Three Gorges Probe

Worries related to China’s “Going Out”

Wu Aoqi
Business Watch Magazine
Friday, August 13, 2010

This article was originally published in Business Watch Magazine on April 5, 2010. You can read the original, in Chinese, here.

Note: The original Chinese title of this article is “Worries Related to ‘Going Out’(‘走出去’忧思录)”. When the Chinese article was published on Business Watch Magazine, a mainland publication, on April 5th, 2010, it was slightly edited and re-titled as “Chinese Investments in Southeast Asia”.

China’s “Going Out” strategy has attracted both international attention and debate. The first step of China’s “Going Out” Strategy has involved predominately large, state-owned enterprises (SOEs) investing in natural resources and mineral extraction in developing countries in Asia, Africa and Latin America. Of these regions, Chinese capital is having the greatest impact in China’s backyard—Southeast Asia. This is particularly true for Southeast Asia’s least developed countries: Myanmar, Laos and Cambodia.

Beginning in the 1990s, long before China began to promote its “Going Out” policies, a large number of small and medium private enterprises flooded in to Southeast Asia. With the recent China-ASEAN Free Trade Agreement (ACFTA), which officially took effect in 2010, the impact of Chinese investment in the region will undoubtedly continue to expand, and the implications of China’s rise will become more apparent. However, because of China’s complex historical and political relationship with Southeast Asia, Chinese investment is often perceived in an extreme manner. This is especially the case in Myanmar, Cambodia and Laos, which are much less developed and industrialized than Thailand, Singapore or Malaysia.

Just what types of impacts are Chinese companies, particularly major state owned companies, having in these host countries? And how are they interacting vis-à-vis local political economies?

These questions are not only important in regards to China’s commercial interests overseas, but they are also related to China’s future strategic goals at an international level.

Chinese Investors’ Image at Risk

Boeung Kok Lake in Cambodia’s capital city of Phnom Penh resembles Beijing’s Houhai or Hangzhou’s West Lake, as, like Houhai, it supports a large number of restaurants, travel agents and other businesses frequented by international backpackers. But unlike Houhai, all of these are about to become history, as 90 hectares of the lake have been filled in with sand so that the entire area, lake and all can be converted into a major commercial development.

Disputes over property, resettlement and compensation and other controversies have already plagued the project. After news of the development was released in 2007, local NGOs began trying to contact the developer, the Shukaku Company, to advocate on behalf of the 4000 families facing displacement. The developer, though, remained out of the public eye, lacking a website and failing to provide any information residents personally appealed to the company.

Media reports in both China and Cambodia have made it clear that Chinese capital is behind the real estate development. According to these reports, Yunnan International Ltd. formerly held a controlling stake in Shukaku Inc and had originally obtained the rights to develop the Boeung Kok project. This project was among the first group of cooperative “Going Out” projects recommended by the Yunnan government.

And just like that, in the blink of an eye, an overseas investment project “recommended” in China became the target of vociferous local criticism. Ignoring the fact that this magnificent lake at the centre of Phnom Penh can never be replaced, it will also result in the resettlement of 4,200 families living in the region. If they are lucky, they can obtain $8,250 US in compensation—far less than what it would cost to purchase another home in Phnom Penh. The only other option for them is to move 20 kilometres outside Phnom Penh to a relocation site where they will receive a dozens of square meters home, but will move them far away from employment opportunities in the city and increase their transportation costs.

The Boeung Kok project reflects the overall image of Chinese investors in Cambodia. In the course of interviews, the authors heard Chinese businesses described most often as “very difficult to get in touch with.”

While this may be the case, China has already become the largest source of foreign investment in Cambodia. According to a recent report on investment by the Cambodian Development Council (CDC), China’s foreign direct investment (FDI) in the country from 1994 through 2009 amounted to $7-billion, making it the largest country for investment. Though Cambodia currently has no mechanism available for releasing detailed statistics on foreign investment—meaning that the public can only collect information on Chinese investment from official speeches and daily observation. For example, on February 11 in Phnom Penh Prime Minister Hun Sen, in a speech, announced that Chinese assistance and investment in Cambodia is concentrated in the construction of basic infrastructure such as roads, bridges, hydropower and electric power.

