China is likely to continue to boost domestic factory investment, but perhaps not those overseas

China is likely to continue to boost domestic factory investment, but perhaps not those overseas

Security bills that expand the role of Japan's military overseas could result in China ramping up investments to protect its supply routes and domestic growth. But Mike Flanagan suggests this is also likely to have ramifications for the funding of garment projects overseas.?

On 19 September, the Japanese Parliament agreed to allow Japan’s Self-Defence Forces to operate outside Japan for the first time since 1945. China’s fury has profound implications for our industry.

Supporters claim the decision allows Japan to take part in UN peace-keeping activities and protect its shipping lanes. Its critics – especially China – claim it risks destabilising East Asia.

China is extraordinarily sensitive at the prospect of its former WW2 enemy re-arming. In its paranoia about foreign threats, it has been promising fortunes to protect its supply routes.

  • $46bn of government money on a ”China Pakistan Economic Corridor” linking its far west Xinjiang province to Gwadar port on the Indian ocean: a 2,000 mile modern road network through some of the world’s highest mountains, as well as nuclear upgrading of Pakistan’s notoriously unreliable power supply. All part of a far pricer “One Belt, One Road” project to secure trade links with the rest of the world.
  • It’s not clear who’s funding a Chinese entrepreneur’s plan – costed between $40-70bn – to link the Pacific to the Atlantic through Nicaragua. According to Reuters, just $200m has been raised so far. The Chinese government denies it is involved: some observers, disbelieving the Chinese on principle, believe it will happen, while others are convinced this is all just hot air.

Apart from huge plans like these, the clothing industry expects to see hundreds of others – supposedly Chinese-funded – over the next few years.

  • Among the most ambitious: Bangladesh’s $1.2bn apparel zone in Munshiganj for non-compliant factories, funded by China’s Orient International. In Pakistani Punjab, politicians believe Shandong Ruyi will provide billions for an apparel park close to Lahore.
  • Among many less ambitious plans, two Chinese businesswomen, trading as C&H Garments, announced in April they would employ 2,000 people in a Rwanda garment factory by 2016 with a $6m investment. So far just 200 sewing machines and a training programme for 200, funded by the Rwandan government, are reported. They announced in July they would invest $25m in Senegal’s first garment plant. The source of this funding is unclear.

There are a few problems with all this.

1: China’s record of talking big and delivering small on big projects...

In 2006, China announced it would fund over 50 economic zones around the world, each forecast to provide tens of thousands of new manufacturing jobs.

By early 2015, just nine had factories operating – and Vietnam’s Longjiang Industrial Park, for example, employed just 3,700 people. 30 of these economic zones never materialised at all, five have been abandoned or indefinitely delayed, and six have merely begun some early construction.

2: ...like everyone else’s

A forthcoming article by professors Brent Flyvbjerg from Oxford and Cass Sunstein from Harvard reviews 2,062 large infrastructure projects worldwide over the past 50 years, like the Channel Tunnel and Boston’s Big Dig. They find that over 80% cost more than planned and deliver less, “resulting in massive economic losses to taxpayers and businesses.” None posed challenges like Pakistan’s proposed motorway network across the Himalayas.

3: Ambitious industrial zone announcements rarely deliver

China’s plans for overseas zones disintegrated for lots of different reasons: land wasn’t available, zones got built but no-one wanted to rent factories, funding dried up, business models didn’t make sense on the sites concerned...the list goes on.

What they all shared, though, was that they weren’t in China – where government agencies decide industrial development policy, other government agencies implement it, or businesses reliably do what the government tells them.

It's different elsewhere. India’s programme for dozens of textile and apparel parks has been hamstrung by the impossibility of acquiring land other people need for their livelihood. Industry associations now say textile businesses can’t afford to invest in them anyway.

Even in communist Vietnam, garment trade associations complain that district authorities ban polluting dye-plants or energy-intensive spinning plants that central government has approved.

4: Being Chinese doesn’t guarantee success

Most overseas projects aren’t delivering.

In 2013, Helen Hai, at the time the spokesperson for Chinese shoemaker Huajian, claimed it was spending $2bn in Ethiopia on a 740-acre “shoe city” complex, providing accommodation for up to 200,000 workers. By the following year, Hai had left Huajian (to become the “H” in C&H Garments) and her successor was talking about a $300m investment to provide 50,000 jobs by 2020. But though the gate to the project looks impressive, there has been no word since of progress on anything like that scale: it now employs just 3,000 people.

5: The Chinese government has its own priorities

With foreign exchange reserves of $3.7 trillion, the Chinese government can spend what it likes on foreign projects that it believes affect its interests – and it probably thinks many of the infrastructure projects in its neighbours do.

At home, where the Chinese Academy of Social Sciences estimates 500 violent incidents a day – mostly over pollution, corruption or high-handed officialdom – it sees three necessities:

  • For the Communist Party to control any formal organisation – like charities or unions – or ban them if it can’t;
  • For continuing export growth to ensure jobs stability and higher wages;
  • With a third of major Chinese river basins, 60% of its underground water, and most city air contaminated, for urgent steps to eliminate pollution without halting growth.

This requires easy credit to develop labour-intensive businesses – especially businesses like Weiqiao and Esquel in Xinjiang province.

Private-sector credit, though, is growing far faster than the economy, and many observers believe that growth will destabilise China’s economy. China’s likely to be less enthusiastic about private firms borrowing for projects like Huajian’s Ethiopian venture, C&H’s plans in Senegal and Rwanda, or Bangladesh’s new factories.

It’s impossible to predict where China’s credit axe will fall.

But mounting paranoia over Japan is likely to make subsidising trade routes more attractive. Slowing exports will probably boost domestic investment. Helping foreign countries develop must be looking less attractive now than a year ago.