1. ‘Chinaphobia’ biggest challenge for China in protecting investments

‘Chinaphobia’ biggest challenge for China in protecting investments

‘Chinaphobia’ might be the biggest challenge for China in protecting overseas investments

By: | Published: August 26, 2016 6:16 AM
china The latest report of local resentment against Chinese projects comes from Kenya, where attacks on Chinese contract workers by local disgruntled youth has led to stoppage of work on a billion rail construction project. (Reuters)

Chinese projects in different parts of the world have been criticised for several reasons, one of the most important being preference for Chinese workers at the expense of locals. The criticism is encouraging China to seek greater protection for its overseas investments. This is likely to result in China insisting on Investor-State Dispute Settlement (ISDS) mechanisms in its bilateral investment treaties. The demand marks China’s graduation from a net capital importer to a capital exporter. While as a capital importer, China was reluctant to commit to ISDS for avoiding possibilities of foreign investors taking the Chinese government to international arbitration on investment disputes, its outlook has changed after emerging as one of the most significant sources of outward foreign investment in the world.

The latest report of local resentment against Chinese projects comes from Kenya, where attacks on Chinese contract workers by local disgruntled youth has led to stoppage of work on a $14 billion rail construction project. The grievance of the locals, as usual, has been that of the project employing Chinese workers at the expense of locals. Similar protests have been associated with Chinese infrastructure projects in various other parts of Africa, as well as Latin America.

Local opposition on grounds of deprivation from new job opportunities is a concern that MNCs have had to handle all across the world. In most countries systemically resistant to foreign investments due to historical inward-looking attitudes, such as in India, foreign projects have been typically ‘justified’ to local stakeholders by the benefits they would generate for local populations, among which jobs are uppermost. Foreign investors, on the other hand, have been wary of committing jobs to locals from the outset, primarily because several new jobs often require skills and expertise hard to locate among locals. This could have happened in the railway project at Kenya as well, where the contractor would have preferred engaging more skilled and experienced Chinese workers in railway construction, compared with relatively unskilled locals. Going slow on local employment on part of foreign investors including the Chinese could purely be due to economic factors, such as the additional costs for skilling locals, as opposed to importing trained workers from home countries.

Notwithstanding the local resistance, empirical research provides evidence of Chinese projects engaging large number of locals, and the number of imported Chinese workers in these projects declining over time. However, this does not mean that resistance to Chinese projects will end. Indeed, local political and business lobbies that are not keen on foreign investment as it encroaches in their protected turfs of monopoly rents, encourage such protests in many countries. Ironically, foreign investors, while not facing protests as such, have encountered and continue to encounter many hurdles to market access created by processes favouring domestic industries in China itself. For Chinese investors now, it is the occasion to experience what major foreign investment source countries and their corporations have been experiencing for several years, in China and elsewhere.

The WTO had tried to minimise the constraints to foreign investment inflows that might arise from host country insistence on local employment. The ‘national treatment’ condition was partly an effort to do so. However, host governments have taken umbrage to national interest and development goals for imposing local employment conditions on foreign investors, as much as they have insisted on the latter procuring raw materials and inputs from only local suppliers. China would be facing such demands sooner or later. Many underdeveloped host countries are in dire need of investment in public goods like infrastructure services. China’s sheer size and predominance as a source of such funds at a time when prospects of global FDI flows to poor countries, particularly those suffering from ethnic conflicts and political strife, are not particularly bright, puts it at a strong position in negotiating investment conditions. Nonetheless, incidents like those in Kenya are examples of projects going off-line due to domestic factors often beyond the control of host country federal governments. China might, therefore, intend to prevent such circumstances in future by making the host country governments more accountable in uninterrupted functioning of its projects. The ISDS could well be an alternative in this regard.

While the ISDS might give Chinese investments greater protection in many host countries, it might still not be enough to facilitate access for Chinese investors. This is particularly true of the developing world where increasing Chinese control over major infrastructure assets is becoming a source of significant discomfort. A pertinent example is Australia’s refusal to block the bids of Chinese firms from buying Ausgrid—the largest national electricity network. The refusal was notwithstanding China being Australia’s largest trade partner for several years and the two countries having recently concluded a bilateral trade and investment agreement incorporating strong protection for investors. The ‘Chinaphobia’ swamping large parts of the developed and developing worlds might be the biggest challenge for China in protecting its overseas investments.

The author is senior research fellow and research lead (trade and economic policy), Institute of South Asian Studies, National University of Singapore. Email: isasap@nus.edu.sg.

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