One can only guess just how widespread Chinese investment actually is.

In addition, local groups have almost no recourse to obtain information regarding Chinese investment. Even Dr. Hossein Jalilian, the director of research at the independent think tank, the Cambodian Development Resource Institute (CDRI), with close ties to the government, revealed to this author that his organization has found it almost impossible to determine which Chinese investors have invested in which sectors, or even “which investors are from mainland China, which are from Taiwan and Hong Kong, and which are ethnic Chinese from Malaysia.” The same goes for the media. In the report referred to above, a reporter for the Phnom Penh Post noted that he had requested that the Chinese Embassy in Cambodia release information on whether Chinese companies had invested in the Boeung Kok project. The response from the Embassy was that they “had no information.”

This practice is in stark contrast with companies from other countries, which proactively reach out to local communities. A reporter from Agence France Presse (AFP) in Phnom Penh told the authors that the French Embassy sends regular newsletters to the media informing them about the activities of French companies in Cambodia. The location organization NGO FORUM and the staff of a number of international organizations also expressed that it was much easier to interact with Australian companies and other Western companies.

In interviews with the representatives of Chinese companies in Cambodia, this author brought up concerns that “Chinese investors lack communication with local communities.” In response, one private investor noted that he felt Chinese businesses were not averse to interacting with local communities and organizations, but that most of them were simply too busy and that some of the questions being asked by NGOs involved commercial secrets or had too little to do with their business activities for them to be able to respond. The representative of one SOE noted that he felt that his company had fully considered the interests of local citizens in its operations, and that it had received the praise of the Cambodian government, which was sufficient.

The government, for its part, has no lack of praise for China. At a 2009 ceremony inaugurating the Prek Tamak Bridge, financed by a preferential loan from the China Import Export Bank and built by the Shanghai Construction Company, Prime Minister Hun Sen exclaimed, in Chinese, “Shanghai Construction, I love you!”

Professor Qin Hui of Tsinghua University—who has already made two research trips to Southeast Asia to explore Chinese investment in the region—pointed out that these varying points of view reflect the vast difference in the institutions found in China and the host countries. In China, Chinese companies primarily interact with the government in their business operations—and only on very rare occasions do local communities have an opportunity to interact with them or express concern. Chinese companies tend to follow this model in their operations outside of China—with the belief that they only need to please local governments. However in a country like Cambodia, which has a relatively well-developed civil society with more than 2,700 registered international and local NGOs, citizens have a very active voice in public affairs. For this reason, when Chinese companies neglect to communicate with local citizens, conflicts will likely ferment and deepen.

In the course of conducting interviews this author found that some Chinese enterprises had in fact both complied with Cambodian laws and held forums with local communities, however these forums fell well short of meeting the needs of citizens. In Koh Kong province in Southwestern Cambodia, where a Chinese company is developing a hydropower project, residents of a nearby village told the authors that when the company first decided to develop the project two or three years ago it had, with government assistance, held a meeting with villagers and made several verbal commitments to compensate the villagers for the damage to the local ecology, including building a road, a school, and an irrigation system. However, when villagers approached the company actually doing the construction and requested that it make good on these promises, the construction company told them that this was a matter that they would have to take up with the investor, as they were not responsible for any of these things. As it is impossible for the villagers to travel to Phnom Penh to meet with the investor, communication broke down.

Such phenomenon reflects the realities of the broader legal environment in Cambodia. In the 1990s, when the UN and other international organizations entered the country to support the reconstruction efforts following many years of war, the contemporary political and legal structures were designed according to Western models. In interviews, a number of people noted that Cambodia has excellent laws, but that implementation is an entirely different story. It is for this reason that Cambodia has such rampant corruption today.

