What does the construction of a mega-resort
in the Bahamas (complete with hotels, golf course, casino, and water park) have
to do with SA’s infrastructure drive recently announced in Pres Zuma’s State of
the Nation and the Minister of Finance’s budget speeches?
Baha Mar, a resort company headquartered in
Nassau, Bahamas, recently secured a $2.4 billion loan from the Export-Import
Bank of China to complete a mega-development. After the 2008 financial crisis Baha
Mar had run into financing difficulties. The Chinese facility put the show
back on the road, but with a difference.
The loan is a form of vendor finance. Baha
Mar gave the subcontracting to China State Construction Engineering as well as
a US subsidiary of China Construction America. 7 000 Chinese workers were sent
to the Bahamas to do the physical building.
It’s a win-win-triple win. Baha Mar wins
as it gets its resort. The Bahamas win with a huge investment in core
industry, tourism. The Chinese score a triple win: the application of (a tiny
bit) of their huge forex surpluses, secures orders for production facilities
back home (resorts require material, furniture, steel etc) and jobs for its
According to the Financial Times Baha Mar is
only one example of a long list of beneficiaries to have received some form of
financial support from various Chinese state institutions. They vary from
countries (“from Angola to Venezuela”), to well-known companies like Reliance
in India and Petrobas in Brazil and less well-known ones like a failing bicycle
maker in the US, and NGO activities like a social housing project in Venezuela.
The Chinese game plan is very clear. It
has vast reserves (more than US$3 trillion and still rising), a huge export
machine sending lower value-added goods into the world and many millions of
workers. Put the three together and it can use its surpluses to generate overseas
demand for its products and workers back home. In the process it piles up more
resources (while things are going well) and runs the risk of losing some
reserves (should some of these financing arrangements go south). All in all a
nice alternative to just buying US and EU treasuries – which they are doing on
a large scale anyway. They can now also generate some demand in the real
economy of China itself.
No genius, just the immensely comfortable
position of being a saver saving much more than it can possibly use at home.
Countries with huge current account
surpluses have all done this in the past. When it was still an empire, the UK
exported billions of its surpluses overseas. The US did so after the Second
World War. Germany is doing it today, with a lot of its huge surpluses ending up
in Greece!! Being surplus saver logically means that the savings must get
re-circulated. What else must the saver do with it? If it hoards it in the
vaults of Central Banks, money gets withdrawn from the global system,
contraction follows and recession/depression sets in. Then the savers and the
non-savers lose. No winners.
This happened in 1929 – 1933 and that did
nobody any good.
The big savers at the time were the US and
France. France became a saver not because they had an efficient and innovative
economy like the US, but because they pegged their currency at a lower rate
against gold. French goods became very price competitive, visits to Paris and
holidays on the Cote d’ Azure very cheap, the country generated a surplus and gold
streamed in (the whole world was then on a gold standard, since abandoned).
Much like China today, which also has an under-valued currency, inter alia,
enabling its exports to be super-competitive.
(The UK, in contrast to the French, took
the pound back onto the gold standard at too high a value –Winston Churchill nogal
when he was Chancellor of the Exchequer – foreshadowing the same mistake
Margaret Thatcher made 65 years later when she took the pound into the EMU at
too high a rate. The UK was forced off the gold standard on 21 September 1933
and George Soros ejected the pound from the EMU on 16 September 1992. What is
it with Sterling and September; and valuing the pound too high?!!)
This brief walk through history should
remind us that there is no such a thing as “the end of history”. One hegemony gets
on top, but it does not stay there for ever. Decline and fall is destined. At
the moment China is rising, not because of military power, but because of the
power of savings.
Infrastructure spending is budgeted to run
at about 7.9% of GDP over the next three years and will probably increase
substantially after that. It basically reverses a pattern of declining
(public) investment that started in the middle 1980s. In the budget review
some 43 projects running into potentially more than R1 trillion are listed.
The sources of these funds are taxes,
user charges (like Gauteng tolls), borrowings on the capital
market, bilateral loans and private capital where
public-private-partnerships are undertaken, or any combination of these.
This is where the Chinese enter into the
picture. They are now the biggest savers in the world and as the FT reporting
indicates, they are very willing to spread their savings around. Of course,
one does not just borrow from countries. Savings also sit in pension funds,
banks and large companies, which one finds even in countries with struggling
economies. But there is no question that China is currently a huge player when
it comes to savings.
Given China’s status as SA’s new best
friend, it is logical that a tiny portion of their savings can fund a huge
proportion of SA’s planned infrastructure spend.
Firstly, how will they make these savings
available? Will it come via the SA bond market or will it be in the form of
direct loans (e.g. to build a high-speed train between Durban and Johannesburg)
which will include vendor finance as with Baha Mar in the Bahamas? If it is
vendor finance, to what extent will Chinese workers and engineers replace SA
workers and engineers? Could China State Construction Engineering replace say
M&R or WBHO? (I am obviously just speculating here). Could we be treated
to the delightful spectacle of construction executives and workers marching and
toyi-toying to protest such arrangements? The best deal for SA would simply be
debt issued and bought on the capital markets.
The second issue is one of geo-political
alignment. Traditionally SA has been in the Anglo-Saxon orbit or sphere of
influence. That is clearly changing and we will now move closer to the Chinese
sphere of influence. This move will also feed into a natural SA tendency to
want thumb a nose at SA’s long Eurocentric and Anglo-Saxon ties. But the new
SA and China are very different societies when it comes to values, political
cultural and world view.
Interesting times ahead.
Sender, Fin Times, 2 March 2012; Lords of Finance, Liaquat
Ahamed, Windmill Books, 2010.