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Botched Chinese railway project in Africa is warning to belt and road investors

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  • Lessons should be drawn from the poorly executed US$4 billion Addis Ababa-Djibouti freight railway, warns head of China’s export credit insurer
  • Planning behind many China-led projects abroad has been ‘downright inadequate’ and costly

The planning behind many of China’s major infrastructure projects abroad has been “downright inadequate”, leading to huge financial losses, according to the head of the country’s state export credit insurer.

Wang Wen, of China Export and Credit Insurance Corporation, known as Sinosure, said Chinese developers and financiers of projects in developing nations supported by Beijing’s “Belt and Road Initiative” need to step up their risk management to avoid disaster.

He cited the mistakes of a major railway project in Africa that has cost Sinosure close to US$1 billion in losses, according to its chief economist.

Lessons should be drawn from the poorly executed US$4 billion Addis Ababa-Djibouti freight railway that was inaugurated early this year but has already had to restructure its debt because of underuse caused by power shortages, Wang told a belt and road infrastructure financing forum in Hong Kong earlier this month.

“Ethiopia’s planning capabilities are lacking, but even with the help of Sinosure and the lending Chinese bank it was still insufficient.”

He said other China-backed projects plagued by poor preparation have included sugar refineries that have lacked a supply of sugar beet, and underused railways in Latin America.

His comments were a stark reminder to Hong Kong financiers and investors at the forum looking to tap belt and road opportunities of the risks of backing projects in developing nations.

Put forward five years ago, President Xi Jinping’s “Belt and Road Initiative” aims to create modern-day Silk Road trading routes across Eurasia and Africa by building railways, roads and ports. It has, however, so far relied on state financing, which has raised concerns about its sustainability and political impact.

The Hong Kong Monetary Authority has been working hard to make the city a financing hub for belt and road projects.

The Addis Ababa-Djibouti railway, Africa’s first cross-country electric railway, was built by China Rail Engineering Corporation and China Civil Engineering Construction Corporation and backed by US$3.3 billion of loans from the Export-Import Bank of China.

Sinosure, which provides payment guarantee to the project, is now almost US$1 billion out of pocket on the 756-km railway that gives landlocked Ethiopia sea access through neighbouring Djibouti, said Wang.

Many large projects in nations supported by the belt and road strategy are financed by Chinese banks, often with payment guarantees or default insurance provided by Sinosure.

Others are provided by multilateral policy banks such as the China-initiated Asian Infrastructure Investment Bank (AIIB). The rest are commercial-oriented projects such as power plants and toll roads that commercial banks are willing to lend to.

Policy banks’ so-called “concessionary lending” at favourable terms to borrowers is mostly off-limits to international commercial banks because of their profit objectives.

There have long been calls for more private sector funding.

“[Belt and road] projects are such a mammoth undertaking, to realise them we have to get commercial capital involved,” said Peter Burnett, Standard Chartered’s head of corporate finance for Greater China and North Asia in an interview. “That is going to happen and we are beginning to see it.”

Although Asia has a huge amount of private savings looking for safe long-term investments, suitable projects are hard to find within the region and most of the funds end up in developed markets, said AIA’s group chief investment officer Mark Konyn.

The life insurance giant has doubled its allocation to infrastructure to around US$20 billion in the past decade, he added.

To help change this, the Hong Kong government’s mortgage insurer Hong Kong Mortgage Corporation earlier this month said it plans to buy a diverse basket of infrastructure loans in nations not limited to the belt and road’s geographical scope next year and explore the idea of “securitising” or repackaging them into securities to be sold to investors.

HSBC Greater China chief executive Helen Wong said the initiative would help “recycle” commercial banks’ capital to be redeployed into other greenfield infrastructure projects, besides enabling wider capital markets participation in regional infrastructure development.

FAW, maker of China’s iconic Red Flag cars, gets record 1 trillion yuan credit line

It comes as the country’s carmakers face hazardous times amid slowing sales and a law change that may dent their profits

If fully used, the US$145 billion of credit available to FAW would be enough to buy General Motors, Ford and Tesla combined

It is one of China’s most beloved home-grown companies, its iconic Red Flag cars an instantly recognisable symbol of Communist Party might.

