New Frontiers: The Story of China, Africa and Oil

China india

China and India face the biggest dependency on external energy supplies among the world’s rising powers. Having outgrown their domestic energy sources both countries are looking abroad to meet their growing power needs. In its quest to challenge China’s pre-eminence in Asia through industrialisation and economic growth, India will be forced to draw ever more on the oil wells of the Gulf states, although its private oil firms have invested abroad, particularly in Africa, they have trailed in China’s wake, hampered by a lack of cohesive government backing.

In contrast there was nothing haphazard about China’s entry into the world of overseas oil exploration, as soon as the country’s demand began to outstrip its own domestic supplies, the government directed its state owned oil companies to begin securing supplies from abroad. The pursuit of crude all part of the country’s wider “going out” strategy.

This strategy itself a revival of its earlier efforts to assist African countries in 1960s, immortalised in the Tan-Zam railway, at once a classic example of south-south cooperation and a sombre reminder that grand infrastructure projects need long term nurturing by a capable state, and protection from the vagaries of the copper market, the line’s original raison d’etre.

Chinese oil companies were the arrivistes of the global oil industry, wealthy, ambitious, but lacking the high tech drilling technology and years of experience that the western majors have. Instead the Sinopec and the others were left with the politically risky, authoritarian and downright dangerous countries in which to develop much of its international portfolio.

Early deals to secure oil with Angola passed relatively unnoticed. Angola was a conflict ridden state forgotten by the major powers, after the end of the Cold War factions backed by the CIA, KGB and others were quickly dropped, suddenly unimportant in the wider context of a post-Soviet and Socialist world. Angola had an embattled, war-exhausted government faced by a number of rebel groups, now stripped of the veneer of ideology on one side and the IMF at the height of the Washington Consensus on the other, which demanded fiscal responsibility in exchange for credit. The Angolan government’s failed multiple IMF programs throughout the 1990s, thanks to its unhealthy mixture of poor governance, massive demand for government spending, propped by short term lending from European banking powerhouses.

The Chinese entered this scene with an innovative compact, or the “Angola Model” which would be copied across countries in Africa, Latin America and Asia. Chinese finance offered usually commercial rates of interest with a long repayment period. Unlike the IMF or World Bank, crucially China did not insist on any changes to government policy. How Chinese finance mutated into its unique form was the use of the loan, Angola’s colonial neglect followed by years of civil war had destroyed its infrastructure, the credit from Beijing was specifically earmarked for the rebuilding of the country.

While many critics of China see its role in Africa as a master plan, to control natural resources, but this ignores the fact it also saw a unique business opportunity in Africa. Angola benefited from selling China more oil at a time of rising prices, at the same time Chinese construction firms began building much needed roads, bridges and buildings across the war-torn, landmine riddled country.

In the words of the Chinese it was a “win-win” situation. Angola found a willing buyer for its oil and got Chinese expertise for the rebuilding of the country, whose construction firms would charge a fraction of the cost a western firm would.

With regard to the Chinese oil plays across Africa, the fact is they were taking the scraps left by the Western majors with little choice but to take acreage in whatever tough, remote or expropriation happy regime which remained. But the Chinese government is also playing a deeper, longer term game by engaging with African governments, through a mixture of flattery, non-condescending friendship and non-interference, tied with win-win business partnership rhetoric. Beijing has given every Chinese company pitching for business in Africa an advantage through the use of political energy and persuasion and the tireless work of its diplomats in pushing Chinese interests.

Closer to home China has identified a weakened seller in Iran, the country has a one of world’s biggest reserves of oil and gas, but its defiant stance against a belligerent US has cost it dearly in terms of trying to sell its main export earner. China, citing the non-interference policy has politely ignored the demand for US sanctions, and has continued trading with Iran, but it has to play a subtle game with the Americans, as sanctions remain high on the political agenda. The Chinese do not want to anger the US, but do want their foreign policy space invaded either.

The vast Central Asia state of Kazakhstan has also become a major supplier to its Eastern neighbour, despite moving the capital to Astana which is closer to Moscow and joining the Russian dominated Eurasian Union, the country’s economic centre continues to be Almaty, nestled in the mountains close to the Chinese border.

Another state to fall into the Chinese orbit is the secretive, Soviet era relic, Turkmenistan, which has incredibly rich Caspian gas resources, before the emergence of China as an energy supplier, the gas pipeline used to point towards Russia, supplying it with natural gas, which could be controlled and sent to Europe. The construction of a pipeline to Xinxiang in western China has allowed President Berdimuhamedow to break the Russian gas monopoly and develop a new link, both physically and politically with China.

