Markets Insight
March 1, 2012 2:53 pm
Cheap Chinese finance rolls into Bahamas
In September, Baha Mar, a resort company with its headquarters in Nassau, announced that it was strengthening relations with its Chinese partners by opening an office in Hong Kong. The company has good reason to embrace the Chinese – it secured a $2.4bn 15-year loan from the Export-Import Bank of China earlier in the year.
In a way, the loan was a form of rescue finance. Baha Mar was building a $3.5bn “mega resort” in the Bahamas and its partner, Harrah’s Entertainment abandoned the project in 2008 after the global financial crisis. But it was also a form of vendor financing. Baha Mar gave the contracting work to a mainland group, China State Construction Engineering as well as its US unit China Construction America.
Moreover, 7,000 workers were sent to the Caribbean to build the hotels, golf course, casino, water park and accommodation.
“It was important for the Chinese to show that they can build complicated projects to top quality,” says Don Robinson, Baha Mar president. Baha Mar, like other companies which may have had trouble sourcing long-term, cheap and plentiful finance, has become one more recipient of capital from Chinese banks.
The list of beneficiaries is a long one and includes governments from Angola to Venezuela, as well as companies from Reliance in India through Petrobras in Brazil to a failing bicycle maker in Ohio in the US and a social housing project in Venezuela (underwritten by China Development Bank with the proceeds repaid partly in oil).
Beijing has always used its banks as an instrument of policy. Both the massive infrastructure build out at home, and the export machine sending lower value-added Chinese-made goods out into the world are slowing. China needs to generate demand for the capital, telecoms and power equipment, and for the workers who build dams, power plants, railways and property projects across the country.
By offering cheap finance, Beijing is generating the orders to keep factories humming and workers employed that it otherwise might not receive. It is now taking the concept and applying it to services as well as manufactured goods. It is also making use of a competitive advantage that has often gone under-appreciated – its abundance of cheap capital, the result of both its $3.18tn in reserves and (to a lesser extent) its capital controls. For Beijing, such financing is far more productive than buying US Treasuries, and has the added advantage of reducing its reliance on dollar-denominated investments.
For the companies borrowing the money, Chinese capital is an unmitigated blessing, (though not for their own governments seeking to keep orders and jobs at home). But for other players it is a more complicated story. Both Exim and China Development Bank are explicitly policy banks, arms of the government. CDB at least has access to the resources of the state and uses the balance sheet of the government as well as its own when it distributes its largesse – frequently in chunks of $10bn and more. But often the listed banks have similar mandates, blurring the line between commercial and policy lending. These kinds of projects involve huge concentrations of risk, though in many cases the banks think in terms of strategic importance of a given project rather than the cash flows used to repay the loan.
In the past, the use of vendor financing hasn’t been confined to the Chinese of course. The Japanese, the Koreans, the Europeans and the Americans all have institutions similar to Exim and China Development Bank. It is the scale of the Chinese effort that is unprecedented.
The challenge of the Chinese vendor financing model is especially formidable for banks like HSBC which seek to increase their presence in China and believe they have a role in supporting Chinese companies as they go global. In some ways that is a reasonable ambition, given that the Chinese banks still lack a presence in much of the world and lack the experience and skill of HSBC in trade finance and other services.
But how does HSBC compete against such long-term money so cheaply priced and available in such quantity?
Meanwhile the Baha Mar project, due to be completed in 2014, will challenge the pre-eminence of the Atlantis resort as the cool tourist destination. Li Ruogu, president of Exim, attended the groundbreaking ceremony as did the Chinese ambassador to the country.
The Chinese are also spending tens of millions of dollars to improve Nassau’s international airport as well as to upgrade their own diplomatic facilities.
In short, the combination of China’s state-owned enterprises and debt from state-owned banks is a powerful alliance that will increasingly resonate outside China as well as within.
Copyright The Financial Times Limited 2012.
0 comments:
Publicar un comentario