Is China really that bad for us?

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With its sheer economic size and military muscle, China has proven that she is not a push over. She’s confident, quite the entertainer, diplomatic and generous in the eyes of some nations. But to others, she has acquired an image of being a bully; a ruthless dictator who wants it all, one who wants things done her way or else…

It is often argued that the Caribbean has seen both faces of this powerhouse. And the individual experiences leave some nations torn between deciding what the true intentions of China in the Caribbean are.

In Guyana, the experience has been mixed. On the diplomatic level, the Governments of our time have lauded China for its investments in Guyana. But in other instances, China has been criticized for being silent on the fact that a number of its companies have engaged in corrupt acts in Guyana. In fact, China appears to be less concerned with its companies, some of which the Government is part owner of, which are involved in the endemic corruption here.

But the side of the coin that you choose to see is up to you –the reader.

The Inter-American Development Bank (IDB) believes that before judgment is passed on the People’s Republic of China, one must justly consider its place in the Caribbean.

 

TRADE

 

Since China emerged in 2009 as the world’s largest exporter of goods and the fourth largest exporter of services, the percentage of total imports sourced from China has increased dramatically. Low-cost Chinese manufacturers have penetrated almost all markets. Import of Chinese products in the Caribbean region has mushroomed and many countries report China as one of its top five sources of imports.

On the flip side, to fuel its rapid industrialization, China has increased imports of raw materials and emerged as a significant export destination for commodity producers in Latin America, but to a much lesser extent in the Caribbean.

In rank order to 2010 data, the IDB said that Cuba, Dominican Republic, Guyana, Dominica, Barbados, Haiti, Suriname, Trinidad and Tobago, and Jamaica were exporting to China albeit at low percentages of total exports. Over time, the trade balance between the region and China has tended to deteriorate, with China selling or exporting more to the Caribbean than buying or importing from the region.

The IDB said that this indicates that the Caribbean region has much to do to promote exports to China. During the period covered, the Caribbean region has had a positive balance in only two of the years.

According to the IDB, the Caribbean countries that have benefitted from the increased demand for primary goods are Cuba (metalliferous ores and metal scrap), Jamaica (aluminum oxide), Trinidad and Tobago (oil and gas), Suriname (minerals, timber), and Guyana (minerals, timber).

The four leading products exported to China from the Caribbean states with available data are alumina (65 percent), timber (9 percent), nonferrous metal waste (7 percent), and crude minerals (4 percent) for the period 2006–2008 (Economic Commission for Latin America and the Caribbean; United Nations Commodity Trade Database.).

The rest of the Caribbean is dependent on services—tourism, financial services, and call and data processing centers—which have not seen such a dramatic up-tick in their exports. In general, merchandise imports from China have exceeded merchandise exports to China, creating a regional trade deficit with China.

 

INVESTMENTS AND FINANCING FLOWS

 

Compared with other parts of the world, the Caribbean has not been as favoured in attracting Chinese foreign direct investments in absolute terms because the majority of its economies are small, tourism-dependent markets and not resource rich, but some have done better in relative terms.

According to the IDB, most of China’s outflows of investments and granting of loans have been concentrated in resource-rich developing countries.

Over the past eight years, China has lent US$100 Billion in total to Latin American and Caribbean governments and companies, but half of the loans went to Venezuela, followed by Argentina, Brazil, and Ecuador in rank order. China extends financing principally through the China Development Bank and the Chinese Export Import Bank.

By 2010, the two Chinese banks had loaned more money to Latin America and the Caribbean than the World Bank, the Inter-American Development Bank, and the US Ex-Im Bank combined. Most of the Chinese funding, however, was concentrated in a few countries and did not displace these historically dominant financial institutions on per country basis, except in the cases of Venezuela and Argentina.

Excluding the BVI and the Caymans, the leading Caribbean destinations for the time period covered in rank order were Cuba, Guyana, Trinidad and Tobago, Suriname, and Jamaica. The other Caribbean states garnered less than US$10 Million.

