Is Pakistan really a dream destination for China?
Has to compete with more robust economies
BEIJING:
Before divulging into the topic of ascertaining Pakistan’s potential, let us first take a look at the demographics of Chinese global investments.
Under its ‘go-global policy since 2000’, the Chinese government has been encouraging its domestic companies to invest overseas for sustaining their profitability and enhancing market share, while taking advantage of the country’s huge foreign exchange reserves.
Investment: Chinese company keen to set up oil refinery
As per the World Investment Report, prepared by UNTCAD, China has emerged as the third largest outward investor with an investment flow of $116 billion in 2014.
Analysts, at the American Enterprise Institute; a US-based think tank that has been tracking Chinese investments and construction contracts, valuing over $100 million since 2005, provide an interesting picture of the Chinese overseas business focus.
According to them, bulk of the Chinese investment stock (56%) resides in developed countries whereas China has clinched over 96% of its construction contracts in the developing countries.
This simply means that Pakistan has a better chance of attracting Chinese companies for construction contracts than for investment on ground.
The actual situation in Pakistan corroborates this fact.
In terms of investment focus; energy, metals and real estate remain the top sectors for Chinese companies.
Energy sector alone attracted over 40% of total investment stock, whereas the other two sectors enjoy a share of 17.8% and 10.1% respectively. As far as the construction contracts are concerned, energy and transport sectors have a predominant combined share of over 76% in monetary values of contracts.
How should we interpret Chinese investment trends?
We can deduce that excess capacity lies in the Chinese infrastructure sector, for which it is encouraging companies to seek contracts in overseas market of developing countries.
China’s large policy banks, such as China Development Bank and EXIM Bank, are rolling these infrastructure projects through provision of funds. It is also seeking resources in the shape of minerals and metals, for which Chinese companies are investing around the world.
Chinese companies visit to explore Pakistani market
We need to clearly demarcate boundaries between ‘outward investments and construction contracts’ here. In actual, it is the investment part that creates long-term employment on ground and induces value addition and probable technology transfer.
Where does Pakistan stand?
This $46-billion China-Pakistan Economic Corridor (CPEC) initiative should be deemed more of an infrastructure project. Here, the bulk of money will be spent on energy and transport projects; in line with Chinese trend in construction contracts.
As to the question of where will the investment portion of Chinese exposure reside, we know that large infrastructure projects are usually financed through debt with smaller equity segment.
It would not be different for the Chinese case in Pakistan. Companies would be investing a small equity portion in the large energy projects whereas debt from Chinese banks will be covering the greater lab.
Should we expect Chinese companies from other sectors coming in droves during or after completion of this CPEC project?
We need a bit of a reality check here.
China is indeed building other such economic corridors in South-East Asian and Central-Asian regions under its ‘one belt one road’ initiative. Building economic corridor is one part and attracting Chinese investments, on ground, is another story.
The economic corridor may facilitate investment flow, however, Pakistan needs to take into account the competitive nature of the investment business. It will be competing against more robust economies of emerging markets for Chinese money. Brazil, India, Malaysia and Indonesia are some of the developing countries where Chinese investment stock is much larger than in Pakistan. Trade linkages of these countries with China are much deeper. Pakistan needs to take a leaf from the connection between trade and investment.
It is pertinent to mention here that the Chinese private sector has taken a lead over State-owned Enterprises in investing abroad. The trend is evident from the presence of large number of Chinese private companies among the investor delegations visiting Pakistan in recent times.
And why should these companies look outside for business? Well, the rising labour costs and reduced margins in Eastern China where majority of these companies are located are some of the contributing factors for production relocations.
And do we offer conducive environment to Chinese investors vis-à-vis other competitors? A million dollar question, whose answer will commence with security situation on ground.
Pakistan is making all-out efforts to ensure wider security, but unfortunately the perception is harder to beat as every single terrorist incident augments this perception. Also, we need not ignore the entertainment element for foreign investors in the host economy.
Pakistan also rates low on this entertainment aspect as compared to its competitors. The entertainment element may not account high for foreign investors in case of extractive industries. However, for manufacturing and service sectors, it has its weight.
CPEC’s western route clears another hurdle
As for investment incentives or infrastructure deficiencies, the former are more or less the same across similar economies; the latter, however, can be overcome through dedicated economic zones and other facilitations.
The security and entertainment also remain key factors, which the government needs to take in stride for making a rigorous pitch for Chinese investors. Otherwise, distinction for dream investment location might not be achieved.
