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Infrastructure Cooperation— New Opportunities for China – US Relations

Tuesday,May 09, 2017

By: CCG

 

500 英-CCG报告:中美基础设施领域合作前景广阔,-为中美关系提供新机遇-印

 

Foreword

 

On 6th of April, Chinese President Xi Jinping was invited to the Mar-a-Lago resort in Florida to meet President Donald Trump for the first time. Trump immediately expressed a strong disapproval against globalization and free trade, launching a series of tough and controversial policies in order to show determination in fulfilling campaign promises that propelled him to win the election. Establishing a ‘win-win’ cooperation between the U.S. And China proved to be a formidable task for China's economy and diplomacy. On the eve of the meeting between the two heads of state, the U.S. Secretary of state, Rex Tillerson, stated that the two key drivers for their bilateral relations were friendship and cooperation, and repeatedly stressed the principle of: "no conflict, no confrontation, mutual respect, cooperation and win-win.” In his article: China and the US: an odd couple doomed to co-operation, Martin Wolf, deputy chief editor of the Financial Times said that finding the basis for cooperation was key to the summit. “Mr. Trump wants an infrastructure boom in the US. China is by far the world’s greatest exponent of fast infrastructure delivery. It must be possible to marry China’s capabilities to Mr. Trump’s objectives,” he wrote. A CCG report published in January titled “Trump’s era: Challenges, Opportunities and Policy Responses suggests that construction of infrastructures would become a new sector in which both countries can find mutual interest.

 

One flagship program President Trump proposed to boost the US economy is to expand infrastructure investment, which can reach $1 trillion in the next 10 years. China, on the other hand, has comparative advantages in this sector in terms of capital, technology and expertise. According to official statistics, in the first 10 months in 2016, China’ s investment in infrastructure has reached USD 1.4 trillion, meaning that China has been able to meet Trump’ s investment objective for the next 10 years in less than one year. In the meantime, China’s investment in the United States still maintains a strong momentum, with the total amount hitting a new historic record at USD 45.6 billion in 2016. This report points out that China and the United States have complementary advantages in infrastructure building and can explore more cooperation opportunities in this field.

 

The report identifies seven opportunities that strengthened China-US infrastructure construction cooperation can create:

  • China-US infrastructure cooperation can help the Trump administration achieve economic development goals.
  • Chinese and American infrastructure companies can benefit from the US infrastructure development initiatives.
  • China and the United States can launch comprehensive industrial capacity cooperation through railway transportation projects.
  • Chinese machinery equipment manufacturing companies can expend export, investment and cooperation in the US market.
  • High tech enterprises can participate in the United States’ most cutting-edge infrastructure projects.
  • China-US infrastructure cooperation is in line with the overall trend in which capital is flowing into infrastructure development.
  • Growing momentum in public-private partnership in both countries;

 

Meanwhile, the report also identifies the potential barriers for China-US cooperation in infrastructure, such as the impact on the US domestic market competition, the viability of PPP programs, and political uncertainties, and proposes the measures accordingly to counterbalance the constraints, including:

  • Localizing Chinese companies in the United States;
  • Integrating Chinese capital from various sources to participate in US infrastructure;
  • Involving the U.S. in the ‘One Belt One Road’ initiatives for infrastructure;
  • Promoting Chinese investment abroad and establishing China-led infrastructure cooperation mechanism;
  • Enhancing exchange of Chinese and American provincial/state governments to seek more cooperation at the local level;
  • Expanding the role of Chinese and American think tanks in public diplomacy to provide more advice for policy making;
  • Improving international PR relations to create a better environment for Chinese investment abroad.

 

 

President Trump’s infrastructure development plan

 

The US infrastructure is in dire need of renovation. According to the “Global Competitiveness Report”, the US is ranked the 19th in terms of the level of infrastructure development, after Spain, Portugal and Oman. The American Society of Civil Engineers (ASCE) issued a comprehensive evaluation report in 2011, rating the US infrastructure D+. It also estimates that in order to upgrade the transport infrastructures by 2020, the United States needs to invest $3.6 trillion, equivalent to the annual cost of reparation, replacement or expansion. According to the research done by the American Chamber of Commerce, from 2013 to 2030 the US would invest $8.2 trillion in infrastructure. Most of the interstate highways in the United States were constructed between the 1950s and 1980s and cannot meet the demand of road transportation nowadays. In 2008, Americans were delayed on the highway by up to 38 hours, compared to only 12 hours in 1980. As another immediate result, Americans consumed more fuel per year that leads to direct economic losses of nearly $100 billion.

