Aurora Magazine

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The China opportunity

Published in Mar-Apr 2012

Charting China’s progress to economic powerdom.

Pakistan and China have perhaps the most axiomatic of relationships between any two sovereign states in the world today. It is a relationship that matured fairly early in its lifetime, and has since resolutely withstood the test of time. Notwithstanding the fact that Pakistan is ideally situated in geopolitical terms to serve China’s strategic interests in the region and provide it access to the warm waters of the Arabian Sea as an alternative trade route, the relationship also offers tremendous ammunition for Pakistan’s economic development.

As a matter of record, the relationship has made considerable progress since the time of the establishment of diplomatic relations between the two countries in 1950, followed by a multi-dimensional military assistance programme post the 1965 war with India, and the signing of a strategic alliance in 1972 following the debacle of East Pakistan. Economic cooperation between the two countries began in earnest in 1979. Pakistan’s exports comprised mostly raw cotton and cotton yarn that China was in need of in exchange for machinery, cement and capital goods.

Demand for Chinese finished products remained low until the 1980s, as the quality of goods did not match imports from more developed markets, such as Japan, as well as countries in Europe and North America.

Yet, in absolute value terms, trade between the two countries has remained extremely low key, despite the fact that China’s global trade has grown by leaps and bounds over the last decade and a half. To put things into perspective, in 2010, Pakistan-China trade volume reached a so-called ‘all time high’ of $8.6 billion. In comparison, India-China trade that year was worth nearly $62 billion and China’s total trade amounted to almost three trillion dollars.

Demand for Chinese finished products remained low until the 1980s, as the quality of goods did not match imports from more developed markets, such as Japan, as well as countries in Europe and North America.

The transformation of China in recent years has been simply spectacular. Credit for the country’s outstanding achievement first goes to its visionary leader Deng Xiaoping, who started the well-known ‘reform process’. It is said that although Xiaoping had long espoused that China needed to shed its isolationist philosophy, it was after his meeting with Lee Kuan Yew, the father of modern Singapore in 1978, that he decided to cross the Rubicon.

However, a point worth noting is that for almost two decades China quietly underwent far reaching reforms internally.

Its economic policies and infrastructure evolved in stages, distancing the country from its hard line, inward-looking, socialistic past. During this time, Hong Kong played a key role as China’s conduit for trade with the rest of the world, with many Hong Kong business houses moving their labour-intensive activities to the mainland because of cheaper labour and maintaining their base at home. It is said that the integration of Hong Kong with the Pearl River Delta in Guangdong was the most striking aspect of the trade and investment links between the two strategic partners.

It was in 1997, the year Hong Kong was handed back to China by the UK, that President Jiang Zemin raised the ‘go global’ slogan, officially opening up the country for foreign investments and encouraging local entrepreneurs to extend their horizon beyond the mainland.

Ten years later, in 2007, the China Investment Corporation (CIC), a sovereign wealth fund, came into being. CIC was allocated $200 billion, out of China’s hard-earned foreign exchange reserves. Its mission was to make “long term investments that maximise risk adjusted financial returns for the benefit of its shareholders.” The underlying objective was to put China’s growing foreign exchange reserves to good use. Within four years, CIC assets had doubled to $400 billion, which was a clear proof of pragmatic management and optimal use of funds in a world market plagued by a financial crisis that had brought down many champions of unbridled capitalism to their knees.

During 2010, Chinese overseas investments amounted to $68 billion. In geographical terms, Asia remained the main beneficiary, attracting two-thirds of all investments, 75% of which went to Hong Kong. Singapore and Myanmar were the other two countries that shared most of the remaining balance. Latin America attracted nearly 15% of the total investment in 2010 and Europe 10%. Investment in America of $1.3 billion was under one percent of total worldwide investment. In terms of sector-wise investments worldwide, 45% went into leasing and business services and a similar amount was shared by five other sectors, namely financial services, manufacturing, mining, transportation and wholesale and retail trade.

Chinese overseas direct investments (ODI) in Africa, mostly initiated after 2006, have been the focus of widespread attention in recent years. Major investment destinations in that continent have been Algeria, Nigeria, South Africa, Sudan and Zambia. With South Africa, China has established a strategic relationship, partly because of the large ethnic Chinese population, estimated at over 100,000 and partly because of the country’s aspiration to become part of the BRIC alliance. A single investment by the Bank of China in South Africa’s Standard Bank amounted to $5.5 billion, more than the entire Chinese investment in the US to date.