Even though many Chinese businesses are careful not to disturb local citizens and to mitigate their impact on the environment , disputes are unavoidable. For example, in the hydropower project referred to above, villagers went to the construction company looking for employment opportunities. After their requests were rejected, the villagers began to criticize the Chinese company. The construction company told the authors that Chinese businesses are not willing to employ local workers because they are unskilled, inefficient, not willing to work overtime, and will often work only up until payday, For this reason, most companies prefer Chinese workers, who are more willing to put in long hours.

For this particular project, the authors learned that there were a total of 500 workers on site, of which more than 200 were from China. The rest were recruited from other parts of Cambodia. Only a few local workers were hired to do some menial tasks. Any work of a technical nature was completed by Chinese workers, while Cambodian workers did only manual labour such as digging ditches. While Cambodians were paid from between 5 and 8 dollars per day, Chinese workers made upwards of $800-1,000per month or even more. Cambodian workers were quite knowledgeable of the wage difference. One ethnic Chinese Cambodian that the author spoke with had requested a raise, but was rebuked by his Chinese manager.

Additionally, there were a number of conflicts on the work site, causing the Chinese company to request troops from the Cambodian government to help maintain peace. In the eyes of local villagers though, these armed soldiers appear to be hired by the Chinese company as “private guards” that prevented them from entering the work site.

A Mix of Opportunity and Risk

When considered in tandem with the Chinese government’s “Going Out” strategy, the China-ASEAN free trade agreement makes Southeast Asia attractive to Chinese investors. In less developed ASEAN countries, including Cambodia, Laos, and Myanmar, investments are primarily backed by capital from State Owned Enterprises and are concentrated in resources, mining and extraction, and infrastructure sectors. In the words of a legal advisor to Prime Minister Hun Sen who also serves as a legal consultant for many Chinese investors: “Chinese state owned investors are the main players; individual investors and private enterprises are lacking in capacity, and came to Cambodia later (in comparison with entrepreneurs from other countries), and are not very competitive in this market.”

Chinese investments in Cambodia, Laos and Myanmar are concentrated heavily in the hydropower sector. According to a report issued in 2008 by Heinrich Ball Foundation, the World Wildlife Foundation and International Institute for Sustainable Investment (IISD), Chinese companies in Laos are either already investing in or planning to invest in 17 hydropower projects, with Sinohydro Corporation the largest investor. In Cambodia, there are 6 projects, with investors including Sinohydro, Datang, the State Grid Xinyuan Company, China Gezhouba, and China Heavy Machinery Company. Another report by Earth Rights International said that by September of 2008, Chinese enterprises are participating in the development of 35 hydropower power projects in the country.

The space that has opened for Chinese companies to invest in Southeast Asia comes as international financial institutions and Western states pare back investments in the region. In Laos, for example, the original plan and strategy for developing hydropower was created by the Asian Development Bank (ADB) and the World Bank (WB) in the mid 1990s. These plans emphasized the utilization of the country’s water and mineral resources to facilitate development of its infrastructure and its broader modernization. However by 1999, these international institutions changed their thinking, and instead started to advocate that Laos develop its agriculture sector, its ecology, and tourism and implement other sustainable development projects.

A major reason behind this change was that WB, ADB and other Western investors became increasingly hesitant, given the heated debates and disputes on the environmental and social impacts resulting from industrial projects. Particularly for hydropower projects and dams, INGOs and the international media have fiercely criticized the negative impacts on the environment and local livelihoods.

Multinationals and international financial organizations—concerned over the public outcry—now tread very carefully with respect to such projects.

Additionally, an increasing number international institutions have established stricter international standards for credit-financed projects that carry potentially significant social and environmental impacts—such as hydropower, mining and industrial agriculture. Strict adherence to these standards requires that projects go through years of reviews, which drastically increase their cost. Host governments are also often wary of such standards, thinking they are overly complex and rigid.  As a result, the WB and the ADB gradually reduced their financial support for hydropower and natural resource development in countries like Laos.

As these financial institutions gradually scaled back their investments in these areas, Chinese enterprises moved in to fill the gap. But Chinese financial institutions and companies do not adhere to the same standards as Western companies in their overseas investment. Thus, Chinese companies also have an advantage with respect to the cost of developing and operating projects.