 

It has been widely acknowledged by the US politicians and scholars that infrastructure investment can not only spur economic growth and improve employment, but also bring tremendous social economic benefits. A 2014 IMF report stated that the increase in infrastructure investment is one of the few government policy tools to support growth. In addition, improved transportation infrastructure is also conducive to congestion and pollutant emission reduction, which facilitates the mobility of people and goods, increase efficiency and productivity, and strengthen American’s global competitiveness. Previous studies have shown that for each dollar invested in public transport infrastructure, 3-dollar return of profit can be yielded. Since President Roosevelt’s administration after WWI, infrastructure construction investment has proved to be a means to stimulate the US economy. There has been barely disagreement arising from the US bipartisan politics with it, and therefore it should be easy to get the political support from all levels of governments. Even before Trump administration, President Obama, for example, has been trying to expand domestic infrastructure investment following the subprime mortgage crisis in 2008.

 

However, it is undeniable that how to find the source of investment in infrastructure construction is a daunting challenge for any government, especially for the United States which suffers from sluggish economic growth and sizable federal budget deficit. As a solution, the Obama administration has turned to the investors in foreign countries, including China. The Obama government began to engage the China Investment Corporation (CIC) executives at the 2011 Davos World Economic Forum, followed by several rounds of official discussion in 2012 and in 2013 on how China can invest in the US infrastructure development. In July 2014, the White House announced the “Build America Investment Initiative” that attracts private capital to invest in infrastructure. In addition, through the “Select USA” initiative, the Obama government explored other innovative way to acquire finance at home and abroad. Two former US finance ministers Henry Paulson and Robert Rubin published an article, titled "Why the United States should listen to China," to call on US local governments to create a favorable environment for Chinese investment in the US infrastructure.

 

Former US Secretary of State John Kerry once said that infrastructure investment is a “win-win” solution, through which investors can gain economic benefits and investment recipient countries can boost their economy through infrastructure development. Nowadays, the China-US relations are facing a lot of uncertainties. But, investing in the US infrastructure is in line with the Trump administration’s agenda and also China’s interest, and therefore can be a good area to rebuild the positive momentum in the bilateral relations. As China’s Ministry of Foreign Affairs stated, China and the United States remain optimistic about the potential cooperation in infrastructure. Many Chinese and US high-level government officials and trade experts as well as world leaders such as former Australian Prime Minister Kevin Rudd all believe that Trump administration should welcome China’s participation in the US infrastructure development plan.

 

 

Seven opportunities to support China - US infrastructure cooperation

 

  • China-US infrastructure cooperation can help the Trump administration achieve economic development goals.

According to the statistics from the US Department of Transportation, only for land transportation infrastructure building, there has been a gap of investment up to $900 billion. Secretary of Transportation Elaine L. Chao recently announced that the Trump administration’s construction plan does not only include transportation infrastructure but also energy, water resources, broadband and veteran hospital construction projects. However, due to the big gap in funding, it is highly uncertain if the majority of Republican lawmakers in the House and Senate will support Trump's infrastructure development plan. Once it is delayed at the Congress, Trump may fail to deliver his campaign promise to double the US economic growth rate.

 

China can help Trump achieve his goal. With 30 years of rapid economic growth, China has accumulated a capital that amounts to $11 trillion, 10 times more than Trump’ s expected investment in the US infrastructure. By 2015, the bilateral trade and investment has reached $519 billion in value, created 2 million jobs in the U.S., and averagely reduced the annual cost of living $850 per American household. In 2015, China's investment in the United States exceeded US’ investment in China. According to Rhodium Group study on China's investment in the United States, out of the total, around $9 billion was invested in the US infrastructure projects. For Trump, one of the priorities is to attract the greenfield investment in the places affected by industrialization. Chinese companies, such as Fuyao Glass Industry Group Co., Ltd, have made great contributions to the local US economy by establishing offices and storage centers in Alabama and South Carolina. Its investment in Michigan and Ohio in the recent years has also created nearly 4,000 jobs.

 

  • Chinese and American infrastructure companies can benefit from the US infrastructure development initiatives.

Contracting foreign projects is a traditional way for Chinese companies to participate in the infrastructural investment abroad. According to the 2015 American "Engineering News Record" (ENR), a total of 65 Chinese enterprises are ranked among the global top 250 international contractors, with Chinese Railway Engineering Corporation, China Construction Engineering Corporation, Chinese Railway Construction Corporation, and China Communications Construction Group as the top four contractors. Another report about China's foreign project contracting in 2015, the United States has become one of the top 10 markets for Chinese international contracting companies. Chinese contractors have strong international competitiveness and successfully completed a number of infrastructure projects in the United States using cutting-edge technology and skills.

