More Western nations match China's financing strategy to win contracts
Wednesday, January 12, 2011; 12:04 AM
When General Electric approached the U.S. Export-Import Bank in 2009 wanting to sell 150 locomotives for $477 million to Pakistan, there was a sense of futility. GE had already lost an earlier bid to a Chinese firm. Why would Pakistan buy American-made locomotives this time?
After all, China was a powerful competitor that routinely offered low-cost financing - below-market interest rates, easy repayment terms - that cut tens of millions of dollars off the bottom line of its international deals.
But in a case that underscores a significant shift in how the United States and the rest of the developed world are dealing with the challenge of China's economic might, the U.S. Ex-Im Bank decided to fight back. In February of last year, U.S. Ex-Im informed Pakistan's Ministry of Railways that it would take the unprecedented step of matching China's below-market-rate financing terms. And on Dec. 9, the executive committee of Pakistan's National Economic Council approved the purchase of the locomotives. While the case remains caught up in Pakistan's famously Byzantine court system, thanks to a lawsuit brought by a Chinese-backed plaintiff, the Ex-Im decision underscores an evolving new view on China.
"There's a new willingness to take on China, to compete toe-to-toe with China on financial terms," said Fred Hochberg, the chairman of the Ex-Im Bank. "This is a policy change that we will compete with anyone who's not compliant."
China's president, Hu Jintao, will travel to the United States next week for his second and probably last summit with President Obama. Behind the visit, with the pomp of a 21-gun salute and a state dinner, the relationship between the United States and China is undergoing a sea change.
The consensus about China formed during the Clinton administration, that as long as the United States was patient with China it would ultimately adopt Western political values and business practices, is "crumbling," said Daniel Rosen, a longtime China specialist and principal at the Rhodium Group, a New York-based consultancy.
What's replacing it is a new willingness to challenge China - in Congress, within the federal bureaucracy and in business circles - as more and more officials and executives draw the conclusion that Beijing, emboldened by its success at riding out the global financial crisis, is not interested in playing by Western rules.
A new Defense authorization law, signed by Obama on Friday, contains a provision banning Defense Department purchases of solar panels from countries that haven't agreed to open up government procurement to all competitors. The provision was written to target China, its authors said, because China has failed to sign the agreement. In the past, administration officials said, the federal government would have lobbied to strike the provision, fearing a backlash from Beijing. Not anymore.
The United States is not alone. With China in mind, Japan's Bank for International Cooperation changed its rules late last year, giving it more flexibility to finance loans for Japanese companies all over the world. Faced with heavy competition from Chinese firms in Africa, Brazil has sought U.S. help to establish its own export-import bank. And France is worried about China's challenge to its high-speed rail industry; French officials have aired the possibility of encouraging a merger of competing European firms to confront Chinese competition.
"The political resistance to brash tactics which would imperil the delicate management of the China relationship has collapsed," said Rosen.
Instead, Rosen said, he sees Western and other major countries employing what is basically an industrial policy to confront China. Take the Pakistani case. "By choosing to offer potentially costly concessionary economic terms on financing," he said, "the U.S. is saying that this industry has to be a winner for the U.S. We may not call it industrial policy, but it is."
Hochberg contests the idea that the United States is embracing an industrial policy. "We are not picking winners or losers," he said. The United States is simply responding to unfair competition, he said, or otherwise Chinese firms are going to snap up contracts all over the world.