In more recent times, the largest Chinese investment has been the Baha Mar Resort in The Bahamas via a US$2.4 Billion loan from the China Export-Import Bank (Hotel News Now 2011). The developer of the project filed for bankruptcy protection on June 29, 2015 (Gleason & Fitzgerald, 2015).

POTENTIAL BENEFITS FOR THE CARIBBEAN STATES

 

The rise of China undoubtedly represents significant positive opportunities for the independent states of the Caribbean. First, China represents an attractive export destination (rising purchasing power, large market size), especially for commodity producers.

The five commodity producers in the sub-region—Belize, Cuba, Guyana, Suriname, Trinidad and Tobago—have already benefitted handsomely from the commodity super cycle that China fueled up in 2011–2012. The commodity boom is waning and commodity prices are expected to continue to decline over the medium term.

Nonetheless, if Chinese authorities can manage to maintain growth rates between 5 and 7 percent and complete structural reforms while avoiding financial and environmental crises, China will continue to be a growth locomotive for its trading partners. Second, China represents a new source market for tourists. In 2014, an estimated 117 million outbound Chinese tourists spent approximately US$498 Billion.

Leading destinations were Hong Kong, Macau, the United States, and France (Plowright, 2015). The number of Chinese tourists is expected to double by 2020. Main constraints on Chinese tourism outside of Asia are the cost of long-haul travel and the limited amount of vacation time the typical Chinese worker earns in the year (Credit Lyonnais Securities Asia, 2014).

To date, the typical Chinese tourist has tended to economize on food and accommodation and splurge on the purchase of luxury goods. However, shifts in tastes and expenditure patterns are emerging. For the most recent data available, it seems that among the higher income Chinese households, they are spending more on entertainment and experiences.

In the eyes of the IDB, an opportunity clearly exists for Caribbean tourism-dependent economies to target this higher income bracket, those who may be seeking different experiences and opportunities to explore far-flung and exotic cultures.

For the Caribbean to capture more of the Chinese market, the IDB believes that many changes and investments would have to be made—streamlined or visa exemptions for Chinese nationals, more five-star hotel properties, better personal and property security, more offering of Chinese cuisine, hiring of Mandarin and Cantonese speakers as staff and tour operators, sensitizing staff and tour operators to Chinese cultural proclivities and differences, developing marketing materials and signage in Mandarin language, offering more price-competitive shopping experiences, and establishing more airlift connections.

The IDB also believes that it represents an alternative and flexible source of loan finance and foreign direct investments. Already, state-owned development banks in China have surpassed the World Bank in lending, and outbound foreign direct investments from China to the rest of the world have multiplied. Chinese financing, however, tends to have strings attached. Loans from state-owned banks tend to support the penetration of Chinese multinational corporations abroad.

According to the IDB, what distinguishes Chinese loans and grant capital is that it is not accompanied with “policy conditionality” as is the case sometimes with the more established international finance institutions such as the International Monetary Fund, the World Bank, and regional development banks as well as bilateral donor organizations.

For the IDB, China is a pragmatic partner in foreign relations, willing to engage with a wide spectrum of regimes, irrespective of quality of governance, political conditions, financial conditions, or state of development. Most importantly, China is also open to accepting repayments in physical commodities, especially oil, which broadens access to countries that may be illiquid or have a history of loan defaults and thus have no access to traditional capital markets.

 

POTENTIAL CHALLENGES FOR CARIBBEAN STATES

 

Beneficiary countries need to ensure that they have clear strategic development goals, adequate negotiation capacity and robust institutional safeguards when considering financing and investment transactions from any bilateral source.

In engaging China, Caribbean states should clearly seek to enhance bargaining positions; but they must, at the same time, be aware of potential trade-offs. In bilateral bargaining, the burden is on each party to negotiate well, but differential institutional capacities and asymmetric information may weaken bargaining positions and impede optimal outcomes.

