Wednesday, February 16, 2011

The Chinese are coming; the Chinese are coming!

Those who believe that China may not be a construction partner for the California high-speed rail project need to keep their eyes and their options open.  There should be no doubt about China's ambitions.  The US is still the largest market in the world for enterprising China.  They produced the components of the new Bay Bridge in San Francisco/Oakland.  They are eager to get their high-speed rail foot in the door in the US.  

We would be foolish to ignore the momentum already achieved in Washington and in the individual host states.  Much of our skepticism comes from the fact that building and operating high-speed rail is a deficit operation and other private investors in HSR have struggled for decades; one example being the private investments made for the Chunnel.  Those debts had to be restructured a number of times.  Why would China want to lose money?

We do need to make a distinction between private, for-profit projects, and those like high-speed rail which are government funded as are viewed as "investments" only in the loosest sense.  Here's a snap shot of how China is making money now. 

In the Bahamas, the Export-Import Bank of China is providing a $2.5 billion loan, which it intends to syndicate to other Chinese banks. In exchange, China State Construction will import as many as 8,000 Chinese workers to build the resort. China State Construction also will make a $150 million equity investment in the project, with the rest, $800 million, coming from Baha Mar.

Yes, the Bahamas are British, not US territory. And the project in question is private, not government.  But, the distinction between private and government is ambiguous in China and the Chinese company (that is, government) is willing to make a major equity investment in this development.  Note that 8,000 Chinese workers will be employed IN THE BAHAMAS!

Be assured that the Chinese are eager to get in on the ground floor of high-speed rail in America.  There is no domestic capacity here for either manufacture or construction. California would be the most likely first client.  There has already been considerable mutual courtship, including with our prior Governor.

Although fraught with the bureaucratic problems described in the article, the amounts of money involved are vast and provocative.  Even if California was a "loss-leader" the Chinese are smart enough to see that, they could dominate this highly competitive market in the US against all their European and Japanese HSR rivals.  Call it their "investment." 

As the Chinese would say: "Beware the tiger on the path you least expect."

FEBRUARY 16, 2011
Chinese Firms Get Their Day in Sun


In 2008, when Harrah's Entertainment Inc. pulled out of a multibillion-dollar casino resort in Nassau, a Bahamas development company scrambled to find investors and financing to rescue it. Three years later, the Chinese rolled the dice.

On Monday, Baha Mar Resorts Ltd. is set to break ground on the $3.4 billion hotel, casino and resort project. Its unlikely partners: China State Construction Engineering Corp., the country's largest construction company by revenue, and the Export-Import Bank of China, a state-owned bank with the mission to help Chinese companies expand overseas.

"They were extremely aggressive about wanting to be in the project," said Don Robinson, president of Baha Mar. "It will help China State Construction prove to the world that they can build a very complex project outside China."

The Bahamas project, the largest property to be built and partly owned by a Chinese company outside of China, underscores the push into overseas markets by Chinese firms. Beijing has been encouraging Chinese companies to go abroad to help diversify the country's $2.85 trillion foreign-exchange reserves and reduce its reliance on the U.S. dollar.

Chinese banks, providing hard-to-find financing, are helping to make such big bets abroad, especially on cheap real estate and infrastructure projects amid a recovering economy.

In the Bahamas, the Export-Import Bank of China is providing a $2.5 billion loan, which it intends to syndicate to other Chinese banks. In exchange, China State Construction will import as many as 8,000 Chinese workers to build the resort. China State Construction also will make a $150 million equity investment in the project, with the rest, $800 million, coming from Baha Mar.

But as more Chinese entities seek to raise their profile overseas, they expose Western companies to bureaucratic pitfalls. The Chinese operations still are largely state-owned concerns that are subject to government approval. Some U.S. partners have privately complained about China's red tape and a long and opaque decision-making process.

"It's not as black and white as a Western negotiation," said Mr. Robinson of Baha Mar. "It takes a lot of relationship building."

China State Construction is known for building many of the great public works in China, such as the new national swim center in Beijing dubbed the "Water Cube." It opened its first overseas office in Kuwait in the late 1970s and came to the U.S. in the 1980s.

But North American projects initially were related to Chinese corporate or government interests. Only recently has the company expanded to include local projects such as the renovation of the Alexander Hamilton Bridge, between Manhattan and the Bronx, and a new Metro-North train platform at Yankee Stadium.

The Bahamas project is the construction company's first of several partnerships in North America with the export-import bank. The two also are bidding to rebuild the Goethals Bridge connecting New Jersey to Staten Island, N.Y., according to people familiar with the matter. If they are awarded the $1 billion project, the bank would finance construction and get repaid over time by the Port Authority of New York and New Jersey.

The Chinese have had false starts in North America before. In the fall of 2009, the export-import bank cut a tentative deal to provide about $1 billion in financing for the stalled Revel casino in Atlantic City, N.J., which was controlled by Morgan Stanley. In exchange, the developer would have agreed to employ the Chinese construction company. But the deal fell through after Morgan Stanley pulled the plug. Under a different financing plan, the Revel project is set to restart construction soon.

The 1,000-acre Bahamas project envisions some 2,250 hotel rooms, a 100,000-square-foot casino and an 18-hole golf course.

When the Chinese first got interested in the project in 2007, there were plenty of financing options for Baha Mar, which is controlled by the Swiss Izmirlian family, who live in the Bahamas and own properties in London. China Construction's best hope at the time was to win the role of contractor, said Yuan Ning, chairman and president of the company's U.S. subsidiary.

But then came March 2008 and Harrah's, now Caesars Entertainment Corp., terminated its joint-venture agreement with Baha Mar. Caesars declined to comment. Amid the financial crisis, Mr. Yuan saw the need, as well as the opportunity, to sweep in. "We had spent more than a year preparing for the bids," he said.

It took more than two years for the entire Chinese chain of command to approve the project. The parties reached a preliminary agreement last year and spent the past seven months getting nods from Beijing and the Bahamian government. Any overseas Chinese investment greater than $100 million must be signed off by China's currency watchdog. "It lasted a very long time," Mr. Robinson said.
Mr. Yuan called the deal a major test for China State Construction to prove itself as an international player.

"We're looking to make more investments by taking advantage of our ability to tap financing provided by banks and invest our own capital," Mr. Yuan said.
Write to Lingling Wei at and Alexandra Berzon at

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