Fearful of capital flight and mindful of debt-fueled acquisitions overseas, the Chinese government has been tightening its capital controls since last November. This year there has been a marked slowdown in China’s non-financial overseas foreign direct investment (OFDI), which has been down 45 percent year-on-year to $57 billion in 7MCY17. Its potential impact on One Belt, One Road (OBOR), and by extension, CPEC, has been flagged by this column earlier. (Read “CPEC: risks ahead,” published August 8, 2017).
Operating at the intersection of finance and politics, China’s state regulators have been increasingly scrutinizing overseas acquisitions of major Chinese private-sector groups in sectors ranging from electronics and big-tech to luxury hotels and resorts and Hollywood cinemas. But developments reported last week suggest that OBOR may also be in for some belt tightening.
First, China’s state planner, the National Development and Reform Commission (NDRC) issued guidelines for Chinese firms investing in OBOR countries to avoid ‘vicious’ competition and corruption. Those guidelines were promptly endorsed by China’s State Council (cabinet), which underscored the need to “pay attention to mutually beneficial cooperation with local governments and companies”, through “eligible domestic enterprises” making investments in OBOR projects. A restricted list of sectors includes “real estate, hotels, entertainment, sport clubs, outdated industries,” besides “chaotic regions”.
So far as numbers go, OBOR-related investments are well on the rise. “Chinese acquisitions in the 68 countries officially associated with President Xi Jinping’s signature foreign policy totaled $33 billion as of Aug 14, surpassing the $31bn for all of 2016,” as per Reuters, which also noted a “smooth approval process for Belt and Road-related deals”.
Statistics are a hazy thing in China. But the upward trend in OBOR investments is clear. Caixin, the leading Chinese financial journal also noted last week that in 7MCY17, “New nonfinancial ODI into 50 countries involved in the (OBOR) initiative amounted to $7.65 billion, accounting for 13.4% of the total ODI, 5.7 percentage points higher than same period last year.”
The recent endorsement of the ongoing OFDI clampdown by the highest level of Chinese government raises some questions for Pakistan’s policy planners. Are OBOR-bound investments also in for some shake-up? Should Pakistan, whose OBOR tab is said to be north of $55 billion, brace itself for a slowdown, even as majority of early-harvest CPEC projects reach advanced stages of completion? How would the new policy affect CPEC’s hoped-for private-sector spillover for local firms getting in on the act?
BR Research spoke to a half-dozen independent economists and ex-government officials who keep a close eye on CPEC progress. And the consensus seems to be that CPEC-related Chinese investments will not be affected in the wake of China’s restrictive OFDI guidelines. But there was ample word of caution by these individuals, most of who spoke on the condition of anonymity.
“No, CPEC-bound investments will not be affected as China’s interest is driven mostly by strategic factors. But the Chinese, who have been patient with Pakistan’s bureaucratic inefficiency, wouldn’t want CPEC projects to bring bad name to China. Initially they allowed their State-owned enterprises (SOEs) to go in and invest in early-harvest projects. But going forward, I expect scrutiny over the high rates of return that have justifiably been criticised in Pakistan,” according to one Islamabad-based economist.
Dr. Kaiser Bengali, another distinguished economist, sees things differently. “I see CPEC’s multiplier effect mainly in China. Why would China rein in its investments in Pakistan? Their companies are enjoying high rates of return; they have tax concessions; and now their security is also being paid for by Pakistani taxpayers. They will even bring toilet paper from China as it is tax exempt,” said the outspoken economist.
As per an influential economist at a leading Islamabad-based think tank, some delays in CPEC projects’ implementation may be in the offing, but for different reasons. “Following some transparency and procurement-related issues in Pakistan, the Beijing-based CPEC monitoring unit has now also been tasked with vetting Chinese SOEs’ procurement deals. This may lead to a slowdown in CPEC projects,” he speculated.
If state-led Chinese investments in CPEC seem secure at the moment, what about the private-sector spillover inspired by all that CPEC activity? Would the new investment guidelines not limit the ambition of Chinese private sector to come in and take a stab at business opportunities here?
“As for the private sector spillover, I don’t see the Chinese private sector going beyond visiting and talking to actually investing at this stage,” said another economist. Dr. Bengali noted that recent security incidents, especially in Balochistan and Khyber Pakhtunkhwa, are a setback to building Chinese investor confidence.
“Having seen that the CPEC’s major projects in energy, roads, railways, and ports are being led by the Chinese SOEs, any hopes of private-sector spillover materializing anytime soon are premature. The spillover will depend on how fast the Special Economic Zones come online. I see that happening in the medium term, say anywhere between three to four years,” the think-tank economist commented.
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