These two old rivals have had an enormous effect on each other. China deeply influenced its close neighbours over centuries with its writing system, architecture, religion, philosophy. Japan, through the 19th Century, as it opened up to trade and “modernizing” with the West, saw China as weak in the face of the West’s modern military technology as evidenced in the two Opium Wars. This set Japan on its course of imperial expansion into China and the outcomes are well documented.
Fast forward to today and tensions between the two are as high as ever. But it is the commercial battlefield that has emerged between the two that will heavily influence business, both in Asia Pacific and beyond, for many years to come.
Both countries have positioned themselves as major outbound players in all forms of infrastructure projects and we are now seeing them increasingly compete head on with each other – particularly on major transportation projects.
Why are both countries positioning themselves in this way? In Japan, the advent of Abenomics* has seen a major effort to reflate the economy, with mixed success. Infrastructure has long been regarded in Japan as a means of pump priming their economy and billions have been poured into domestic projects to the extent that new opportunities are limited. Outbound projects are therefore highly sought after to keep Trading Houses productive and profitable. The Outbound industry is highly coordinated between Trading Houses, Government (JBIC & JICA) and the commercial banks. In China, the uber investment stage of their industrialization has plateaued and the economy is shifting to being dominated by services. For the massive State Owned Entities (SOE’s) in construction, an outbound strategy is self-evident and is backed by the Government. The Chinese Government approach is often to deal bilaterally with a host Government, sign a deal with them, and then have the SOE’s come in and deliver the project.
Approaches between Japan and China differ greatly, but in essence both are trying to do Government to Government (G2G) transactions in order to circumvent normal tender processes. This poses the question for a prospective Adviser – how and where should we play in a G2G deal? Or, is it impenetrable? The obvious answer may be to bolster the capability of a Host Government through robust independent advice, however Chinese SOE’s in particular need substantial assistance to deliver the obligations their Government enters into.
Despite popular belief, the Chinese consortia are now having to deal with relatively expensive financing packages from their domestic Commercial Banks in comparison to their international peers. Japanese consortia on the other hand have the cheapest and long tenor support of their domestic lenders and it is no coincidence that Japanese lenders now dominate Project Finance lending league tables.
The Chinese however are seen as more diplomatically active in developing countries and their Government is maneuvering Chinese contractors and lenders to accept risks that very few other countries would be prepared to take.
Roddy Adams is the Managing Director of Infrastructure Finance & Economics. He has over 20 years of banking experience in the infrastructure & energy sectors, with RBS, National Australia Bank and most recently as a partner with KPMG. He has closed global Project Finance Transactions as a sponsor, adviser, equity investor, lender and bond underwriter, and was previously a Board Member of Infrastructure partnerships Australia.
*Abenomics is the name given to a suite of measures introduced by Japanese Prime Minister Shinzo Abe after his December 2012 re-election to the post he last held in 2007. His aim was to revive the sluggish economy with "three arrows": a massive fiscal stimulus, more aggressive monetary easing from the Bank of Japan, and structural reforms to boost Japan's competitiveness
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