China tycoon to invest RM10b in M'sia, ADB debunks BRI ‘debt trap’ concerns

https://youtu.be/4bhexUMxO0w 

China tycoon to invest RM10b in Malaysia

Yan Jiehe says country is business friendly, with strong fundamentals

China’s Pacific Construction Group Ltd (CPCG) gave Malaysia a vote of confidence with a planned RM10bil investment over 10 years in areas including infrastructure development and hi-tech machinery.

Yan Jiehe (pic), founder of CPCG, which is No. 96th in 2018 Fortune Global 500, said Malaysia “is business friendly, and one of the most competitive countries in the region”.

“The country’s fundamentals are strong. You have excellent infrastructure, a robust eco-system and a big pool of trilingual talents. Kuala Lumpur, is thus, a strategic launch pad for our expansion into Asia Pacific.

“We plan to invest up to RM10bil over 10 years in Malaysia in line with our core business areas of infrastructure development, hi-tech machinery and education,” he said in a statement.

Yan also said CPCG was open to increasing its investment especially for federal projects that would benefit the people.

“With our track record of having successfully delivered complicated construction projects in China, we are confident that, in collaboration with local partners, we will be able to do the same in Malaysia,” he said.

The group, in a move to make it easier to invest in Malaysia and across Asia Pacific, CPCG has set up CPCI Holdings Sdn Bhd, a wholly-owned subsidiary in Kuala Lumpur as its regional technical competency centre.

CPCI is involved in a RM200mil construction project in Sahabat, Sabah.

“Within the next five years, we plan to employ 150 highly skilled professionals of which more than half will be Malaysians as we position CPCI as a major player across the Asia-Pacific region. These trilingual local talents will be invaluable to work on the group’s projects worldwide,” Yan added.

With CPCI, the group would be able to optimise its operations by centralising its regional decision-making and key activities in Kuala Lumpur including accounting, strategic business planning, business development, bid and tender management, as well as engineering services.

Under its education strategy, CPCI plans to set up business schools and universities, and provide scholarships to local students. As a start, CPCI will provide up to 500 scholarships for construction and engineering students in local universities.

On the group itself, CPCG had a total revenue of RM319bil and it is the biggest private-owned construction company in the world. Founded in 1995 by Yan, CPCG was named as one of the Top 500 Chinese enterprises. It is one of the largest integrated construction groups in China and Asia in terms of the total engineering contract revenue. - The Star

ADB  Panel debunks ‘debt trap’ concerns 

 'Belt and Road Initiative not out to cause hardship to recipients'

KUALA LUMPUR: The Asian Development Bank (ADB) and two China watchers do not believe that China is using its Belt and Road Initiative (BRI) to practise debt diplomacy and causing hardship to recipient nations.

“I don’t buy the notion of China practising debt diplomacy. It is not a sustainable model.

“I don’t think this is the objective of the Chinese government in launching the BRI,” said ADB vice-president Stephen Groff.

Groff told a regional China Conference here yesterday that the failure of some BRI recipient countries to repay loans was due to their “lack of capacity”.

China’s ambitious BRI, which spans more than 65 countries, has given rise to criticism that it will drag developing countries into debt they cannot repay.

Malaysia recently cancelled several projects, saying it could not afford to implement them.

Reminding accusers of China to adopt an evidence-based approach, Groff said countries should look at their capacity when coming to the negotiating table.

At the same panel discussion on “Avoiding Belt and Road debt trap”, Prof Dr Belal Ehsan of International Centre for Education in Islamic Finance said China’s BRI had played an important role in infrastructure investments in Asia.

“Every country in the world is corrupt. It is a question of degree. China now needs a new financial architecture for BRI.

“It cannot be debt-driven but risk-sharing and profit-sharing (like Islamic financing) so that no one is a loser in the end,” he said.

Describing the “debt trap” as a concoction of Western governments and media, chief economist of IQI Global Shan Saeed said: “The rise of China is inevitable, whether you like it or not.

“The US government, media and people do not understand history and culture.

“China has 5,000 years and US only 250.

“In the Western world, everything about China is bad. The time has come for us not to listen to the Western media and be dictated by Western policies.”

To reduce risk in BRI projects, Saeed proposed loans be denominated in local currency or yuan, and not in the US dollar.

ADB believes that adopting transparency and international standards in financing will also help nations reduce risk.

“Institutions have learnt from experiences in the 1990s on debt problems.

“It has taught us the importance of transparency and sustainable framework,” said Groff. - The Star by Ho Wah Foon


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How do we get out of the debt trap without printing more money?

The policy options open to major economies, including China, to reduce debt, before another global crisis hits

Pedestrians crossing in Tokyo. Quantitative easing stopped a debt implosion, but its initial success enabled politicians to avoid structural reforms, The result was slower growth from declining productivity, even as companies and governments continued to borrow. In short, we are in a debt trap! 

