrial life. China has teamed up with South Africa’ Meerkat telescope to work on important questions about the evolution and origin of our universe.

Wu Xiangping, who is an academician of the Chinese Academy of Sciences, commented,

“We already had close cooperation with Australia in jointly organizing symposiums and training classes. The exchanges between China and South Africa have just started…We will step up cooperation with South Africa, and the priority will be finding common interests.”

Wu continued,

“For instance, the study of neutral hydrogen might be a possible direction for joint research. Understanding neutral hydrogen, the first element formed after the Big Bang and the most abundant element in the universe, might help us trace the origin of the universe and study the large scale structure of the cosmos.”

China has made incredible strides in the areas of infrastructure and technological innovation in the last decade, and the fruits of those efforts are beginning to sprout. China may become one of the world’s most advanced nations over the next 20 years, as it continues to develop new projects that rank globally in both scale and sophistication.

China Becomes Cambodia’s Closest Ally, Largest Creditor

China has entered Cambodia’s developing economy and made some major investments. The Middle Kingdom is rapidly cementing itself at Cambodia’s strongest foreign partner, and biggest investor.

Cambodia is located south of China, and the two are separated by Laos, Vietnam, and Thailand. Despite the lack of a land border, China is developing connections in Cambodia at both state, and private levels. Xi Jinping’s Belt and Road Initiative (BRI—or One Belt One Road ‘OBOR’) is focused on creating a new trade route that spans Eurasia as a whole, and it appears that Cambodia plays heavily into his plans.

The old French port town of Sihanoukville has been ground zero for Chinese investment, and migration. Sihanoukville had been a quiet beach town where tourists could explore the old deep-water port and surrounding wildlife. Today it is home to Sihanoukville Special Economic Zone (SSEZ), which is a tax-free economic zone for China and Cambodia. There are more than 100 factories in the SSEZ, the majority of which are owned by Chinese companies.

China Investments in Cambodia’s Future

Sihanoukville has added a substantial amount of infrastructure in addition to the SSEZ. Chinese companies have a preference for hiring Chinese workers, many of whom have relocated to the Sihanoukville area. It is now home to new hotels, entertainment venues, as well as housing for the Chinese nationals.

Overall 250,000 Chinese people account for 60% of Cambodia’s foreign residents, although the actual number may be much higher. Over 78,000 Chinese nationals live in Preah Sihanouk province, which surrounds Sihanoukville, but only 20,000 have Cambodian work permits. The Cambodian government reports that as of July 2019, 2,700 Chinese nationals were deported, with the records beginning in 2014.

Chinese individuals seem to have every reason to feel at home in Cambodia. A lot has happened in Cambodia since the nation signed a strategic partnership agreement with China back in 2010.

Over the last decade, Chinese state loans have built seven hydroelectric dams that when combined provide half of Cambodia’s electrical needs. A Chinese company is also investing in a new road that would connect the Cambodian Capital, Phenom Penh, to Sihanoukville. This adds to the 3,000 kilometers (1,864 miles) of highways and other infrastructure that China began building in the nation in the mid-1990s.

The returns have been good for Chinese companies, but the results for the average Cambodian have been less impressive. Due to the high amount of unskilled labor in the country, and the Chinese preference for imported labor, many Cambodians aren’t getting much out of the newfound economic boom.

Most Cambodian People Get Left Out

There has been a concerted international effort to help Cambodia recover from the brutal genocide it experienced under the now-deceased communist leader, Pol Pot.

While the USA and E.U. Nations did a tremendous amount with the help of the U.N. in the 1990s, increased pressure on the Cambodian government over human rights abuses seems to have pushed the nation into China’s orbit. The E.U. began the process of removing Cambodia from its Everything But Arms (EBA) program earlier this year over human rights issues, which is a dynamic that Cambodia doesn’t have to face with China

Unlike Western investment, Chinese money isn’t tied to any kind of human rights goals. Unfortunately for the average Cambodian, Chinese investment is becoming a closed loop that gives the lion’s share of gains to other Chinese people.

