By K Yatish Rajawat F biz 20 Sep 2014
O ne of the most interesting development of President Xi Jinping’s India visit is the recognition Industrial & Commercial Bank of China (ICBC), the world’s largest bank by assets and capital, got in India’s infrastructure financing.
Financing the world, so to say, is one of the global task that is set by the bank. “The Bank has actively put in efforts to serve the economic and trade relations between China and the rest of the world, meet the financial demand of customers across the globe, and promote business development on a global scale,” Chairman of ICBC, Jianj Jianqing, says in the annual report.
In a way, the bank is serving as the tip of the sword of China’s economic influence in the world.
In Africa, where the Chinese influence is well captured and reported, ICBC is the single largest shareholder in Standard Bank, a South African bank with presence in 18 countries. Therefore, it is important to see the role of ICBC in all the business deals that has been signed.
Take the most reported deal here, which is Indigo’s lease back arrangement for its A320 aircrafts. Indigo calls it an MoU with ICBC, and claims it is due to its consistent operational and financial performance. The press release is brief and has the most important detail of leaseback arrangement missing, i.e. the cost of funding.
“IndiGo already has a relationship with ICBC and this new effort to further explore the collaboration will cement the relationship for the longer term. Through this MoU, ICBC will provide IndiGo financial solutions for the introduction of A320 and the other family of aircraft to the fleet in the form of sale and lease back or financial lease or commercial lending. The number of aircraft would be over 30 aircraft and the value of the deal would reach to the amount of USD 2.6 billion,” Indigo’s release said.
Indigo, which claims its operational efficiency and not just its lease back model is the reason for its profitability, is also planning to go public soon. Almost every airline company that has gone public in India has destroyed shareholders’ wealth. Therefore, it is very important for Indigo to get the lowest possible rates of financing.
And ICBC can provide that. China is flush with foreign exchange reserves worth $3.2 trillion and needs to deploy it beyond American treasuries. Its banks are also flush with deposits that they have to deploy for higher yield abroad as local rates.
Indigo is not the first company nor will it be the last to discover the Chinese banks and their low rates.
Anil Ambani has always been ahead as a deal maker ahead of his times, in 2012 he raised $1.18 billion from a consortium of Chinese banks to retire debt for his telecom company Reliance Communications. The refinancing was at a rate of 5 percent, which is lower than the deposit rates of Indian banks. A second loan of $1.9 billion was raised for 3G expansion with an agreement to buy Huawei’s equipment.
Chinese banks are offering an opportunity for Indian entrepreneurs but there is a catch: Chinese funding might be cheap but their ability to leverage is not.
Chinese banks insist that companies should use Chinese equipment, which American, European and other companies also do. But what becomes a cause of concern is when Indian entrepreneurs become a proxy for Chinese influence in the country.
Once Indian entrepreneurs discover and get drunk on cheap Chinese loans they will use their political capital for China more actively. This is the threat that the Indian central bank needs to guard against when it is approving loans from Chinese banks. Maybe, the RBI’s deft touch on Chinese loans to Indian companies will keep the Chinese influence under check.
China’s experience in other countries like Brazil and Russia shows that Chinese banks are a great source of cheap funds but they also exert influence at the board level. For instance, Russian oil companies Roseneft and Transneft together raised $25 billion from the China Development Corporation to build an oil pipeline to China. The terms of the loan were too attractive to ignore but finally China insisted on a subsidised price for the oil supplied.
Petrobras of Brazil also raised $10 billion where China secured supply of oil and securitised the loan against payment. These are mega deals where China has used its banking heft to secure energy supplies.
The challenge that China faces in India and with the new government is more macro in nature. The stated goal of the BJP and its government at the Centre is creating manufacturing core in the India. Chinese imports are the biggest barrier to creating the manufacturing engine.
Chinese Premier Xi has smartly referred to India as the back office of the world, a dream that the previous UPA government believed in. But the fact is that without manufacturing jobs, there is no way all of India’s teeming youth will find employment.
There are several competitors for the back office title in the world. Technology that enables these jobs also makes these jobs very fluid and transferable. Companies and customers can shift a back office job from Gurgaon to Istanbul to Manilla on the basis of currency fluctuations.
Manufacturing jobs take time to shift from one country to another as there is capital, land and skilled labour involved all of which cannot be moved so easily. Moreover, Xi reference does not mean China will give up its ambition to become the services back office of the world.
Plus, manufacturing jobs are for a section or part of the population that has different educational background and experience this population cannot get back office jobs. So India will not give up its ambition to create manufacturing jobs. Will Chinese banks and a capital play a role in it? Only time will tell. But for now the China funds need to be far more scrutinised than they had been subjected to in the past. Let’s not get swept away with the cheap money. As they say in hindi, mehenga roya ek baar sasta roye baar baar (what is cheap brings more miseries over a period time what is expensive the cost is borne only once).
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