ALL of us are worried about growing global debt as a precursor to another round of crises. After the last global financial crisis, 2007-2009, global debt rose to more than US$200 trillion or US$27,000 for each person in the world.

Since 2.8 billion or nearly 40% live on US$2 per day, there is no way that the debt can ever be repaid. The bulk of debt owed by governments, banks and companies will be repaid by creating more debt.

If we are happy to create money, we should be happy to create more debt. Right?

Wrong. The right question is not the size of the debt or liability, but where is the net asset? Individually, we can always repay the debt if we spend less than what we earn, or invested in an asset that generates sufficient income to pay the interest.

Collectively, the government can always borrow to repay, because it can always tax to repay, if not principal, at least on the interest. Countries only get into trouble when they owe foreigners and cannot raise enough foreign exchange to repay their debt.

High levels of investment – and debt – are good for China’s economy

Charles Goodhart, Emeritus Professor at London School of Economics and one of the foremost thinkers on money and banking has written a series of important articles for Morgan Stanley, analysing the current debt crisis.

Emerging markets

The reason we ended up with more debt than ever is due to three factors since 1970 – the willingness of the financial sector to lend, the increase in global savings relative to investment and the demand for safe assets. Professor Goodhart attributed the structural increase in savings to favourable demographics in the last forty years – particularly as emerging markets like China increased their savings from growth in their labour force that engaged in international trade.

The increase in savings relative to investments created a global savings glut, which meant lower real interest rates.

The willingness of emerging markets to park their excess savings in advanced countries in the form of official reserves and the banks willing to extend credit at lower interest rates created the boom in financialisation. Lower interest rates encouraged speculative activity (funded by debt) rather than investments in long-term productive projects.

When the bust occurred, the advanced central banks wanted to avoid a debt implosion and added to the bubble by lowering interest rates and flooded the markets with short-term liquidity.

The quantitative easing (QE) stopped the widening of the crisis, but its initial success enabled politicians to avoid taking tough action in structural reforms. The result was further slower growth from declining productivity, even as companies and governments continued to borrow, affordable only at near zero interest rates. In short, we are in a debt trap – more debt, little growth.

China lacks urgency about its debt problem, IMF says

Negative interest rates are causing a major problem in the global economy

 Central banks charged with reviving growth using only monetary policy are now actively using negative interest rates and desperate enough to think about helicopter money.

Negative interest rates as a policy tool was invented by small countries like Sweden and Switzerland to discourage large capital inflows that created excessive currency appreciation.

But for the eurozone and Japan to try that would actually destroy their banks’ profitability, which is why bank shares dropped after these were introduced. If banks think they will lose money, they will cut back lending to the real sector further, negating the objective of QE to stimulate growth. Banks receiving QE funds faced the double prospect of being punished for taking credit risks and also the need to increase both capital and liquidity due to the tighter bank regulations.

Helicopter money

Helicopter money is not about central bankers jumping out of helicopters to atone for their mistakes, but about central bank financing a massive increase in fiscal expenditure – truly monetary creation on a large scale. If this happens, watch out for a rise in gold prices.

Prof Goodhart has carefully analysed the three options for deleverging or getting out of the debt trap. The first is to deleverge by swapping debt for equity, being tried by China.

This is feasible when the country is a net lender and both borrowers and lenders are state-owned entities. The second option is to use inflation to reduce the real value of debt. As the recent experience showed, getting inflation even up to target was tough to achieve.

The third option is to address collateral by inducing lenders and borrowers to renegotiate their debt or make the debt permanent. This is both painful and difficult and is unlikely to be adopted unless other options are tried.

China’s banking regulator moves to contain off-balance-sheet risk

In my view, the true result of the Bank of Japan’s negative interest rates is a tax on the older generation, because they are the ones not spending.

Japan tried Keynesian fiscal spending, which failed to sustain growth but created a huge debt overhang.

The Japanese older generation and the corporate sector keeps on saving because they are worried about the future, not surprising given an aging population and sluggish demand for exports.

So if you can’t increase the inflation tax, or corporate taxation to reduce the fiscal debt, use negative interest rates to reduce the value of savings of retirees and the corporate sector. Only Japanese savers would not revolt under such inequity.

For countries that have net savings and large public assets, like China, there is a fourth option to get out of the debt trap, and that is to re-write the national balance sheet. Most foreign analysts who worry about China’s debt overhang forget that after three decades of growth, the Chinese state has also accummulated net assets (net of all liabilities) equivalent to 166% of GDP.

That can be injected as equity into the overleveraged enterprises and banks if and only if the governance and return on assets can be improved under better management.

In the short-run, a clean-up of the over-leveraged enterprise sector and local government debt, embedded in the official and shadow banking system, will help sustain long-run stable growth. How to do this technically will be explained in the next article.

By Tan Sri Andrew Sheng who writes on global affairs from an Asian perspective.

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