 

  • China and the United States can launch comprehensive industrial capacity cooperation through railway transportation projects

In the US market of rail transit vehicle manufacturing and transportation infrastructure, China’s road and rail company (CRRC) has been the most successful Chinese company going abroad. By 2014, CRRC has won a contract of $566 million in value to provide 284 vehicles to Boston Metro. By March 2016, it won another contract from Chicago of 846 metro vehicle that worth $1 billion. In January, 2017, the company received another contract of 134 vehicles for the “Boston subway project”. In compliance with local government procurement requirement, the vehicles will be produced in the factories located Massachusetts and Chicago, and will help create more job opportunities. CRRC Vice President Yu Weiping said that China has started exporting capital and technology to developed countries, and the comprehensive industrial capacity cooperation is conducive to the realization of the US economic development goals.

 

  • Chinese machinery equipment manufacturing companies can expend export, investment and cooperation in the US market.

Construction machinery equipment manufacturing industry is the main actor in the infrastructure development. China’s leading companies in this sector such as Sany and XCMG have already entered the US market. In 2011, Sany R&D center established a production plant in the southern Georgia. Xugong, which started its joint venture in the United States 20 years ago, established spare part production centers in New York and Orlando and is still planning to build a new factory in Las Vegas. Zoomlion and Sunward both have made public their intention to seize this opportunity of the Trump infrastructure development plan.

 

  • High tech enterprises can participate in the United States’ most cutting-edge infrastructure projects.

Elon Musk, founder of the super high speed rail transportation technology company (Hyperloop), as well as Tesla electric cars, Space X and “Silicon Valley iron manwas invited by Trump to attend the conference on infrastructure construction. The forefront of infrastructure projects in China has seen the presence of prominent investors from ‘Angel investment’, such as Xu Xiaoping. A Hyperloop co-founder visited several cities in China to discuss the cooperation on high-speed rail program. Yingchuang Construction Technology Co Ltd, headquartered in Shanghai, has signed multiple cooperative agreements in September, 2016, with Hyperloop to participate in the construction of the US high speed rail, providing independent research and development of 3D printing technology. Currently, the company is working with the United States to launch 3D printing and exploring other cooperation projects.

 

  • China-US infrastructure cooperation is in line with the overall trend in which capital is flowing into infrastructure development.

According to China Investment Corporation’s study, infrastructure investment, as a special asset class, can play an essential role in managing risk and increase the return of a portfolio of assets. With solid government support, infrastructure projects usually can secure stable cash flow and return of investment while avoiding inflation risk. Between 2008 and 2016, the annual composite rate of return on investment in the global open market for infrastructure stocks reached 9%, much higher than return rate of global stock investment at 5.7% during the same period. The total value of the global open market for infrastructure stocks is estimated to have exceeded $2 trillion.

In recent years, more and more international financial institutions consider infrastructure investment as an effective means to diversify the portfolio and maintain the value of assets. According to the poll conducted by PwC, the majority of investors believe that infrastructure investment has strong appeal to investors because of the potential long-term return and stable cash flow. Standard & Poor's 2014 report estimates that globally, infrastructure investment demand and public fund supply can create a gap of $500 billion per year, of which $200 billion can be filled by institutional investors. An article on the Economist in 2014 released a global investor’s poll, which finds that 2/3 of respondents had made investment in infrastructure, and about half of them said that they would increase the amount in the future.

 

  • More US local governments are expected to expand PPP in infrastructure development.

Although it remains in its infancy in the United States to use PPP model to fund infrastructure projects, many well-known investment institutions such as Blackrock have set a positive tone for the future PPP expansion to boost the US infrastructure development. Some states, especially those developed economically such as California, Virginia, Texas, Florida, and New York, have achieved a great number of successful PPP projects, which covers a wide range of sectors such as road and rail transportation, bridge construction, water treatment, among others. The shortage of financial resources is clearly the main reason for the development of PPPs at all levels of US governments. According to a 2015 survey, more than half of the respondents from the state, county and municipal governments said that their offices were running PPP projects and will expand it in the next three years.

One of the most important factors for the PPP expansion in the recent years was the Obama administration’s plan in 2014 to attract more investment. It was a key measure taken by the White House to promote cooperation between the federal and local governments as well as private sector, in order to increase infrastructure investment and expand the PPP market. Considering the current situation of the US infrastructure and the high expectation on the infrastructure to boost the US economy, it is foreseeable that the US government will attach more emphasis to PPP as a model that can address the shortage of public funds. According to Moody’s global PPP development report, the United States has the potential to become the world's largest PPP market for its size of territory and growing urban population.