The movement of the ‘Stans of Central Asia into China’s economic influence has led to the suggestion that there is a new “Great Game” abound in the region, a reference to the 19th and 20th central war of shadows between Russia and the British Empire, a series of expeditions, espionage missions and intrigue in a remote and dangerous part of the world. Proponents of the new Great Game has the US, India, Pakistan, Iran, Turkey, Russia and China all vying for energy and influence in the region. US influence, always tenuous, is likely to recede once the withdraw from Afghanistan is complete; the military base in Kyrgyzstan is merely scaffolding for the pacification of Afghanistan and closure is planned.

The Chinese demand for energy could be soon partially matched by that of India. Having little in the way of its own energy resources, apart from coal, which is extremely dirty and limited in usage, India will have find alternative sources, which appears to be expensive and will create energy security issues. The Indian Government faces the multi-faceted dilemma of how to continue powering economic growth, which traditionally requires tremendous energy input, the EIU estimates this to be 54% increase between 2011 and 2020 a reliance of oil and gas imports from outside countries, which will create vulnerability in terms of energy security. India could turn to energy efficiency, renewables and nuclear power to help fill this energy gap, and no doubt, this will be part of the answer, but the country will also still have to look to gas and oil to fill the gap.

Putting Down Roots: Chinese Investment in Global Real Estate

London

This week I’m looking at what is currently a red hot trend, namely Chinese investment in global property and real estate, which just happens to tie in very well with an extremely exciting talk I’m giving on the 17 April at the Blackbridge Cross Borders’ 1st Birthday Dinner, which looks to be a fantastic event attended by some high profile businessmen from China and other emerging markets.

Few sectors have the comforting feel of investing in bricks and mortar like property does, whether its buying houses, land or investing in urban regeneration; real estate is a perennial investors’ favourite around the world.

Over the last decade China’s go-global policy has seen wealthy individuals, property firms and insurance companies look abroad to build business empires and diversify their assets. But this is just the beginning, just an exploratory movement, before we witness the real thing.

As Rob Hielscher, Managing Director of Jones Lang LaSalle’s International Capital Group put it: most mainstream Chinese companies have not started investing abroad yet, what we have witnessed so far is an entrepreneurial tip of the iceberg. There are many other firms set to follow these trendsetters, even if the Chinese economy continues growing at even half its current rate, will we still witness a mass outpouring of wealth from the country, much of which will flow into property portfolios.

The figures are stark: Chinese investment in overseas real estate has grown spectacularly from USD 900 million in 2010 to USD 5.6 billion in 2012 and is predicted to grow 20% per annum over the next decade.

While the number of Chinese companies that could potentially invest in overseas property are too many too count, it is possible to highlight some of the big hitters in order to give you an idea of the numbers.

In just the first half of 2013 the top 10 property developers in China generated around USD 80 billion in revenues. Chinese insurers have around USD 1 trillion dollars in assets under management and the Chinese Sovereign Wealth Funds CIC and SAFE have around USD 1.2 trillion in assets under management. They only have to start diverting a fraction of these sums to make this ripple of Chinese investment into a wave.

Chinese investors and individuals are generally driven to buy abroad for the one or more of the following reasons:

To diversify their asset base and secure steady returns: overseas property is a useful hedge against the home market, which may offer stronger growth, but also more risk. In this respect the Chinese companies are no different from any others – they just have more cash right now.

Investment in real estate in order to develop a business: this could be hotel, retail or other venture requiring land. With confidence so high, Chinese companies are thinking big, they are attracted to long term, large scale projects which many other investors would shy away from. Many Chinese companies have expertise in large scale regeneration projects, London and Paris are half the size of mega cities like Shanghai and Chongqing, so scale is not an issue and these firms have been at the cutting edge of the biggest urbanisation process the world has ever seen.

Companies and businessmen are keen to make an impact abroad: demonstrating they are force to be reckoned with and capable of constructing large international business empires able to go toe to toe with US, Japanese and European giants.

Chinese citizens who are living abroad buying as a place to live: their children to live, or as a second home and even to gain foreign residency permits.

As a safe haven investment: putting your money in property as a way of protecting yourself and providing a rainy day fund.

And why might they want to take funds out of China…?

