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China finds tricky export niche amid global slump: Wei Gu

September 7, 2009

Fri Sep 04 12:26:46 UTC 2009

-- Wei Gu is a Reuters columnist. The opinions expressed are her own --

By Wei Gu

HONG KONG, Sept 4 (Reuters) - As exports of manufactured goods slow, China has found a new niche -- exporting its construction boom.

With many countries in the world adopting stimulus plans to drive demand, China has been scrambling for these public spending dollars. And it is well placed to do so.

Infrastructure investment has powered Chinese growth in the past three decades. The nation has deep experience in building roads and bridges quickly and cheaply.

Moreover, it isn't just construction expertise China is offering to clinch the deal. Its state-controlled banks such as the Industrial & Commercial Bank of China (ICBC) <1398.HK><601398.SS> and Bank of China <3988.HK><601988.SS> are eager to throw in some cheap loans too.

China's big advantages are the scale of its companies -- 51 of the world's largest 225 contractors hail from China -- and its substantial capital reserves, which allow its banks to provide long-term, low-cost credit for projects abroad.

The surge in construction revenue from overseas looks remarkable against a 22 percent drop in total exports during the first half.

Services revenue from overseas amounted to $32.2 billion, up 52 percent from last year, outpacing the average growth of 30 percent over the past few years. Chinese companies signed new contracts worth $64.6 billion, an increase of 38 percent from last year.

Chinese construction companies were the biggest beneficiaries. China Railway Construction <1186.HK>< 601186.SS> said the value of newly entered overseas contracts surged 98 percent in the first half, representing one fifth of the total new contracts signed.

Support from the highest authority in China has helped seal deals abroad. In February, witnessed by President Hu Jintao and King Abdullah, China Railway signed a $1.78 billion contract to build the first phase of a special railway for Muslin pilgrims in Saudi Arabia.

It marks the first time that Saudi Arabia, one of the biggest oil exporters to China, gave the country a major public works agreement, although Huawei, a private Chinese telecommunications company, is already a main supplier there.

The success of Chinese contractors is not limited to emerging countries. China's Gezhouba Group <600068.SS> is involved in Australian mining projects. An aircraft technology company has got a big contract for wind power projects in the United States. And a Chinese contractor won a bid to build the Hamilton Bridge in New York.

Winning the services contract opens the door to other export opportunities. Just as IBM <IBM.N> and Hewlett Packard <HPQ.N> promote system integration services to sell more of their hardware, when a Chinese contractor builds a bridge abroad, it is also likely to source the great majority of the materials from China.

Every dollar increase of contracted work will lead to a 4.9 dollars increase in the gross domestic product, according to the Ministry of Commerce. Taking that into consideration, overseas contracted work and related equipment exports accounted for more than 7 percent of total GDP last year. (Total exports were about a third of GDP)

Services exports have started to move the needle. Without the services jump, China's export decline during the first half would have been two percentage points more. Service exports have helped create 450,000 jobs domestically during the first half, said the government.

The benefit of exporting migrant workers to lower the unemployment rate might not be big -- every year China only exports about 150,000, or less than 1 percent of the new workers it adds -- but the habit of importing Chinese labour for projects can cause a lot of friction.

The most recent and serious case was in Algeria, a country where seven out of every 10 adults under 30 are unemployed. About 100 locals and Chinese workers fought with knives and bludgeons. Russia, which has been hit hard by lower oil prices, is coming up with ways which make it harder for Chinese contractors to bid for deals.

Although China likes to stress the complementary nature of its relationship with other emerging countries, the reality is developing countries directly compete against each other because their competitive advantages, namely low wages, are similar.

Beijing has seen some backlash from its largest export markets, namely Europe and America. As China steps up its investment activities overseas, the drive to export more people and services to Africa and Latin America could cause headaches if pursued too aggressively. -- At the time of publication Wei Gu did not own any direct investments in securities mentioned in this article. She may be an owner indirectly as an investor in a fund. -- For previous columns, Reuters customers can click on [GU/] (Editing by Martin Langfield)

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