While Chinese investment has flowed into public infrastructure, much has also supported the construction of hotels, resorts, and casinos that cater to the rising number of Chinese tourists. It is estimated that more than 3,000,000 Chinese tourists will visit Cambodia by 2020, up from 2,000,000 in 2018.

Bilateral trade between China and Cambodia has also risen in recent years. It was estimated to be worth around $6 billion USD in 2017, although 83% of that figure is comprised of Chinese exports to Cambodia. The level of disparity in the China / Cambodia bilateral relationship is noteworthy.

The Cambodian nation has received infrastructure investment, but the nation also has massive debts to China. For the average Cambodian, the uptick in Chinese investment has meant little if they live outside of an urban area. Cambodians aren’t able to work in many of the Chinese factories, afford the new hotels, or even enter many of the new casinos.

The Budweiser APAC IPO: Is this the rejuvenation of the Hong Kong IPO market?

Hong Kong, the U.S., and mainland China are the three main drivers of the global IPO market. Only one of them though has seen a sharp decline in 2019. The Hong Kong IPO market has possibly been one of the biggest victims of the Hong Kong protests and perhaps to a lesser extent, the U.S. – China trade war.

Where the Hong Kong Stock Exchange (HKEX) was sitting at the number one spot in the world in terms of IPO proceeds at this point last year, they are now sitting in the fourth position, behind the New York Stock Exchange, the NASDAQ and the Shanghai Stock Exchange.

Ever since Hong Kong’s 2018 listing reform, which allowed pre-revenue biotech firms to list and tech companies to list with dual-class shares (different weights of voting rights on shares), the HKEX became one of the top exchanges for companies looking to take their business to the public market, particularly those in mainland China. This led to Hong Kong claiming the top spot in the global IPO market in 2018.

With the disruption being caused by Hong Kong’s ongoing pro-democracy protests, large companies have been taking a cautious wait-and-see approach. This is particularly the case when it comes to companies planning mega-listings, such as Alibaba. The hesitation to list on the part of these giants is the primary source of Hong Kong’s drop in IPO value this year – this is evidenced by the fact that the HKEX has seen the number of listings in 2019 remain unchanged from last year, at 88.

The Budweiser listing was scheduled to take place earlier this year, but was called off by Ab Inbev due to “prevailing market conditions”. The listing was estimated to raise $9.8 billion and was set to be the largest IPO of the year, surpassing the $8.1 billion that Uber raised on the New York Stock Exchange. Budweiser’s brave return to the capital market will see it raise only slightly over half of what it had originally planned for, at $5 billion. If the over-allotment option is exercised, this could climb to $5.75 billion.

In an attempt to make the deal a more attractive prospect for potential investors, Budweiser sold off its Australian unit in the intervening period. The intent behind the sale was to present to investors a company whose entire business was focused on high-growth markets, particularly China, India, and Vietnam.

Mega companies looking to go public will have been watching this listing with a keen eye to gain some kind of signal on investor sentiment. Even after having sold off its slowest growth unit and having attracted the Singapore sovereign wealth fund, GIC, as a cornerstone investor, Budweiser’s IPO will still only raise just over half of what they expected in their abandoned listing earlier this year. This will send a strong signal that investors are still quite hesitant and would prefer to adopt a spectator’s position until the current market conditions have turned more positive.

Although the listing is more than three times larger than the next biggest on the HKEX in 2019, it isn’t sending signals which indicate that the Hong Kong market is ready for the mega-listings its looking for. There are no mega-deals immediately pending but the HKEX does have a strong pipeline of smaller sized listings to look forward to. Larger companies such as Alibaba however, will most likely keep their IPO plans on the shelf until investor sentiment is more favorable.

