In latest news, the Chinese are looking for nuts in Pakistan; coconuts to be precise. A 20-member Chinese delegation recently visited the Rawalpindi Chamber of Commerce. Comprising the delegation were representatives from a wide range of businesses from power generation, energy, and steel industry to agriculture, bio tech, ship construction and construction and one of those representatives were looking to invest in coconut farming in the country. These are clear and visible signs that the spillover from the CPEC has come into play.
If anyone still has doubts they should look no further than the sector-wise new firm incorporation data that BR Research recently obtained from the SECP. For claritys sake, the data is aggregated for years FY11 to FY15, and FY16 to 1HFY17. The idea is to see how many new Chinese firms have been incorporated in Pakistan after the signing of the CPEC agreement in April 2015; admittedly this is a crude indicator, but a helpful one, nevertheless, of the spillover effect of the CPEC.
The comparative table here brings home some hard truths: the number of new firm incorporation from China between July 2015 and December 2016 is higher than the number of Chinese firms incorporated between FY11 and FY15. That just shows how fast things are moving. Second, new incorporation from China after the CPEC agreement is far more diversified (outside the mainstream power, construction and IT/telecom sectors) than in the preceding five years.
These trends are in line with Chinas global outbound FDI (OFDI) data. A 2016 KPMG study shows that Chinese OFDI from the non-conventional tertiary industry saw one of the fastest growths between 2011 and 2014.
A similar firm-level analysis for Chinese OFDI in Africa done was by Wenjie Chen and David Dollar for Brookings Institute in 2015. That study (titled: Why is China investing in Africa: Evidence from the firm level) showed that the two sectors that received the most Chinese OFDI in terms of the number of deals are (a) business services, with 1053 deals and (b) import and export, with 539 deals.
When Chinese firms and its government invest in mining projects in Africa, they often induce different kinds of service FDI to facilitate not only mining (e.g., construction), but also to meet the demand of Chinese workers and businessmen who work in the region (e.g., wholesale/retail businesses, hotels and restaurants, etc.) The fact that business services, wholesale and retail, and import-export are among the top three service sectors in terms of Chinese OFDI may well be related to that reason, the study said. In fact, in oil-rich Nigeria, about two-thirds of the projects were actually found to be in service sectors rather than oil and gas sectors.
Contrary to popular perception, therefore, most of Chinese OFDI deals are not engaging in raw material related projects, but are involved in service sectors, a trend which, as highlighted above, is in tandem with Chinas non-Africa OFDI.
And increasingly it is the Chinese private sector that is leading from the front. While latest numbers are not available, a 2015 report by Ernst Young provides some clue. The report (titled Riding the Silk Road: China sees outbound investment boom) highlights that by 2013 the share of state-owned Chinese annual FDI had fallen to 44 percent from about 68 percent in 2009. We are told this trend has continued since then.
The message for private sector businesses in Pakistan, therefore: clean up your books, formalise your company, prepare your sales pitches, print tonnes of business cards, meet those flocking Chinese investors, and be ready to play ball; the Chinese are hunting for good values and they are open for options JV, M&A and what not. You dont want to miss the rally, do you?