In Cambodia the situation is similar to that in Laos. As economic development has progressed, the WB and the ADB have gradually cut their support for projects in Cambodia. In Myanmar, aid from the WB and ADB has been suspended entirely for a number of years since the United States and European countries imposed sanctions on the country.

A senior researcher at the Cambodian Development Resource Institute, Sedara Kim said that, in comparison with the low interest loans offered by international financial institutions, the Cambodian government prefers Chinese loans—which despite having higher interest rates, do not come with any political strings attached. A senior staff member in a Chinese hydropower company with experience in several Southeast Asian countries agreed with this point of view.

The Laos government has opted for a developmental path that relies on the exploitation of natural resources, which fits well with China’s strategy for the region. When the Chair of China’s CPPCC visited Laos in December of 2008, he noted that China should link its “Going Out” strategy to Lao’s strategic policy of “converting natural resources into capital.” He stressed the win-win nature of Chinese cooperation with Laos—calling for Chinese business to take advantage of Laos’ rich natural resources and China’s wealth of potential capital, technology and markets.

The nature of hydropower development in the three countries varies. In Cambodia, where only 20% of the country is electrified, hydropower projects are aimed primarily at meeting its own needs for power and allow it to speed up the pace of industrialization. Laos, on the other hand, hopes to use its enormous hydropower potential to become the “battery of Southeast Asia,” looking to supply Thailand and Vietnam with power. In Myanmar on the other hand, where Chinese companies are investing heavily in hydropower, most of the electricity will be sold to either China or Thailand.

While in Cambodia, this author heard several representatives of Chinese hydropower projects express the following concern: over the past several years China has invested heavily in hydropower in Southeast Asia, and once all of this power comes on line, there are concerns whether Cambodia, given its current level of development, will be able to consume all of this electricity. Most of these projects are being developed on a BOT (build – operate – transfer) basis, for which the sales price of the electricity was set at a low level when the initial project agreement was signed. Given the amount of power that will now be coming on line, it is questionable as to whether the price of electricity will even reach these low expectations and whether Chinese companies will be able to recover costs during the operation phase of the project (BOT arrangements in Cambodia range from 30 to 40 years).

In Laos, there exists similar uncertainty regarding the export of electricity. The primary market for electricity from Laos is Thailand, and while there is a framework agreement with the Laos government for the purchase of electricity, following the economic downturn that began in 2008, Thailand’s demand for electricity has faded and with it has the desire to purchase electricity. While it may still purchase electricity, it is certain that it will demand a lower price. Over the long term, the movement supporting environmental protection in Thailand will continue to strengthen and hydroelectric projects throughout the region will continue to be placed under greater scrutiny and pressured by international organizations and NGOs. This will ensure that Thailand does not move towards high intensity industrialization, and in the countryside, civil society organizations have promoted solar power, small-scale hydropower, biogas and other forms of clean energy. These initiatives will further reduce the need for Thailand to import power from neighbouring countries. This is not good news for Chinese investors in the hydropower sector.

During the course of conducting field research in Laos, Tsinghua University professor Qin Hui learned that Laos is only able to develop low dams with limited reservoir capacity. Because of pressure from NGOs in Thailand, projects on the Mekong River near the Laos-Thailand border have been put on hold, meaning that most of the dams in Laos are smaller scale facilities further downstream. Such projects tend to be much less efficient in respect to electricity production. In comparison, the facilities that China is building in Myanmar along the Irrawaddy and Salween rivers, both of which begin in China, are much larger and more efficient.

By no means though does this mean that China’s investment in hydropower in Myanmar is well designed or even secure. Of the three countries, political risk is the highest in Myanmar. The Military Junta in Myanmar is much less stable than the governments of Laos or Cambodia, and from 2007 to 2009 there have been a series of armed conflicts. In addition, Myanmar’s water resources and natural resources, and subsequently many of the Chinese-backed projects, are located near areas inhabited by ethnic minority groups. Decades of war and political tensions have created serious ethnic conflicts in these areas.