Recently Chinese investors have faced unprecedented uncertainty at home and the sense that anyone that was deemed too flashy, successful or who had upset the new Communist leadership were at the risk of losing their business and fortune. The Xi-Li leadership team have pursued a powerful anti-corruption campaign to hammer home the point that they are in charge, and naturally some unlucky businessmen have suffered as a result.

This has led to a situation where many rich or even middle class Chinese citizens have looked to hedge their bets by investing in property abroad and developed markets are seen as a particularly safe bet.

So where will the money go?

The world’s press has focused on stories of Chinese investors pushing up prices in the world’s most globally interconnected cities, such as London, New York and Dubai. But as Chinese investors become more comfortable in investing abroad, they are looking beyond the obvious and looking at secondary markets, places such as Manchester, Scotland, the South of Spain as well as African cities.

Some investors are students returning to where they studied abroad and feel they know the market well; while others are shrewd investors who have spotted under-priced markets through research and good connections. Naturally the biggest players are large companies looking to increase their global footprint and have teams researching and analysing where the best acquisitions are too be found.

Don’t underestimate Chinese companies ambition and sense of scale, having just been part of the world’s biggest and fastest economic transformation, they are capable and willing to undertake huge projects and pay good money for the best buildings and land. Chinese investors are behind deals like the construction of an Asian business park in London’s East End, buying One Chase Manhattan Plaza or the purchase of the famous Edifico Espana in Madrid.

The Near Abroad: SIngapore

Closer to home, South East Asia has also seen an influx of Chinese buyers, who often have connections with ethnic Chinese communities in places like Indonesia and Malaysia.

Bright Ruby a conglomerate with interests in shipping, property and commodities controlled by the Du family recently purchased the Grand Park Orchard, an iconic Singapore hotel along with a retail development called Knightsbridge in a deal worth over USD 1.15 billion. With 308 rooms, this works out at USD 1.4 million per room, beating the previous record of USD 1.1 billion per room. Chinese companies are on a buying spree and money is (almost) no object, instead their strategy is often to carve out market share, establish themselves in a country and think about making profit later on.

London and Chinese buyers

Meanwhile in London research published by Jones Lang laSalle at the end of 2013 showed that Chinese purchases rose from GBP 54 million in 2010 to GBP 1 billion in 2013, a rise of 1500%.

Significant Chinese backed developments include the Ram Brewery in Wandsworth and Dalian Wanda’s play in the lucrative Nine Elms riverside venture, as well as the plan to turn the Royal Albert Dock into an Asian business port. Add to this the large of number of private purchases in the UK’s capital famously frothy property market, attractive thanks to historically high returns and easy access for foreigners. All in all London is a sweet spot for Chinese investors.

African Property Frontiers

We know Chinese companies have been making a major impact in Africa for a while now, but they have been more renowned for their expertise in mining and oil extraction. Now a visionary plan by the Zendai Group to turn Modderfontien, a dull Johannesburg suburb into a new financial district with 10 hotels, 10 shopping centres and an African theme park – all close to Sandton the current business hub in Jo’Burg. The plan would represent one of the largest deals between South Africa and Chinese companies. As well as the boost to the local economy, the centre would also likely to act as the HQ for (the many) Chinese companies active in Southern Africa.

Built on Sand? What are the pitfalls of Chinese investment going to be?

Like any sector property has its pitfalls and dangers and is particularly prone to speculation and bubbles, which can end badly (see Florida, Spain and parts of Eastern Europe in recent years for evidence). Foreign property is not immune from anti-corruption drives emanating from Beijing. Bo Xilai, the ex-Mayor of Chongqing a massively high profile corruption victim saw his villa in the South of France repossessed by the Chinese state. Because real estate is a good way to spend “black” or “grey” money many Chinese buyers have been paying cash, literally turning up with a suitcase of notes, which is tempting for many sellers, but in time could leave them open to accusations and criminal proceedings.

Chinese companies and individuals also run the risk of a nationalistic backlash, as host countries fear a foreign dominance of their economy and the effect on increasing property values, which can price people out of the market.

What does this mean for me? How should my company act? What opportunities are there?

