A slowing domestic economy is encouraging many Chinese firms to seek growth opportunities overseas. Outbound investment has become a draw for those in the construction sector for example, as capacity utilisation rates are well under break-even point and China’s real estate bubble could be about to burst.
However, China’s outbound investment faces strong headwinds. For one, many firms, especially state-owned enterprises (SOEs) have joined the frenzy in bidding for overseas mining assets, only to be caught by falling commodity prices. Others, who have entered the African markets, have faced accusation of colluding with dictatorships and with having a neo-colonial agenda. The Arab spring has also forced many Chinese firms to abandon their investments. In Libya alone, China evacuated over 20,000 workers. More than 50 projects under construction were abandoned with over $18.8 billion loss, according to estimates by China’s Ministry of Commerce.
The good news is that China Inc. is quick to learn from its mistakes and China has well over $4 trillion of reserves at their disposal. Some have dubbed this China’s Marshall Plan after the 1948 US Economic Cooperation Act, the Marshall Plan, to rebuild Europe after the Second World War.
Shao Yu, chief economist of Oriental Securities, a Shanghai- based securities brokerage, is a big advocate of a Chinese version of the Marshall Plan. “It is first and foremost the change of perception of China’s outbound investment,” Shao says. “China’s outbound investment needs to be positioned as extending help to countries which need investment in infrastructure projects, as well as cheap and reliable Chinese goods.” With overcapacity in sectors such as construction equipment, cement and steel, Shao adds, China needs to turn to overseas markets to export its excess capacity. According to Asian Development Bank (ADB) estimates, 32 ADB member states in Asia need $8.22 trillion by 2020 in infrastructure investment.
There are those in government who are also keen on a Marshall Plan. SAFE is concerned about continued capital inflows and the build-up of China’s already huge foreign exchange reserves. One way to divert such inflows is to encourage investment overseas, especially in the capital-intensive infrastructure sector. “We started to talk about China’s Marshall plan,” says Guan Tao, a senior SAFE official. “If the original Marshall plan was to help reconstruction of Europe with the excess capacity of the US war machine and financing from US banks, China should do the same,” he says. In addition, to encourage Chinese firms to invest overseas, Chinese banks – both policy banks such as China Development Bank, and commercial banks such as ICBC – need to provide RMB-denominated financing packages, Guan says. “RMB financing is an important pillar to China’s Marshall Plan,” he adds. The policy is also in line with the push for wider use of the RMB in overseas markets.
“The competition in markets such as India is not only about the quality of products, but about whether you will be able to provide a financing Chipackage,” says Zhang Zhiyang, head of strategy at Shanghai Electric’s power station unit. To win bids, Zhang has had to work closely with Chinese policy banks to provide long-term project financing. A China Marshall Plan could become a major stone to kill several birds for Chinese policy makers.