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Overseas Chinese firms must learn to control political risks

Thursday,Aug 18, 2016

From: Global Times

 

Illustration: Peter C. Espina/GT

Over the last few years, Chinese firms have experienced a string of setbacks in various overseas investment projects including a high-speed rail in Mexico, the Colombo Port City Project, a China-Thailand railway project and, the latest, the Hinkley Point C nuclear power plant. The reasons behind these setbacks are complex, but can be categorized into three aspects.

First, some Chinese authorities were too eager to push forward these projects, creating a false impression on foreign counterparts who raised the prices accordingly. That led to an increase in negotiation costs and even caused some projects to fall into a deadlock. Although most of the overseas projects that Chinese firms are involved in follow market rules, the firms themselves are mostly State-owned enterprises (SOEs) and some of the Chinese government agencies who oversee the projects are all too eager to get these off the ground. This situation, to some extent, leaves an impression that these are vanity projects which the Chinese contractors want to use to impress their higher authorities. This is particularly so for projects that can be used to symbolize the good relationship between China and their foreign partner. Additionally, for the sake of mutual interest, some Chinese firms and authorities are willing to concede to exorbitant demands raised by the foreign counterparts. This has led countries to believe that the same can be done with Chinese investors. Take the China-Thailand railway venture for example. The Thai government suddenly announced in March it would not seek project funding from China after the two parties had already agreed on funding terms. Thai authorities balked at the interest rate set by China which was higher than a rate offered to Indonesia last year for a separate high-speed rail and thus decided against Chinese financing, casting a shadow on the joint venture.

Second, Chinese firms underestimate political changes in foreign countries where they seek to advance overseas developments. This has often left Chinese-funded projects in the center of political contentions. Given that China enjoys a stable business environment and maintains policy continuity, some Chinese firms are insensitive to the fluidity of political systems overseas, and as a result fail to take adequate preventive measures for long-term and large-volume investment projects. Some Chinese-funded projects overseas involve major infrastructure with strategic implications, which comes with certain controversy. Therefore, whenever a new administration takes office, these projects are at risk of being singled out for reassessment or even halted. The reason the Colombo Port City Project was previously suspended and is now allowed to go ahead was because Sri Lanka’s new government used the Chinese-funded program as a target for attacking the previous government. Although the development is strategically significant for Sri Lanka, the new government had to play with it in order to impress supporters. The Hinkley Point C nuclear power plant is a similar case. Britain’s new Prime Minister Theresa May can use the delay to show the public that she is sensitive to responses that arose over the project and to distinguish herself from her predecessor David Cameron who made impressive political achievements while in office.

Finally, compared with companies in developed countries, some Chinese firms have not developed finesse in business diplomacy and public relations and are clumsy when it comes to winning support from local people. Chinese firms have demonstrated their tremendous strength in infrastructure projects as China seeks to promote bilateral and multilateral economic ties with foreign nations through its One Belt, One Road initiative as well as with China-Latin America cooperation and China and Central and Eastern European (CEE) countries cooperation platforms. But most Chinese firms are stuck in a system of trying to impress their foreign counterparts with just tangible developments while they ignore building and promoting a brand. In pursuing some projects overseas, firms often forget that they need to woo the general public, which then makes them an easy target for criticism in the local community. The China-Mexico high-speed rail deal was called off due to rumors over inappropriate conduct by Chinese firms in the bidding process.

Overseas expansion is a very complicated issue which involves multiple factors including economic, political factors and communications. Chinese firms should reflect on their weaknesses as they seek to expand overseas in the coming years and strive to improve their capability. Most importantly, they should make more efforts in assessing political risks in the countries they seek to work with. Domestically, China should abandon the mentality that rushing will lead to success and avoid associating overseas projects with national pride and Chinese firms should learn to be a gracious loser if some projects fail. The fact is, these international projects are based purely on commercial interests. Only when Chinese firms show more ease over creating overseas projects will they feel less pressure and find more success instead of backlash and denial. [By Chu Yin, a researcher at Center for China and Globalization(CCG) ]

From Global Times,2016-8-9