  • Partnering with Chinese firms in major commercial /residential deals. Companies from China might have tonnes of cash and expertise of operating in their home market, but they still need help in unfamiliar countries and cities.
  •  Understand the wants, needs, likes and dislikes of Chinese buyers, talk to people they work with and the investors themselves. This could mean understanding everything from what cities or regions are likely to be favourable, to knowing the number 4 is unlucky and the number 8 is lucky. Something to bear in mind when handing out door numbers. All this research will gain you a competitive advantage over other businesses.
  • The most straightforward advice of all, sell your property or land to Chinese buyers, this might be easy, or it might be worth advertising in Chinese language press (at home or in China), or better yet networking with Chinese investors at home or abroad, otherwise they might never find out about your prime piece of real estate. Building bonds with potential Chinese buyers/partners should be thought of as a long term project, as they will often want to get to know you well before committing to a deal.
  • Providing advisory or ancillary services: While Chinese buyers are becoming more cosmopolitan and knowledgeable about the rest of the world, they still (like any outsider) need assistance and local knowledge to help them navigate the often murky waters of real estate markets around the world. Your experience, understanding and connections in a given locale, could be a fantastic match to cash rich ambitious investors. In addition property needs services, such cleaning, security, maintenance, furniture and so on, all of which provides a whole host of opportunities for those ready and prepared for them.

Sri Lanka: Can the peace dividend continue?

sri lanka flag

Sri Lanka: Can the peace dividend continue?

Sri Lanka recently brought an end to its long running civil war and is enjoying a honeymoon of rapid economic growth, political unity and increasingly warm relations with China. However, the country’s political and economic situation remains fragile and there is the danger of a return to widespread inter-ethnic violence, which plagued the country for over 25 years, along with the risk of a deteriorating economic situation and a further manifestation of a growing authoritarian streak in the government. Below I summarize the country’s geo-political, economic and trade issues, as well as outline three potential scenarios the country could face.

When I visited Sri Lanka in 2009 the civil war was just coming to its dramatic conclusion and the Asian Development Bank and World Bank officials I spoke to were cautiously optimistic that the violence would end for good and the country would benefit from a significant peace dividend. No longer having to fight against the Tamil Tigers meant the armed forces budget could be cut considerably , leaving more funds for infrastructure and social spending, while civilians and soldiers involved in the war are able to put their energies into something more productive; “swords into ploughshares”.

The end of the conflict provided a big boost to business confidence, as companies rode the wave of optimism and took the opportunity to invest and expand. On a personal level, Cinnamon Gardens, the charming Hikkaduwa based guest house we stayed in was planning an expansion of rooms in anticipation of rising visitor numbers. Since then a Chinese funded motorway has improved links between Colombo airport and the main tourist hotspots in the south of the country and tourist numbers hit 1 million in 2012, bringing USD 1 billion in revenue, both new records.

These factors have already translated into an 8 per cent GDP growth rate in 2011, up from an average of 5 per cent during the last few years of the war. The island has always enjoyed spectacular scenery, but the end of the war has seen tourists returning to enjoy the views, providing important foreign currency earnings. Most of the tourists I met were western who lived for months at stretch on the island during the winter or honeymooners, but new groups are emerging, middle class Russians and Ukrainians looking for a warm place to spend the winter and invest money, but the biggest potential is from China, which has a growing taste for foreign travel, and whose numbers are rising rapidly, albeit from a small base.

The country has recently turned away from the IMF to international capital markets to finance its increasing fiscal deficit; this represents a vote of confidence in the island’s economy, but also raises new risks, that of an unsustainable debt problem, particularly as Sri Lanka entered 2013 with a deficit of 7.8% of GDP in 2013. A sharp downturn in the economy could quickly raise the spectre of a sovereign debt problem and a run on the Rupee, leading Sri Lanka straight back to the door of the IMF.

Sri Lanka is also poised to benefit from two external forces; firstly the potential for South Asian trade to increase, particularly with India, but also Myanmar, Pakistan and Bangladesh. Currently the region has the biggest barriers to inter regional trade in the world; only 5 per cent of South Asia’s trade is inter-regional, compared to 25 per cent for the ASEAN region or 67 per cent for the EU. Sri Lanka has a bi-lateral trade agreement with Pakistan and India, but nonetheless tariffs and barriers remain high. If the countries manage to overcome the political barriers (such as border disputes) that exist between them, and reduce tariffs and other trade restrictions, then all the countries involved would see significant economic benefits, and Sri Lanka would be no exception.

Secondly: Sri Lanka is also in a position to benefit from China’s growing investment and trade ties with the region. The foremost example of this trend is the construction and development of the Port of Hambatota, which was largely financed and constructed by Chinese firms such as Sinohydro and China EXIM bank. Hambantota lies just a few miles from the vital shipping lane, which runs from the Straits of Malacca to the Suez Canal. The Port will provide berths for repairs, refuelling and maintenance for ships on this route, which represents a large proportion of the world’s shipping traffic. Next to the port will be Sri Lanka’s biggest export processing zone as well as a new international airport.