Chinese assistance and loans on attractive terms have been used in the smaller countries in Africa, for the development of roads, railways, ports, dams for power generation and refineries. However, not all of China’s investments have earned the gratitude of the local population. In some countries, claims of poor business practices and poor quality of work on infrastructural projects such as roads and hospitals has led to violent protests. In Nigeria, for instance, hundreds of textile mills have closed down because of competition from low cost Chinese manufactures. Yet, for China, Africa remains a vital source of much needed raw materials.

The UK has been one of the preferred destinations in Europe for high profile Chinese government and private sector investments. CIC took many people by surprise in 2009, when it became one of the largest shareholders in Songbird Estates, the majority owner of Canary Wharf, a major business district in London, and one of its two main financial centres – the second being the city of London, also known as the ‘square mile’. The investment served to bail out the property company, giving CIC the third largest equity stake in the process. A more recent investment by CIC has been the purchase of 8.7% stake in Thames Water from two Iberian investors, as reported in the Daily Telegraph in January this year.

Another interesting acquisition by a private sector company was the purchase, in 2011, of 20% shares in Manganese Bronze Holdings (MBH), manufacturers of London’s famous transport vehicle, the ‘black cab’, by a Shanghai-based, private automobile company, Geely International. Collaboration between the two companies had started with an order secured by Geely for 1,000 black cabs from Azerbaijan in 2011 – however, that deal later turned sour because of inordinate delays in receipt of payments and caused some loss to MBH. Geely, as the story published in The Economist in June 2011 titled ‘Streaks of red’ also pointed out, owns the Swedish car maker Volvo as well.

The most well known acquisition, by a private Chinese company in America relates to Lenovo, which started out in 1998 as Legend Holdings, and was listed on the Hong Kong Stock Exchange in 1994.

By 1996, it became the PC market leader in China. The company officially changed its name to Lenovo in 2004, before it acquired IBM’s global PC business for $1.75 billion. Lenovo also develops and manufactures workstations, servers and hardware components. After the acquisition, it became the third largest PC producer in the world.

According to a June 2010 Reuters report, Fosun, one of China’s largest private conglomerates, acquired 7.1% equity in Club Med, a French listed company and internationally famous leisure and resort group – the first such deal between the two countries’ businesses.

In Pakistan, Asia International Finance Company Limited, a leading Chinese business group, recently invested $40 million in KASB Finance Limited, a holding company of KASB group. That deal was also claimed as the first ever investment by a Chinese company in Pakistan’s financial services sector.

Chinese telecom giant, China Mobile has invested over $1.6 billion in Pakistan in the last three years, mainly on infrastructure and brand development. The company claims to have nearly seven million subscribers in Pakistan.

The Haier Group of China has invested $35 million in a joint venture with Ruba General Trading Company, for the production and marketing of a range of domestic appliances. Its factory is located near Lahore and products are available across Pakistan.

Other notable investors from China include ZTE telecom equipment and network solutions and Huawei Technologies, a global ICT solutions provider, public sector firms such as China National Petroleum Corporation (CNPC), China State Construction Engineering Corporation (CSCEC), and Dongfang Electric Corporation, manufacturers of power generators and railway equipment.

Pak China Investment Company Limited (PCICL) is a DFI formed under a partnership between the Government of Pakistan and People’s Republic of China for the promotion of trade, investment and economic growth of Pakistan. The company was incorporated in July 2007 with an authorised capital of $200 million and was formally launched in December 2007. PCICL provides funding and support for investments in the industrial sector, agriculture, services, IT, manufacturing, real estate and infrastructure development.

Although Chinese investment in public sector companies is of great potential value, the public sector itself has earned a bad name, with botched up projects and misdirected investments. The case of Gwadar Port is a typical illustration of how a strategic project can be led to rot because of selfish partisan interests and political wrangling.

Although Chinese investment in public sector companies is of great potential value, the public sector itself has earned a bad name, with botched up projects and misdirected investments.

However, private sector investments from China can go a long way in generating economic activity in Pakistan, creating jobs and improving the standard of living of the population. Pakistani entrepreneurs must come forward and enter into joint venture agreements with Chinese firms that are ready to invest overseas. As the cost of Chinese labour increases, Pakistan may well become a pit stop for Chinese exports worldwide. Such initiatives will not only lead to greater creation of wealth, but also get Pakistan out of the economic quagmire it finds itself in today.

Ejaz Wasay is Senior Fellow Marketing, Institute of Business Management.