Paw Tracker newsletter (Week of Jan 17)

It’s data time. As December statistics began to arrive, government agencies overseeing different aspects of the Chinese economy started drawing up their overview of the past year in numbers. 2021 proved to be a rebounce year for the BRI from the abyss of 2020, with both trade and investment showing stronger growth than a year before. These numbers also highlight the predominant dynamics of the BRI economy – natural resources, including hydrocarbons and metals, flow from BRI countries to China’s global industrial and manufacturing powerhouse, which in turn exports manufactured goods to BRI and other countries. The BRI’s stated vision of helping host countries achieve industrial upgrades is yet to manifest in such data.
 

It’s also Chinese New Year time. We will take a break for the next two weeks and see you in the Year of the Tiger!

Talk of the Town

China’s import and export saw exceptionally strong growth in 2021, consolidating its lead as the world’s largest trader in year two of the pandemic era. Trade with BRI countries grew even faster, and ASEAN remains China’s largest trade partner.

Statistics released by Chinese Customs last week paint a picture of a changing Chinese economy and an evolving global economic landscape. Total exports grew 21.2% year on year in RMB (29.9% in USD). The growth rate is impressive considering that in 2020 Chinese exports managed to register positive growth (4%) when most major economies experienced a decline. This further expands China’s share in total global trade of goods (13.5% in the first three quarters of 2021), strengthening its position as the world’s top trading country.

A notable trend in 2021 was that China’s trade with BRI partner countries grew by 23.6% YoY measured in RMB, a considerable rebounce from a mere 1% growth rate a year earlier. Increase in trade with this huge bloc of economies also outpaced China’s overall recovery in import and export, a contrast with last year, when it was trade with traditional partners that kept Chinese import and export afloat. 

At a press conference organized by the State Council, Li Wenkui, a Chinese Customs official, further broke down the BRI trade data:

• From 2013 to 2021, trade with BRI countries grew in its share of total Chinese trade from 25% to 29.7%

• Energy, minerals and agricultural products are major sources of growth for imports from BRI countries. Crude oil imports grew by 44% in 2021, natural gas by 38.9%, agriculture products by 26.1% and metal ores by 24.9%.

• On the export side, car parts, textiles and lithium batteries are the engines of growth, with lithium battery exports to BRI countries registering a 50.4% increase in the past year.

The data illustrates the trade dynamics of the BRI today: the resources of partner countries power China’s manufacturing prowess that feed back into those countries (at least partially) as manufactured goods. It  also reflects China’s overall economic restructuring and industrial upgrade. Complex and highly skilled manufacturing processes are constituting an increasing proportion of exports. The car industry and its supply chain became a more important driver of Chinese exports (a 119% increase YoY in 2021, and for the first time making up over 1% of total Chinese exports). Electronic parts and printed circuit board exports also increased significantly in their share of overall export.

The trade data reflects a gap between the stated vision of the BRI to help other countries in the Global South leap onto the train of industrialization and development and the reality of them being a source of primary resources for China’s industrialized economy. This is a trend that probably will take years of targeted investment and host country initiative to turn around. In 2021, Chinese FDI to BRI countries grew by 14.6% to over USD20 billion. The big question for the 8 year old Belt and Road Initiative is how much of this investment will translate into momentum for transforming host country economies along the value chain?

This week's highlight projects

The Philippines: China notches another win in railroad diplomacy

On 18 January, the Philippine Department of Transportation announced that a consortium of three Chinese companies had won a bid to construct the first phase of the southern line of the Philippine National Railway. Valued at $2.8 billion, the railway will be the longest and fastest in the country upon completion, shortening the time it takes from the country’s capital, Manila, to the southern part of Luzon from 12 hours to 4. 

Huang Xilian, the Chinese Ambassador to the Philippines, predicted that the project would create 10,000 jobs annually during construction and would serve nearly 15 million passengers when it is fully operational, which is expected in 2025.

The bigger picture: Perhaps nowhere in the world is Chinese railroad diplomacy more advanced than in Southeast Asia. Despite suffering setbacks during the pandemic, Chinese contractors have chugged steadily along, completing the Chengdu-Lincang railway, a first step in linking Chengdu to Yangon, Myanmar’s largest city, and the China-Laos railway, which connects Kunming to Vientiane, the capital of Laos, last year. The latter railway is expected to bring a million passengers through Southeast Asia for China’s lunar new year next week. It hasn’t all been plain sailing, however. Hopes to connect Kunming to Singapore via Kuala Lumpur were dashed in 2020 when Malaysia and Singapore jointly agreed to cancel a Singapore-Kuala Lumpur railway line.

One more thing: The contract signing comes just months before the Philippines Presidential election in May. With presidential terms limited to just one, the election will see the end of the Duterte era, during which Philippine-China relations have swung between hard rhetoric, a “golden era” and back to hard rhetoric. The Philippines’ relationship with China is already featuring in the presidential candidates’ campaigns, and the frontrunner Ferdinand Marcos Jr., son of the former dictator, has openly expressed a desire for continuity and engagement, rather than confrontation. The Chinese embassy in Manilla is taking a proactive stance and bolstering relations with Marcos Jr. Beijing and Chinese companies involved in Philippines projects will no doubt be watching Filipino politics closely over the coming months.

Other project & corporate updates

Energy China: Growth in contract deals shifts to the domestic market

In another data dump last week, one of China’s largest state-owned companies and most active players on the Belt and Road, Energy China, posted a 51% growth in contract value in 2021 compared to 2020. The total value of contracts signed last year reached RMB 872.6 billion. 

While contract value for overseas projects saw steady growth of 21.6%, it was domestic contracts that saw by far the largest growth. Value of contracts for domestic projects grew from RMB 399.3 billion in 2020 to RMB 655.5 billion in 2021. Contracts for overseas projects made up 25% of total contract value. In previous years they have accounted for around 30%.

A breakdown of the contracts (domestic and international) shows that the largest area of growth was in construction services, Energy China’s core business, led by construction contracts in “traditional energy” and “new and smart energy”. Contracts for transport related projects saw the largest growth, increasing in value by 229.6% compared to 2020.

The three largest EPC contracts for overseas projects signed last year were for an LPG storage and transportation facility in Trinidad and Tobago, a 1500MW gas fired power station in Uzbekistan, and the Balakot hydropower project in Pakistan.

Why it gets our attention: As we have noted before, with the international economy, particularly in developing countries, still in the pandemic doldrums, extravagant Belt and Road project construction may be a thing of the past. Though Energy China’s performance in 2021 shows some resilience to those headwinds, it is clear that the main arena of business has shifted back to the domestic market, which continues to post strong growth and saw somewhat of a construction boom in 2021.