The writer is an entrepreneur based in China
Published in The Express Tribune, April 4th, 2016.
Before divulging into the topic of ascertaining Pakistan’s potential, let us first take a look at the demographics of Chinese global investments.
Under its ‘go-global policy since 2000’, the Chinese government has been encouraging its domestic companies to invest overseas for sustaining their profitability and enhancing market share, while taking advantage of the country’s huge foreign exchange reserves.
Investment: Chinese company keen to set up oil refinery
As per the World Investment Report, prepared by UNTCAD, China has emerged as the third largest outward investor with an investment flow of $116 billion in 2014.
Analysts, at the American Enterprise Institute; a US-based think tank that has been tracking Chinese investments and construction contracts, valuing over $100 million since 2005, provide an interesting picture of the Chinese overseas business focus.
According to them, bulk of the Chinese investment stock (56%) resides in developed countries whereas China has clinched over 96% of its construction contracts in the developing countries.
This simply means that Pakistan has a better chance of attracting Chinese companies for construction contracts than for investment on ground.
The actual situation in Pakistan corroborates this fact.
In terms of investment focus; energy, metals and real estate remain the top sectors for Chinese companies.
Energy sector alone attracted over 40% of total investment stock, whereas the other two sectors enjoy a share of 17.8% and 10.1% respectively. As far as the construction contracts are concerned, energy and transport sectors have a predominant combined share of over 76% in monetary values of contracts.
How should we interpret Chinese investment trends?
We can deduce that excess capacity lies in the Chinese infrastructure sector, for which it is encouraging companies to seek contracts in overseas market of developing countries.
China’s large policy banks, such as China Development Bank and EXIM Bank, are rolling these infrastructure projects through provision of funds. It is also seeking resources in the shape of minerals and metals, for which Chinese companies are investing around the world.
Chinese companies visit to explore Pakistani market
We need to clearly demarcate boundaries between ‘outward investments and construction contracts’ here. In actual, it is the investment part that creates long-term employment on ground and induces value addition and probable technology transfer.
Where does Pakistan stand?
This $46-billion China-Pakistan Economic Corridor (CPEC) initiative should be deemed more of an infrastructure project. Here, the bulk of money will be spent on energy and transport projects; in line with Chinese trend in construction contracts.
As to the question of where will the investment portion of Chinese exposure reside, we know that large infrastructure projects are usually financed through debt with smaller equity segment.
It would not be different for the Chinese case in Pakistan. Companies would be investing a small equity portion in the large energy projects whereas debt from Chinese banks will be covering the greater lab.
Should we expect Chinese companies from other sectors coming in droves during or after completion of this CPEC project?
We need a bit of a reality check here.
China is indeed building other such economic corridors in South-East Asian and Central-Asian regions under its ‘one belt one road’ initiative. Building economic corridor is one part and attracting Chinese investments, on ground, is another story.
The economic corridor may facilitate investment flow, however, Pakistan needs to take into account the competitive nature of the investment business. It will be competing against more robust economies of emerging markets for Chinese money. Brazil, India, Malaysia and Indonesia are some of the developing countries where Chinese investment stock is much larger than in Pakistan. Trade linkages of these countries with China are much deeper. Pakistan needs to take a leaf from the connection between trade and investment.
It is pertinent to mention here that the Chinese private sector has taken a lead over State-owned Enterprises in investing abroad. The trend is evident from the presence of large number of Chinese private companies among the investor delegations visiting Pakistan in recent times.
And why should these companies look outside for business? Well, the rising labour costs and reduced margins in Eastern China where majority of these companies are located are some of the contributing factors for production relocations.
And do we offer conducive environment to Chinese investors vis-à-vis other competitors? A million dollar question, whose answer will commence with security situation on ground.
Pakistan is making all-out efforts to ensure wider security, but unfortunately the perception is harder to beat as every single terrorist incident augments this perception. Also, we need not ignore the entertainment element for foreign investors in the host economy.
Pakistan also rates low on this entertainment aspect as compared to its competitors. The entertainment element may not account high for foreign investors in case of extractive industries. However, for manufacturing and service sectors, it has its weight.
CPEC’s western route clears another hurdle
As for investment incentives or infrastructure deficiencies, the former are more or less the same across similar economies; the latter, however, can be overcome through dedicated economic zones and other facilitations.
The security and entertainment also remain key factors, which the government needs to take in stride for making a rigorous pitch for Chinese investors. Otherwise, distinction for dream investment location might not be achieved.
The writer is an entrepreneur based in China
Published in The Express Tribune, April 4th, 2016.