Competitive Financing: An Alternative Solution for Doing Business in China

Competitive Financing: An Alternative Solution for Doing Business in China
China (in red), the members of the Asian Infrastructure Investment Bank (in orange), the six proposed Belt and Road corridors (in black), and the Maritime Silk Road (in blue).By Lommes, Wikimedia Commons

By John Gruetzner

Canada is currently exploring the parameters permitted under USMCA Article 32.10 for realistic mechanisms to improve its commercial position in the Chinese market.

In the Joint Outcomes of the First Canada–China Economic and Strategic Dialogue, the Government of Canada committed to sending a high-level delegation to the second Belt and Road Forum in April 2019. Ideally, this undertaking will identify commercial opportunities for Canadian service providers and industry to participate in the Belt and Road Initiative (BRI).

Canada should talk the talk but also walk the walk by offering significant financing via Export Development Canada (EDC) both to companies and directly to sovereign entities from a triaged list of the 68 countries that comprise the BRI.

In the short term in this period of uncertainty, greater potential for non-commodity exports is possible for those outside of China to sell manufactured products and business services into China. To maximize this opportunity, EDC and Canadian private-sector banks would have to provide BRI with focused financing either to compete with or to partner with Chinese firms.

The Belt and Road Initiative is China’s version of the Marshall Plan. It aims to fund global infrastructure connectivity to China. This is designed, in part, to alleviate poverty and generate economic activity that will permit China to dominate global trade. Within China, it is also a stopgap to commercialize, through loans and investment, China’s massive overcapacity in key sectors like steel, cement, rail production, and power generation. The Chinese government has initially committed US$600 billion in funding over 10 years to BRI.

The major focus for non-Chinese media and academics regarding the BRI has been on macro-level concerns such as the implications for the national debt in China, geopolitical posturing, and possible interference by China in the politics of borrower countries. US and EU think tanks are also busily monitoring the economic and national security implications of the BRI.

Yet very little focus, from a business perspective, has actually been placed on the importance of competing commercially against or working with Chinese companies on tenders under the BRI program. What are the implications of the BRI for Canadian technology exporters’ global market share? The commercial impact is probably the least understood but most important BRI outcome.

At a conceptual level, the BRI is not a negative force, given the infrastructure deficit that exits globally in the BRI recipient list. The policy devil of course will be in the details of implementation. Rather than worry about the negatives, the best way to mitigate these is for the G-20 to provide borrowers with alternative financing and commercial choices.

The EU–Asia Centre stated recently, “As long as the principles of the OECD, the World Bank and the IMF on transparency, public procurement and sustainable development are observed, the European Union is not hostile.”

The BRI has triggered a financial and policy response by the EU, the United States, and Japan. This month Australia announced an A$3 billion initiative in the form of a Pacific-focused infrastructure development bank with A$2 billion plus A$1 billion of export financing for Australian companies.

The prospective list of borrowers from any Canadian counterpart to the BRI fund should be tight. The right balance when selecting these countries must factor in both commercial and diplomatic goals. The commercial potential for Canadian exporters in the new innovation sectors comprises the commercial side of the equation (along with solid economic analysis to make sure that the borrowers can repay, of course). The other side, the foreign policy goals, also need to be weighed carefully.

In certain instances Canada may want to offer to assist with conflict resolution or settlement of existing debt held by countries that benefit from politically neutral debt relief. Nepal, Sri Lanka, Myanmar, and Mongolia are potential recipients of this type of support as are countries in central and South America. Iceland might also wish trade financing for national security reasons and the refurbishment of its fishing industry, an industry Canada can also compete in.

Canada should deliver a financing package that is fiscally disciplined but also designed with export promotion as the main goal. The loan products offered must respect Canada’s commitments to OECD consensus financing, but also provide creative financing structures that are exporter friendly, competitive, and naturally viable within the borrower’s debt capacity.

John Gruetzner is the Managing Director of Intercedent Limited. He is also one of 24 founders of the China Policy Centre to be launched next year in Ottawa.

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