China's possible role in rebuilding America

By Einar Tangen

Over the last 30 years, the condition of America’s infrastructure has been declining, while the cost to fix it has been rising, according to the 2017 report by the American Society of Cost Engineers (ASCE).

The cornerstones of Donald Trump’s economic plans was to take $750 billion dollars from “Obamacare” and other social programs, pass a massive tax decrease, and then borrow to put 2 trillion in military and infrastructure. 

The idea was that lower taxes, plus the monies injected into the military and infrastructure, would stimulate the economy towards 3% growth, guaranteeing a second term.

Over the last 30 years, the condition of America’s infrastructure has been declining, while the cost to fix it has been rising, according to the 2017 report by the American Society of Cost Engineers. [Photo courtesy of Einar Tangen]

Unfortunately for Trump, the only part of that plan, which both the Republicans and Democrats agree on, is the need for infrastructure.  

How big is the infrastructure problem? 

According to the ASCE the cost to solve the problems are almost 4.6 trillion dollars. This begs two questions, is Trump’s attempt to address the issue over a ten year period, with just 1 trillion, enough, and will the fiscal Republican conservatives, who have sworn to prevent deficit borrowing, agree to reverse their position.

Putting aside the defense funding, and his inability to get his agenda through Congress; the question is, can he find one trillion for his infrastructure programs and get them producing measurable economic effects, in time to help him with his reelection efforts? 

Already, House and Senate leaders have signaled that an infrastructure bill will probably be delayed till 2018. This means there will be nothing to show by the 2018 midterm elections, which will see every member of the House and 1/3 of the members of the Senate up for re-election. 

Politically, on the Republican side, the fiscal conservatives have drawn a line in the sand on deficits and borrowing, and without them Trump does not have enough votes, from his own party, to secure deficit funding. In terms of the Democrats, while many may agree with his ideas, in principle, his relationship with them on other issues has, in effect, made cooperation impossible. 

To address this, Trump is proposing to use devises, like increased leverage, private public partnerships, tax deductions and toll roads. If these are acceptable to Congress; they will require private parties to take the financial risk for both project financing and fiscal guarantees, increasing the cost of projects and their reliance on private financing. 

You are probably asking by now, why the first part of this article has been about Trump’s political and fiscal woes, if this article is about how China can participate in America’s infrastructure needs.

The answer is, given the current political situation, infrastructure funding will be even more heavily dependent on private financing. At a time when employment is at record lows and rising bond yields will push costs higher. 

So who can fund America’s needs? 

The Middle East, Europe and Japan have their own financial challenges, in essence leaving China, an uneasy trade and political competitor, but with trillions in foreign reserves and proven lower cost infrastructure capabilities. 

Already China is making headway in providing large ticket items like passenger rail cars to cash strapped US cities like Boston, Los Angeles and Philadelphia. The terms have been simple; build the rail cars in the US and get the contract. But, given the high US based labor costs; this makes Chinese manufacturers even more dependent on sourcing lower cost materials like steel, copper, glass and getting labor intensive items like seats, from China, in order to maintain their competitive edge and profits. But, given the recent moves by Trump, to impose tariffs on things like aluminum foil, and threats to do more, these assumptions might evaporate. 

So is there a play?

The answer is yes; if Chinese companies can offer turnkey operations, including financing and job creation, in exchange for guaranteed revenue streams. This may not be a hardship, given the aftermarket services are often more profitable than the initial products. 

Chinese companies should look at the models the US used in China and around the world, post 1945, where they used the financial backing of the World Bank and IMF to back big ticket projects all over the globe. 

New York Gov. Andrew Cuomo, right, and Armando "Chick" Galella, second from right, wave to construction workers a they cross a span of the Tappan Zee Bridge replacement, called the Gov. Mario M. Cuomo Bridge, near Tarrytown, N.Y., Thursday, Aug. 24, 2017. [Photo: AP]

Chinese companies can also look to additional guarantees from local, state and the federal governments. In the US, big ventures like nuclear power plants, rail, rail cars, bridge repairs, roads, subways and subways cars, can be tied back to federal, state and municipal guarantees and long term agreements about payment streams. This will help buy down the borrowing rates and therefore lessen the overall costs.

Financing mechanisms, like revenue bonds, which allow specific or district projects to borrow at government rates and pay down interest and principle using the revenues generated by the projects are an example of how funding sources and means can be used to lower rates, risk and costs. 

If the projects are financially viable and guaranteed by government direct or moral obligation, the bonds would be attractive to Chinese insurance and pension funds, who could benefit from the portfolio diversity and stability they bring. 

These types of deals will require a high level of sophistication and knowledge about municipal politics, laws and the financial markets, but these services are available within the US. 

In other countries where China is going, via the Belt and Road Initiative, the financing and legal products and laws may not be as sophisticated, as they are in the US, but what Chinese companies learn in the US could be exported and used in these new areas, assuming they offer the right balance of local development and profit for Chinese companies. 

Summing up

Chinese companies should not bet on what Trump can or can’t do, the infrastructure opportunities are there and are not going away. Delays will only increase the costs to the local governments and people. China has the financing and infrastructure expertise, at a time when there are few others to compete.

The key for Chinese companies is learning, and then using, every available advantage, while still making sure that it is a locally beneficial project. 

If you need current examples, you can look at what Foxconn is doing, effectively getting US states and cities to bid for their factories. 

The US is a sophisticated place where Chinese companies are positioned to do well and can learn valuable lessons that can be applied to the Belt and Road Initiative. It should be a fertile area for Chinese companies as they look for new projects outside China. 

(Einar Tangen is a China-based American commentator)