Commentary on Political Economy

Wednesday 4 December 2019

How China Inc can be tripped up by miscalculations abroad

Case of RCom in India shows SOEs can find it hard to deal with regional conglomerates

The Rajapaksas’ return to power in Sri Lanka is a reminder of China Inc’s unfortunate geopolitical miscalculations in south and south-east Asia. During Mahinda Rajapaksa’s 10-year presidency from 2005 to 2015, some of China’s biggest state-owned enterprises rushed to secure large construction contracts that Sri Lanka ultimately could not afford. This caused Beijing much embarrassment after Mr Rajapaksa’s political opponents unexpectedly defeated him at the polls five years ago, and then began either to scale back many of those projects or renegotiate the Chinese state financing that underpinned them. Mr Rajapaksa is now riding high again as prime minister, after his brother and former defence minister, Gotabaya, last month won the presidency back for Sri Lanka’s most powerful clan. However, Gotabaya Rajapaksa indicated on his first overseas visit as president — tellingly to India — that he would not be rushing back into China’s economic embrace.  It has been a similar story in both the Maldives and Malaysia, where Chinese SOEs were similarly tripped up by opposition party electoral victories that led to greater scrutiny of those countries’ financial and commercial dealings with Beijing. 

 Given the Chinese Communist party’s ever tighter grip on power at home, it is not surprising that the large SOEs it controls might find it difficult to read shifts in the political weather in such countries. But how have these same companies done in south and south-east Asia in more commercial contexts, which they should be better prepared to navigate given their own impressive records at home? Alas a high-profile corporate case study now unfolding in India — the bankruptcy of Anil Ambani’s Reliance Communications group — suggests Chinese SOEs also have much to learn when dealing with private regional conglomerates and the tycoons who control them.  Ten years ago Mr Ambani was to India’s telecommunications sector what Mahinda Rajapaksa was to Sri Lankan politics: a seemingly irresistible force with no immovable objects lying in his path. In 2008, Forbes ranked him as the world’s sixth richest man with a fortune of $42bn, just one spot below — and a mere $1bn poorer — than his older brother, Mukesh.  In a bitter 2005 inheritance battle mediated by the Ambani brothers’ mother, Anil Ambani was given his late father’s power, telecoms and finance units while Mukesh Ambani took over the family’s oil business. A few years after the carve-up, Anil Ambani controlled four listed flagships with a combined market value of $108bn.  At this time, China Inc courted Anil Ambani as assiduously as it did Mahinda Rajapaksa. China Development Bank and the Export-Import Bank of China, two of Beijing’s largest policy lenders, and Industrial and Commercial Bank of China showered RCom with credit.

According to people familiar with RCom’s development, much of it was used to purchase telecommunications equipment from Chinese champions such as Huawei. The extent of the dealings of CDB, Eximbank and ICBC with RCom would only become apparent years later when Anil Ambani’s empire began to crumble, in large part because of his brother’s entry into India’s telecommunications market. Mukesh Ambani’s start-up, Reliance Jio, has turned the industry on its head.  While Mukesh Ambani is now Asia’s richest man with a fortune estimated at almost $60bn, Anil Ambani’s net worth has collapsed to less than $2bn, according to Forbes, and RCom has gone bankrupt with about $7bn in debts. According to a 2018 restructuring plan viewed by the Financial Times, CDB, Eximbank and ICBC are owed about one-third of this amount. In its 2018 annual report, Huawei suggests that its state-bank partners will bear the brunt of any losses stemming from this exposure. “To transfer risks, Huawei arranges for third-party financial institutions to provide sales financing, such as export credit facilities, leasing and factoring,” the company said. “These institutions bear the associated risks and profit from these operations.” 

 For the captains of China Inc, it is one thing to bet on the wrong south or south-east Asian politician ahead of an election that they then go on to lose. But it must come as an even greater shock to bet on a tycoon who is then upended by his own brother’s business expansion and forced into a messy and very public bankruptcy proceeding.  That sort of thing never happens back in China, where, when necessary, the Communist party is usually able to work out quiet agreements between state-controlled creditors and state-controlled debtors. Beijing must at least be grateful that Sri Lanka’s Rajapaksa brothers are still getting on famously with each other.

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