 

 

Challenges for China to participate in Trump’s infrastructure development plan

 

While rolling out the trillion-dollar plan for infrastructure development and create around 25 million jobs in the next years, President Trump has repeatedly stressed the principle of "buy America, hire Americans.” As Secretary of Transportation Zhao Xiaolan said in a TV interview, job creation is the top priority for the Trump administration. Although the United States welcomes foreign investors, foreign investment increase has not yet been translated into the creation of more jobs. This needs to be changed.

China's traditional way to contract infrastructure projects overseas is exporting capital, technology and labor altogether, so it cannot increase local employment. Against such as backdrop in the United States, China may encounter huge political barriers, especially in the local governments.

 

  • Local companies will be prioritized in President Trump’s infrastructure development plan

In line with the Trump administration’s "American First" principle, it is expected that American companies will be prioritized in the infrastructure development plan. Local bond investors issuers, financial institutions, engineer project consulting, project contractors, and suppliers will all consider Chinese companies as their competitors. They are savvy about local politics and can fuel the public concern about “foreigners taking over Americans’ public asset”. Recently, Alibaba-affiliated mayi.com encountered setback when it was trying to expand the business in the United States. This is just one of the many cases to show the Committee on Foreign Investment in the U.S. stricter scrutiny of China’s investment. A report released in November last year by the US China Economic and Security Review Commission has urged the Congress to ban Chinese SOEs to merge American companies through legislation.

 

  • PPP has not yet been widely accepted and adopted in America

The United States is lagged behind in the adoption of PPP mode, for three reasons: 1) the US infrastructure projects have long been relying on tax revenue and government bond issuance to acquire fund. So local governments are not motivated enough to try other financing options with low-interest rate and tax free; 2) compared to public investment, financing through PPP requires more technical input and professional staff that many local governments do not possess; 3) it is eventually local governments’ decisions to adopt PPP mode, but local government officials have to prioritize their political interest and made policies based on the demand of local interest groups.

 

  • Chinese companies lack understanding of US local politics

There have been plenty of studies done on China’s investment in the United States from strategic perspective, but not too much focused on the US investment environment at the local level. However, state, county and municipal governments also have their own legislative and executive bodies, and play a leading role in attracting foreign investment and launching infrastructure projects. The Chinese companies are used to building connections with federal government and local government leaders, but overlook the overall local political ecosystem and the relations with local labor union, civil society, media, industrial society and NGOs. they lack awareness of local political ecology,neglect local unions、community, media, trade associations and various nonprofit organizations. They are too focused on self-interest in the negotiation and prefer to use the raw materials and labor from China, which have triggered local public’s concerns and resistance and discouraged local politicians to support the Chinese companies, especially during the elections.

 

 

Seven suggestions to strengthen China-US infrastructure cooperation

 

  • Localizing Chinese companies in the United States

To the Chinese companies, the most politically and socially popular way to invest in the United States is to establish local factories. According to the American Recovery and Reinvestment Act of 2009, the construction materials and operating equipment used in the transportation projects such as aviation, railways and highways must be manufactured in the United States. CRRC’s production base in Springfield and Chicago has created 150 and 169 jobs respectively for local public. Massachusetts Governor Charlie Beck said that CRRC’s factories that bring back the jobs in manufacturing industry can be considered a milestone in the state history.

The report suggests that Chinese companies in the United States should comply with local regulations and laws, and procure more resources from local market. They are also advised to ensure a certain percentage of women and minority workers in the staff.

 

  • Pulling financial capital to jointly participate US infrastructure development

Since direct investment may incur higher political barrier, CIC suggested that Chinese companies can play a role as minor stakeholders through equity investment. Steven Orlins, the President of the US -China Relations Committee also suggested that China can also establish a special infrastructure fund to ease Americans’ concerns about the impact of Chinese investment on the US national security and employment.

China has a number of private equity fund managers with overseas experience and access to US private equity partners and investment banks. The report echoes the CIC suggestion that a sovereignty fund should be established to lead the government, industry, private equity fund, banks and other financial institutions to jointly invest in infrastructure building in the United States and participate in PPP projects. They are also advised to turn merged US companies into local partners and seek comprehensive cooperation with them in production, technology, service and management. It can help Chinese companies acquire more international operational experience and expand China’s international production capacity.