Below are a few examples of how practical realities in the region today may constrain optimal negotiations and how Caribbean partners and stakeholders may be susceptible because they are likely to be the weaker party in the negotiations; a priori, the party desirous of an injection of financial capital, which is in scarce supply, but offering a resource or an opportunity for which there are many other substitutes or competitors.

According to the IDB, Chinese multinational companies have been criticized in several countries for having “low local content,” that is, not hiring local labour, using only minimal amounts of locally sourced materials in turnkey operations (e.g., building of roads, ports, stadiums, hotels, hospitals, dams) or failing to honour tax holiday contracts by incorporating value added activities in extractive businesses.

As a result, the development impact may be reduced, especially in the case where the local unemployment rate is high and qualified local talent is displaced or underused.

The argument used to defend low local content is that local firms in the Caribbean generally have low capacity to deliver complex and large-scale projects on time. The low content proposition, however, reduces the spending multiplier effect and does little to build know-how or add value to local resources.

Since China has significant over capacity in steel and cement industries and surplus labour, these “tied deals” would seem to serve Chinese interests. Thus, there is a tradeoff between rapid completion with a minimum of local input into the project, and slower implementation with higher local input. The former option has the downside of reducing; a priori, the multiplier effect of the investment.

On another point, the IDB notes that the institutional capacity of the host country should ideally be strong in monitoring and enforcing compliance with assorted labour, environmental, and consumer safety standards vis-à-vis any foreign investor, but less than perfect capacity is a fact of life and low capacity is a hallmark of underdevelopment.

Therefore, host countries have to be extra cautious in engaging with companies that either come from home environments with non-uniform application of best standards or who are still on a learning curve and adjusting to internationally recognized best practices. Some Chinese firms have been accused of being more lax in complying with environmental regulations, and given that the majority of Chinese investments are in environmentally sensitive sectors such as energy, mining, and dam and road construction in developing countries, this may pose a reason for concern and make the case for extra efforts to improve enforcement capacity on the part of the host country.

Nonetheless, in 2013, the Government of China, in an attempt to improve standards, issued new environmental guidelines for Chinese firms operating abroad; calling upon them to abide by local regulations, to develop integrated risk management and mitigation systems with reporting mechanisms, to support community development, and to communicate with stakeholders about sustainability issues. Information on implementation of these new guidelines is not readily available.

Furthermore, the IDB notes that transparency, accountability, and full appropriation of benefits are overarching goals in any bilateral relationship. When these elements are missing, the distribution of benefits may be skewed or fail to be realized. When foreign partners are prone to non-transparency in business practices, this may reinforce the power of corrupt local elites, especially in country settings with compromised procurement systems, weak systems of oversights and audits, inadequate enforcement of anti-corruption laws and a weak press that could serve as deterrents or countervailing sources of power in the host country.

According to Transparency International, Chinese companies tend to publish little about country-to-country operations (revenue, taxes paid, capital expenditures), reveal little about organizational and signed contractual arrangements, such as corporate holdings, interlocking board memberships, political contributions, effective prices for goods and services rendered) and they tend to not report on audits and internal anti-corruption mechanisms.

Moreover, Chinese companies and banks have also shown flexibility in repayments. For example, in the case of Venezuela, much of that country’s US$20 Billion outstanding debt to China is structured to be paid in oil. However, the terms, conditions and effective costs are unknown to the Venezuelan public and international observers. Therefore, it is difficult to objectively access money for value propositions or to conduct cost/benefit and other types of economic and financial analysis.

The two leading Chinese financiers of development projects in developing countries tend to not publish or list on their websites Environmental Impact Assessments for their major projects in either Chinese or English. These tendencies could pose another challenge for host countries with weak institutions and again point to the need to strengthen their capacity as quickly as possible and aspire for full transparency and accountability.

 

CONCLUSION

 

In summary, the growing economic ties between the People’s Republic of China and Caribbean states may appear to be symbiotic but deliberate precautions and steps have to been taken to ensure mutual benefit, otherwise benefits may be one-sided or limited.

Article Categories:
Economic Focus · Finance · Issue 29 · Political · Publication

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