For these reasons, it should not come as a surprise that China’s investment in and operation of facilities in these areas are regularly scrutinized by western governments and Myanmar NGO groups in exile. As most of China’s projects in Myanmar are BOTs extending over several decades, it is extremely difficult to assess risk. A recent report on Myanmar issued by the China Export Credit Insurance Company noted that the Myanmar Military Junta will continue to influence politics in Myanmar over the long term, that Myanmar’s economy will remain closed, that sanctions against Myanmar by western countries will not be lifted over the short term, and that the country faces many obstacles to economic development. The report also said that Chinese companies investing in the area will likely be impacted if the Junta continues to take military action in its four special regions.

Why are Chinese companies investing in such dangerous projects? A representative of a Chinese company developing a hydropower facility in Laos who preferred not to be identified noted that after a MOU was signed regarding the project, before the actual contract was signed, several key economic indicators had already worsened significantly, and it was clear to the company that the investment risk had increased sharply. Regardless, the company went ahead with the project, citing non-economic considerations. He said it is not always the case that companies are thinking in economic terms. Over the past several years, as China’s relationship with ASEAN has gotten much closer—especially with the China-ASEAN Free Trade Zone and the development of the 10+3 framework for enhanced cooperation—the CCP and government leaders now visit the region much more regularly. Many of the contracts for hydropower investment projects are signed during these trips. As a result, when SOE decision makers are assessing whether or not to invest, they also must take into account the involvement of Chinese political leaders. This explains some of the seemingly illogical investment patterns.

In addition to hydropower, Chinese investors in Laos, Cambodia and Myanmar have also taken a strong interest in investment in mining and extraction. According to data provided by the Commercial Section of the Chinese Embassy in Laos, as of August 23, 2006, China has invested in a total of 47 mineral exploration projects, accounting for approximately 34% of investment in mining in Laos. The potential for mineral development in Laos was a major incentive for Sinohydro to develop hydropower in the country. On December 28, 2009, Sinohydro’s investment in hydropower paid off, as its subsidiary, Sinohydro Bauxite Extraction Company Ltd was awarded rights to extract bauxite in a 39.33 square kilometre area in a prefecture under Vientiane.

According to government statistics from Myanmar, Chinese investment in the country from 2008-09 was valued at $856 million, accounting for 87% of direct foreign investment for this period. Most Chinese investment in this country came from the China Non-Ferrous Mineral Group, which in 2008 signed a product-sharing agreement with the Myanmar Department of Mining to develop nickel mines throughout the country.

Looking to the Future: Complementary Interests?

After the ACFTA officially came into effect, commercial interests in Indonesia, Thailand and Malaysia expressed opposition to the new framework—with the hope that their governments would delay agreements that would eliminate custom duties. Indonesia has already submitted a formal letter to ASEAN requesting that the elimination of customs duties on a range of products be pushed back by one year.

Compared to Thailand, Malaysia and Indonesia, which industrialized much earlier, Cambodia, Laos and Myanmar seem much more open to trade with China. Presently, the general structure of trade between the countries consists of China importing natural resources from the three Mekong countries and then exporting to them manufactured goods and capital for infrastructure development. Almost all of the imports from these three countries to China consist of either agricultural products or raw materials. In comparison, Malaysia, the Philippines and Thailand are sending primarily finished products to China, and are concerned over the influx of cheap Chinese consumer products on their markets.  .

In comparison with the six more developed ASEAN countries, as new members of ASEAN, Cambodia, Laos, Myanmar and Vietnam enjoy a five-year transition period, and will not implement waivers on customs duties until 2015. In trips to Cambodia and Laos last year and this year, this author learned that these countries import high-end products from Japan and Korea, middle level products from Thailand, and Chinese products are primarily seen as low end, but are suitable for the majority of consumers in the two countries. As integration continues in the free trade zone, and as shipping routes and the image of Chinese brands improves, it is likely that the mid-level market share of Chinese brands in Southeast Asia will improve. This is a cause of concern for exporters in Thailand, Malaysia and Indonesia who commonly see China as a threat.