The construction of this port has deepened and strengthened relations with China, as that country sinks physical and financial assets into the island. Increased trade and investment from China will act as a counterweight to India’s influence, preventing overdependence on its northern neighbour.

There is speculation that the Chinese navy wants to set up a military base in Sri Lanka, similar claims have been made for Gwadar in Pakistan and for ports in Myanmar, the “String of Pearls” theory which suggests that China wants to surround India with naval bases to contain it. However, for now there is no hard evidence of the Chinese constructing a permanent naval base.

While Chinese investment is currently making the headlines, India remains the country’s biggest trade partner apart from the EU. India naturally dominates Sri Lanka in a geographical sense, with a land area and population that vastly outweighs its Southern neighbour and its powerful influence remains undeniable. Perhaps Sri Lanka’s most overlooked international relationship is with the Gulf Council States, which supply 90 per cent of the country’s oil and gas, and in addition is a major destination for the island’s migrant workers, that help to alleviate the island’s unemployment problems and are a rich source of remittances, as workers send wages home to their families.

Although relations with the West have cooled somewhat, thanks to on-going concern and criticism of the human rights situation in the country (the Rajapraksa Government most recently ignoring the UN Human Rights Council’s recommendations to carry out investigations into allegations of war crimes, as well as moves by the executive to seize more power, such as controversially firing a supreme court judge) as well as Rajapraska’s government inclination towards Asian partners. The US, Japan and EU will of course continue to be significant external influences on Sri Lanka, as the major aid providers to the country, as well as exerting influence via western institutions such as the World Bank and Asian Development Bank.

Below I outline three scenarios for Sri Lanka, encompassing geo-politics, economics and business developments. Naturally these scenarios will play out in a more complex interlinked way than described, but provides a number of pathways the country’s future may play out.

Positive Scenario

•             Sri Lanka’s economy continues to power on, buoyed by increased infrastructure spending, stable government, increasing tourist revenues, and the appearance of foreign investors all contribute to a high steady positive growth rate. The country develops as a trade regional hub, taking advantage of the deep water port of Hambantota and its position close to the Malacca – Suez shipping route, the port’s export processing zone provides a boost for the country’s industrial sector, which begins to expand, providing high quality jobs and a sustainable economic future.

•             Good economic news helps to mollify ethnic tensions, despite its tendency towards the authoritarian, the Government retains its legitimacy and the country’s democracy remains intact. Crucially ethnic and religious violence, in particular Muslim Vs Buddhism and Tamil Vs Sinhala conflicts are kept to a minimum.

•             Sri Lanka develops closer relations with China, but not going so far as too offer the Chinese navy hosting rights, which keeps New Delhi “onside” as well as developing closer links with Bangladesh, Pakistan and Myanmar.

Some good, some bad Scenario

•             GDP growth will continue, but not at the high levels previously enjoyed by the country, as the peace dividend fades and the Government fails to fully capitalise on the country’s potential for development.

•             The government’s failure to address the issues of war crimes during the civil war and lack of action on other grievances lead to outbreaks of ethnic and religious inspired violence, hampering progress towards political unity and damaging confidence in the investment climate and discouraging tourism.

•             South Asian trade integration improves, but political obstacles prevent the levels of integration seen in the ASEAN region, Chinese investment and trade continues to increase and Sri Lanka is able to find a balance between Chinese, Indian and Western influences.

Negative Scenario

•             The peace dividend is quickly exhausted, and the government fails to take advantage of this period to build a sustainable economy, by failing to invest in infrastructure, by allowing corruption to flourish, and through taking a protectionist stance against foreign investment and trade not helped by the failure of the SAARC countries to develop inter-regional trade. In addition Sri Lanka fails to follow the World Bank supported Mahinda Chintana economic plan to take the country forward. Hambantota’s role as a regional and international trade hub fails to materialise and growth in trade is generally disappointing. Although Chinese investment continues to rise thanks to intervention of Beijing, other foreign investors are scared away.

•             The government’s failure to build an inclusive democracy comes back to haunt it as poor economic conditions worsen the country’s inequalities, which exacerbate ethnic tensions, which in turn take the country down the road of violence once again.

•             The country’s lack of economic success, coupled with its lack of natural resources mean that regional powers such as India and China turn their eyes and cash to other parts of the Indian Ocean and Sri Lanka is forced to use the IMF and the World Bank as its main economic partners.