So it stands to reason Beijing would pull out all the stops to keep FAW Group, the country’s oldest carmaker, afloat during challenging times.

The government has lined up a record credit line of 1.015 trillion yuan (US$145 billion) for the time-honoured vehicle manufacturer, signalling an unprecedented level of financial support for state-owned enterprises.

If fully used, it would be enough to buy General Motors, Ford and Tesla combined.

“One trillion yuan is a staggering amount of cash that can be used to do so many things, such as big buyout deals and investment into new areas such as electric cars,” said Wang Feng, chairman of Shanghai-based financial services firm Ye Lang Capital. “It’s the latest sign that state-backed businesses are still the priority. It is not unusual for the government to use its financial resources to support a large state-owned company.”

Shares of FAW Car, the group’s listed unit, jumped by their 10 per cent daily limit amid a declining market in Shenzhen to a two-week high of 6.18 yuan.

FAW made the announcement on Wednesday night on its WeChat social media account, without explaining why it has been offered the biggest credit line in China’s history. But it comes as the country’s carmakers face hazardous times amid slowing sales, a stuttering economy and a law change that may prove detrimental to their bottom line.

Beijing relaxed the rules governing foreign ownership in joint-venture carmakers earlier this year, a move many expect to eat into the profits of the Chinese partners.

The unprecedented show of support for a state-owned firm also comes at a time when private businesses are reeling from fears they have been left hanging in the wind amid the worst rout to hit financial markets in years. Beijing has pledged to support private companies, but no concrete steps have yet been taken to help them weather the storm.

FAW, the 65-year-old carmaker and partner of Volkswagen and Toyota Motors, would receive up to 1.015 trillion yuan of credit from 16 state banks, including China Construction Bank and Industrial and Commercial Bank of China.

The credit line, rather than providing loans, essentially represents a willingness by the banks to extend a maximum of 1 trillion yuan in loans to the carmaker, if required.

The symbolic significance of FAW, formerly called First Automotive Works, cannot be understated. It is the company behind China’s Red Flag limousines, the prestigious vehicles that used to ferry the country’s senior officials around and a source of huge national pride.

FAW also assembles the Audi marque in China, where the standard black Audi A6 sedan had remained the staple ministerial ride for more than a decade.

Mao Zedong, one of the key founders of the People’s Republic, oversaw the establishment of the firm in 1953 with the help of the former Soviet Union. Former President Jiang Zemin spent six years working for FAW between 1956 and 1962, rising from an engineer to a chief manager of the group’s power unit.

The company has its headquarters in Changchun in northeastern China’s Jilin province, essentially a one-factory town, with the company’s 150,000 employees playing an outsize role in the local economy. Massive apartment blocks – built for the assembly’s workers – still line both sides of the main highway leading to the factory’s main entrance. At its peak, FAW was the city, providing amenities from schools to hospitals and even bakeries and an ancillary police force.

FAW’s glory days, which helped to catapult China into the world’s largest vehicle market, may be in the rear-view mirror, as the country’s quarterly sales fell for the first time in September amid a slowing economy.

A consensus prediction among analysts is that China will report a drop in car sales for the whole of 2018.

By 2022, foreign carmakers, currently restricted to 50 per cent ownership in a joint venture, will be allowed to own a mainland plant outright.

The deregulation is expected to have a huge negative impact on Chinese vehicle companies such as FAW and SAIC Motor as they have been relying on joint ventures with international brands like Audi and Volkswagen over the past two decades to make profits.

“It is highly expected that a consolidation of China’s auto industry will take place in the coming three years,” said Nomura analyst Benjamin Lo. “Some weak domestic companies will have to be taken over by larger rivals.”

China’s biggest state-owned auto companies including FAW, SAIC, and Dongfeng Motor will be among the top beneficiaries of the consolidation because they will receive financial support such as easy loans and subsidies from the government to facilitate merger and acquisition deals, said fund manager Ivan Li with Loyal Wealth Management.

SOURCE: SCMP.com

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