How Chinese investors are changing the landscape

19 January 2017

Host nations are balancing the cost of selling a stake in their economies to Chinese investors in return for capital. So local contractors must adapt to long-term partnerships with Chinese allies.

China is clearly the global leader when it comes to capital expenditure on infrastructure. 

The country has spent more than $1.3 trillion on outward global investment and construction since 2005, according to the American Enterprise Institute. Its outlay since 2005 includes nearly $550 billion on energy projects, $240 billion on transport and $147 billion on metals.

“In the past 10 years, the biggest Chinese investments went to the US, Australia and Canada,” says Philip Rong, CEO of JLT China.

“This will continue, but more initiatives are in place to allow investment in developing countries in Latin America, the Middle East, Africa, and South-East and Southern Asia in countries such as Pakistan, Indonesia and Vietnam.” 

The different faces of Chinese investment

Deal structure varies from market to market, though Chinese investors typically act as partners alongside host nation governments and other private backers. 

“The level of finance the Chinese partner puts into the project often determines the amount of control they have over the direction of the project and the contractors chosen,” explains Richard Gurney, CEO of Construction at JLT Specialty.

“Many investors want to retain long-term revenue inflows, having delivered a project through the construction phase. 

“While funding bodies such as pension funds don’t particularly like construction risk, Chinese investors are prepared to be involved in that risk, as well as in the ongoing operational risk,” he adds.

Although it is common for Chinese firms to set up fully edged subsidiaries to run projects in developing economies, they tend to favour joint ventures or mergers with local players in more developed markets. 

Construction of the UK’s Hinkley Point C nuclear power station – one of the most expensive power stations in the world – is a prime example. 

State-owned China General Nuclear Power Group (CGN) and Chinese National Nuclear Corporation (CNNC) are taking a 33.5 per cent stake in the project, funding the estimated £18 billion construction cost alongside French energy provider EDF and the UK government. 

In return, CGN and CNNC are expected to have a significant influence on the choice of construction partners, and will enjoy a guaranteed return from the project for the next 35 years.

China to up investment in the UK 

The recent decline of sterling now makes the UK an even more attractive investment destination than before, according to Ben Crabtree, Partner in JLT Specialty’s Mergers and Acquisition (M&A) Practice. 

Contractors in both the UK and Europe should prepare for an uptick in M&A and project bids from Chinese companies over the next 12-18 months.

De-Risking M&A

A balancing act

For developing countries high in mineral wealth, but low on engineering capability, China’s influence has many advantages. It brings employment, technical expertise, new infrastructure development and access to new revenue streams. 

“In return, China gains direct access to natural resources and a portion of the revenue that flows from directly, and indirectly, mining and processing those resources,” says Gurney.

Meanwhile, debt-laden developed markets, such as the UK, lack the available capital that’s needed to overhaul infrastructure and generate more home-grown power. 

They are increasingly looking at Chinese funding to get the necessary mega-projects off the ground – even if that means submitting a certain level of control over their critical infrastructure to foreign interests.

“Over time we will see increasing Chinese involvement creating a new market dynamic for contractors,” says Gurney. “But with that Chinese investment comes the funding for essential infrastructure. It’s a balancing act,” 

In return, Chinese contractors also gain valuable insights in regulation, project management, risk management and risk transfer from their global partners. 

“Chinese contractors are humble enough to learn from their counterparts in the UK and other mature markets,” says Rong.

However, it is the Chinese who hold most of the power – as well as a lucrative financial stake in the economies in which they invest.

Building relationships with Chinese contractors

“Contractors in the UK and other countries are getting used to working with Chinese contractors, either on a joint venture or sub-contractor basis,” says Gurney. He points out that local firms may have to adapt to new supply chains, as well as a different business culture.
“Joint ventures are put together with the best of intentions, but disputes arise,” he adds. “That puts relationships under strain, especially when projects encounter difficulties.

“Traditional contract dispute resolution mechanisms may not be common in China. Host-nation contractors must adapt to working with partners who may not seek to resolve disputes in that way.”

No matter what form the investment, Gurney says it will be essential that contractors commit to building and nurturing strong relationships with their Chinese counterparts. 

For more information contact Philip RongCEO of JLT China on +86 21 6058 2116