Warburg Backed Mofang Becomes Largest Rental Apartment Player In China

Mofang is a long term apartment rental manager in China. The company presently manages 70,000 individual apartments found in all of the major cities throughout the country. Backed by Warburg Pincus, Mofang Apartments closed $150 million in a funding round. Participating as lead was CDPQ Caisse de dépôt et placement du Québec the Canadian fund manager. The two jointly announced the major financial milestone.

Mofang has revealed its intentions of utilizing the cash infusion to make additional property acquisitions. Their target market is the fast developing sector of rental housing. They are also planning to expand into creating their own franchise business. The fresh funds will ensure the Chinese company has plenty of general operating capital.

Mofang Taking Long Term Apartment Rental Market By Storm

Mofang has gained considerable media attention from the participation of its largest shareholder Warburg Pincus. Alex Zheng the Chinese mainland hotel entrepreneur runs the huge rental apartment managing company. They have now increased their total of raised funds to $550 million since they started the company back in 2010. Caisse’s investment represents only the latest major interest in the Chinese company by a significant international conglomerate. Caisse is a major player in investments with its $231 million of net assets under management.

Mofang has gained a huge amount of public recognition for its professional capabilities and operations that have helped it to become a great success story in 20 different important cities throughout China. Caisse has indicated its enthusiasm for working side by side with colleague investor Warburg Pincus and the Mofang leadership team. Between the three of them, they anticipate improving their already market-leading position in the industry.

Over the last three years, the rental housing market in China has quickly expanded. This is in no small part due to the national government having encouraged the rental market. They see it as a safety counter-measure for escalating housing prices in the big cities. It also is a means of encouraging the professional class in its mobility.

Mofang has enjoyed such fundraising success in the not so distant past as well. Their last fundraising effort culminated with $300 million out of the Chinese mainland fund manager AVIC Trust back in 2016. They have deployed part of this cash to add on to their apartment portfolio. These apartments are geared towards young professionals and recent graduates, both of whom require housing that is both accessible and affordable.

Their prices are affordable too. In the leading Chinese mainland cities like Beijing and Shanghai, their rental units start from the equivalent of $745 each month (RMB 5,000). For the second and third level cities in China, these apartments start from 3,000 RMB ($450 per month).

Mofang’s Business Model for Successful Operations

Mofang has already established a successful business model in only a decade. They usually obtain (from landlords) longer-term leases for whole industrial and commercial buildings. After renovating these, they then handle the leasing out of the building units to tenants. It is an approach that does not require them to take on a huge number of expensive assets.

Ironically, Mofang has benefited from the overcrowding of the space by new startup competitors over the last several years. They have been able to draw from their impressive capital infusions to take major stakes in their fledgling competitors. This has allowed them to buy Wowgu in Guangzhou as well as V-Land the apartment provider to youth based in Shanghai over the past year. Their V-Land acquisition raised $200 million in the form of a series A round that Warburg Pincus led and closed out in April of 2018.

Zheng’s history of success goes back a few years. He earned his first fortune through founding 7-Days Inn. This was among the earliest of affordable Chinese hotel chains. Warburg Pincus started financially backing it in 2007.

Mofang’s New Franchise Model

Mofang has charted its own course separately from the business model of Warburg investment ventures like Hong Kong-based Weave and Shanghai-based Nova. They have not poured money into purchasing properties as many have done. Lately, they have started moving to a franchise model. This will permit them to work hand in glove with local governments and developers together to increase their managed properties portfolio.

Warburg is also active in the markets independently of Mofang. Besides Weave and Nova, Warburg has funded Ziroom the rental housing management company to the tune of over $620 million. Warburg Pincus led that consortium with Sequoia Capital China and Tencent, along with Sunac the mainland property developer.

Mofang’s recent statement of the latest funding round also laid claim to the company having become the biggest institutional manager in the apartment arena based on room numbers in the market. Their operations now cover cities such as Shanghai, Beijing, Shenzhen, Guangzhou, Wuhan, Nanjing, Hangzhou, Suzhou, Xi’an, and Chengdu.

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