Historically, because of its attempts to “export communist revolutions” and because of ethnic conflicts involving overseas Chinese, diplomatic relations between China and Cambodia, Laos and Myanmar have been turbulent. But after implementing economic reforms, relations between the countries improved. Over the past several years, China has lavished developmental aid on these nations and pursued a policy of soft power. When visiting these countries, Chinese government officials often bring with them large amounts of loans and financial assistance. Last December when Chinese Vice President Xi Jinping visited Cambodia and Myanmar, a total of 14 MOUs on cooperation were signed—amounting to 1.2 billion dollars in loans and financial assistance. The development of the electric grid and transportation linkages throughout the Greater Mekong Sub-region are also supported by Chinese investment and developmental aid.

Unlike Western countries, the Chinese government does not attach conditions to its aid to Cambodia, Laos and Myanmar. Rather, aid is often linked to the development of infrastructure and cultural exchange. For example, the Laos National Cultural Palace and the Prime Minister’s Office in Cambodia were built with Chinese aid, while Confucius Institutes and classes on Chinese culture continue to surface in these three countries. In this respect, the only country that has demonstrated the ability to compete with China in Southeast Asia is Japan.

China’s soft power in Myanmar is likely the strongest. Among members of the international community, the isolated Myanmar Military Junta is often referred to as China’s “younger brother.” Of course this label is a result Myanmar’s strategic value for China. In December of 2009 when Xi Jinping visited Myanmar, he oversaw the signing of the Agreement on Rights and Obligations for the Sino-Myanmar Crude Oil Pipeline, a strategically vital project. Once this pipeline is complete, China’s reliance on the Malacca straits will be reduced, as will the risk associated with importing crude oil using ocean carriers.

“Going Out” Responsibly

From the point of view of Myanmar, Laos and Cambodia, China is the dominant power in the region. All three countries have a great deal of close cooperation with China and share mutual interests with their neighbour to the north, but because of complex historical issues, ideological differences and sensitive geopolitical concerns, tensions and conflict are possible. Should China truly desire to be a leader in advancing regional integration in Southeast Asia or perhaps even East Asia, Chinese policy makers must seriously consider the problems that Chinese investment are causing throughout the region.

One of the greatest needs is for China to better manage tensions between its strategic political objectives and economic interests. Regardless of whether it is trying to realize geopolitical goals by advancing trade and commerce, or to use political means to push the development of economic cooperation, China needs to think carefully about its objectives and the tools that it is using to achieve them.

As poor countries, which are further back on the path of development than China, Cambodia, Laos and Myanmar need to attract foreign capital. At the same time, they must also promote development that is socially and environmentally sustainable. Chinese investment has undoubtedly brought all three of these countries new opportunities, especially as Chinese investment represents an alternative to Western capital and international financial institutions. However, the weak political environmental and regulatory capacity of these three countries is not able to effectively manage the rapidly increasing influx of trade and capital. The result is widespread corruption.

The development and construction of large-scale hydropower plants and dams are also having a dramatic impact on the environment, ecologies and local communities. In this context there is little transparency, the complaints of local populations to rampant corruption and forced changes in livelihoods will quickly focus on Chinese investors and may create a deeper discontent with China. It should not come as a surprise then that these countries have a history of anti-Chinese and anti-China riots. Over the past several years, the Western media has developed an affinity for “exposing” the “negative impacts” of Chinese state owned companies operating mines or investing in hydropower overseas. The most radical of these have gone as far as accusing China of engaging in economic colonialism abroad. While many of these politically-charged reports are sensational, some of the cases they expose do demonstrate that the track record of many Chinese companies investing in overseas projects is not very good. After two research trips to the region to explore these issues, this author has come to see that this is, in fact, the reality.

Professor Qin Hui argues that the countries of the Greater Mekong Sub-region are currently undergoing profound economic and social change. Chinese people and companies who aim to be a part of the development of the region can only succeed if they gain a deep appreciation for the local contexts of these countries, respect the rights of local communities and avoid bringing domestic practices from China to their overseas invests. By following such practices, not only will Chinese companies contribute to the development of the Mekong Region, they will also help lay the groundwork for developing better practices back home.

Categories: Three Gorges Probe

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