 

  • Involving the U.S. in “One Belt One Road” infrastructure initiatives

Former National Security Adviser in the Trump government James Woolsey has pointed out in his article that it is strategic mistake that the Obama administration failure to join the Asian Infrastructure Investment Bank. He expected President Trump to show more enthusiasm for the “One Belt, One Road” initiatives. AIIB President Jin Liqun has extended the invitation to America. In September 2015, China National Machinery Industry Corporation and GeCorp signed a MOU to jointly promote clean energy projects in Africa to double the population with access to electricity in Sub-Saharan Africa. It is in line with China’s “One Belt One Road” initiatives and America’s “Power Africa” project. In addition, the China-US cooperation in infrastructure is also conducive to the future bilateral investment agreements (BIT) negotiations. The report recommends to further involve the U.S. in the “One Belt, One Road” initiatives through strategic economic and political dialogues.

 

  • Strengthening the investment &establishment of Sino-US infrastructure co-operation

The focus of the China-US economic diplomacy has shifted from trade to investment. China should promote the impact of China’s investment on the US economy and job creation through media and outreach initiatives. Many experts and scholars have advised China and the United States to increase exchange and dialogue to promote infrastructure cooperation. Chinese central government agencies or Chinese embassy/consulate in America can lead the studies and regular consultations on how to increase the distribution of the US infrastructure development information and improve policymaking in facilitating the bilateral cooperation in this sector. At the G20 Leaders’ Summit in Hangzhou last year, President Xi Jinping and former US President Barack Obama already reached a consensus to promote the PPP mode and strengthen the exchanges and information sharing in the field of public service facilities construction.

 

  • Increase interaction between Chinese and US state governments and push forward state-level cooperation in infrastructure development

Under the US federal system, state governments have great autonomy to roll out their own foreign investment policies and infrastructure projects. Regional economic development and job creation are important criteria to evaluate a US governor’s performance, so state governments, especially those from economically less developed states, are more motivated to strengthen relations with China. The US state governments can serve as a "stabilizer" of the China-US relations. The report suggests to establish an annual dialogue mechanism for Chinese and American governors to discuss infrastructure cooperation and other issues.

 

  • Leverage the role of Chinese and American think tanks in public diplomacy to provide advice on how to improve the bilateral relations

The report points out that the two governments need some time to build trust and connections after Trump took over the White House. During the transitional period, think tanks, chambers of commerce, trade associations and other NGOs are more ideal actors to promote cooperation and dialogue mechanism. The think tank has accumulated a number of former government officials with academic strength and government affair experience, and they can be leveraged to increase the understanding of each other’s social economic policies.

Currently, the Chinese government is encouraging the new type of think tanks with Chinese characteristics. China's think tanks, especially independent think tanks, can be an actor in the “Track II” diplomacy, building connections and host meetings with non-governmental organizations such as chambers of commerce, industry associations, governors and the city alliance, environmental organizations, to establish contact. As the United States does not have a designated agency to be in charge of promoting PPP, civil society groups such as the National Public-Private Partnership Committee (National Council for PPP), the Mayor Business Council (The Mayors Business Council) are playing such a role. The partnership with civil society organizations can accelerate knowledge and information sharing, increase bilateral interaction to help Chinese companies to participate in the US infrastructure projects from the beginning.

 

  • Expanding the channel of ‘Track II’ diplomacy and improve China's international relations to facilitate outbound investment

There are 16 types of infrastructures and most of them do not cause concerns about national security. The key to success for Chinese enterprises is to understand the local politics especially in infrastructural projects. It is crucial to gain local government support and create a favorable investment environment with local political support and community approval. That requires proactive communications and outreach to all key stakeholders. Ideally, the Chinese companies can work with government-authorized economic NGOs that have connections with stakeholders, who can raise awareness of Chinese investment and its impact on overall social development.

 

 

Conclusion

 

There are still many uncertainties in the China-US relations. However, Trump’s trillion-dollar infrastructure investment plan provides opportunities for Chinese companies and create new areas of cooperation. Previously, some skeptical observers said that infrastructure investment plan is not considered as the Trump government’s priorities. Nevertheless, Zhao Xiaolan, Secretary of Transportation had recently come to quell rumors that the Trump administration and Republican lawmakers would wait until 2018 to announce plans for infrastructure projects. She said that the $1 trillion infrastructure plan may be announced before the end of the year.

After the first 100 days in his presidency, Trump and his government are eager to deliver his campaign promise of doubling economic growth and increase employment. However, it is not easy to get congressional support. Although Republicans hold the majority in both houses, Trump’s campaign has caused a serious split in the Republic party, which has increased the risks involved. Nevertheless, a more pragmatic Trump can seize more win-win opportunities in the infrastructure development. With more progress achieved in infrastructure, China can help America boost economies and employment and avoid trade wars.

 

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