Manna from China: Investment proposals aplenty

The Chinese President Xi Jinping, who was in Dhaka on a state visit on October 14-15, gave Bangladesh a gift of a cornucopia of investment proposals amounting to US$24.5 billion. This offer could not have come at a more opportune moment.
The nation aspires a higher growth rate in order to move into the league of the high middle income country in a short time and transform itself into a developed country by 2041. This necessarily requires a considerable uplift in the investment- gross domestic product (GDP) ratio. However, the latter has proved to be rather difficult to achieve.
During the last one decade (since 2005-06) this ratio could be raised by only 3.0 per cent. In the previous decade it increased by 4.0 per cent. At this rate it would take at least two decades to achieve the investment ratio that could move the economy to the higher trajectory of 8.0-10 per cent growth. Without such a growth rate, the ambition expressed by government leaders will be just another wishful talk.
The achievement of a high investment ratio requires a correspondingly high private investment ratio since the capacity of the government to profitably invest a large amount is limited. Almost all government corporations, where a large amount of capital has been sunk, piled up huge losses in the past, and infrastructure projects take inordinately a large amount of resources and time to construct due to capacity constraints, leakages and governance problems. This could be overcome by private investment, but unfortunately it has been virtually stagnant over the last several years. Actually private investment is a bit lower now than what it was in fiscal year (FY) 2008-09. Hence, the modest increase in the total investment ratio can be attributed mostly to a jump in public investment (4.4 to 7.6 per cent).
Raising public investment much above what has been already achieved will require increasingly large-scale borrowing given the budget constraints. Revenue collection has fallen woefully short of the target and budget deficit has been growing over the past few years.
Since Bangladesh has climbed out of the low income category, it is unlikely that large funds can be accessed at concessional interest rates. Herein lies the importance of the Chinese offer. If the loans are being offered at rates significantly lower than the market rates, then Bangladesh could raise the investment ratio at reasonable cost without reducing consumption now or in future.
Another benefit that may flow from the proposed Chinese investment is that it will not tax domestic capacity too much since the Chinese are likely to construct the projects on a build- and- transfer basis with mostly their own skilled manpower. They may also be expected to complete the projects on time if they can reduce bureaucratic red tape and other obstructions.
Why are the Chinese keen to invest such a large amount in Bangladesh? Some people surmise that it reflects the geo-political strategic importance of Bangladesh. However, if one looks at Chinese foreign investment portfolio, a more expansive picture emerges.
In our own region, India has received commitment of $20 billion in investment from the Chinese President when he had gone there on a state visit in 2014.
China is involved in massive bilateral investment in Pakistan ($46 billion) to develop China Pakistan Economic Corridor to link China to the Arabian Sea. It has already built a deep sea port in Gwadar in the south-western coast of Pakistan, which is now undergoing expansion.
It built a similar sea port in Sri Lanka and is now implementing several other major projects. Chinese companies are engaged in large-scale development projects in the Maldives including the construction of a resort and expansion of the airport to handle the growing volume of tourists nearly one-third of which are from China.
It has already invested heavily in Myanmar becoming the largest foreign investor of the country.
China has also invested in Nepal in a river dam, an airport and a hydropower project. It is now the top foreign investor of Nepal eclipsing India.
Bangladesh is in fact the last to receive Chinese commitment of large-scale investment in the South Asian region. It is noteworthy that all these countries (except India which is still hesitant) have consented to the Chinese one-belt-one-road (OBOR) scheme. This is the dream project of the Chinese President Xi Jinping, which will revive and expand the ancient maritime and land silk routes to connect China to the rest of Asia and Europe as well as Africa.
China has lent huge funds to Russia for its energy sector. It has promised the UK to partially fund a nuclear power plant. It has extended loans to several other European countries. China's massive investment in Latin America, Central Asia and Africa to secure its mineral and other raw material needs has received attention. In December 2015, the Chinese President announced fresh loans of $60 billion for Africa.
The stock of Chinese foreign direct investment (FDI) in foreign countries exceeded one trillion dollars by 2015. A large fraction of China's reserves are invested in US government debt. China held US treasury bills and securities valued at US$ 1.185 trillion as of August 2016.
Since the Financial Crisis, the returns to these assets have fallen very low. In addition to geo-political and strategic interests, the Chinese investment spree could be a response to diversify its portfolio to increase returns as well as reduce political risks.
It may be noted that the value of all Chinese real investments mentioned above are less than the reduction of its international reserves in recent times. It reduced international reserves by a massive US$348 billion during last one year (Sept-Sept) alone, while it reduced the holding of US treasury securities by US$85 billion.
The quantum of Chinese investment in the South Asian region is not extraordinary.  We may see more Chinese investment all around the world in future.
The Chinese are known to be shrewd and tough negotiators. It has the capacity to drown any country (except the big ones) in loans, not to speak of poor countries such as Bangladesh. But the capacity of the latter to service debts is limited. Hence, they should be careful about running up loans in excess of what they can service without much pain.
The nature or terms of the proposed Chinese investment have not been revealed; however, it seems from press reports that most of it will be loans.  We hope that our negotiators will have sufficient skills to negotiate contracts with China that are beneficial to the country. If the contracts are not done properly, loans can build up quickly and the debt servicing requirements ultimately soar beyond capacity.  Sri Lanka is having difficulties with servicing the large debt it has accumulated. The dire state of some debt-ridden European countries should also be an eye-opener.
Alarmed by the prospect of sovereign default around the world, the United Nations Conference on Trade and Development (UNCTAD) warned in a very recent post: "Countries in Africa and elsewhere have been stacking up debt, even as their ability to repay these debts is shrinking." Small countries are often lured into pet projects of their rulers requiring mega bucks, but with low returns. To avoid such an outcome, the principal criterion in negotiating a loan should be whether or not the additional output produced by the loan-financed investment fully offsets the debt service liabilities.
Currently Bangladesh is in a comfortable debt situation; the debt-GDP ratio was 13.6 per cent and the proportion of export earnings needed to service foreign loans 5.1 per cent in FY 2014-15 (ERD, Government of Bangladesh). This permits it to take considerable additional loans without much difficulty of repayment.  This could impart a feeling of financial complacency.
But debts can be alluring, and once a trend is set in motion, it may spiral out of control. If all Chinese proposals materialise, the ratios above will more than double in a short time, and more offers will be forthcoming. One of the main attractions to debt is that the more severe of the possible adverse consequences may not occur in many years, but some of the more desirable benefits will accrue in the near term. To what extent foreign debts will help our development depends much on how the government of the day handles the external debt issue.       
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