CHEAP CHINESE LOANS - NEED TO BUILD A GREAT INDIAN WALL

By Ruma Dubey

Almost everything that we buy today is from China.  They seem to have got a control over the world. Cheap goods and mass production are China’s hallmark and this entrenchment is so high that we today have to urge people to not buy “Chinese Kandils” for Diwali! Thankfully, we have not yet come across Chinese Ganpati for the festival which just went by.

When such is the incursion, it thus comes as no surprise to see that the Chinese are making their way, dangerously, into some of the biggest industrial houses of India. From cheap goods, China has now caught on to cheap loans, twisting it to their advantage while we think that India is benefitting.

But there is an ominous trend around these “cheap” loans. These loans are coming as a “packaged” deal. Anil Ambani, in the real sense, started the trend – he was amongst the first to borrow huge money from China, not once but twice. The first time was in 2011 when Ambani needed $1.9 billion to fund his 3G needs for Rcom. The loan came underwritten from China Development Bank and it was recorded as the largest financing in the history of India’s telecom sector. And then for the second time, RBI approved refinancing of its FCCBs worth $1.18 billion through a consortium of Chinese banks; once again the largest refinancing ever. But China is killing two birds with one stone – not only is it getting borrowers, but the funding is linked with conditionality of equipment purchase, meaning direct boost to exports. The $1.18 billion loan for Anil Ambani was approved on the understanding that Reliance would buy Chinese telecoms equipment from Huawei Technologies and ZTE Corp. Though this does not come as a “mandatory” rule to getting loans, it comes with a tacit understanding that Chinese banks would only lend to Indian companies if tied to future procurement orders. Yes, these loans are indeed cheaper than Indian loans and do help in savings but the tie-up with supply of equipments is a huge risk.

One more similarly highly leveraged group – the Essar group too has gone to the Chinese for borrowing. Essar Energy recently announced borrowing $300 million from Export-Import Bank of China. The proceeds of the loan will be used to repay an outstanding amount of $233 million under an existing bridge loan facility and for general corporate purposes. Prior to this, in March’13, the same company had signed a $1 billion deal with China Development Bank. This was supported by an agreement to supply fuel products from Essar's refinery to China's PetroChina Co – thus this loan was like an advance payment for fuel product exports.

This quid pro quo arrangement is not restricted to just India; it is the way the Chinese today lend money. China has a lot of money to lend and it not some altruistic bone which is making them generous lenders – it is purely a ‘you-scratch-my-back-I-scratch-yours’ kind of play. Like in 2009, Brazilian oil giant Petrobras got a 10-year $10bn dollar loan from the China Development Bank. This was linked, like Essar Energy to supply of oil - 150,000 barrels of oil supply a day for the first year, followed by 200,000 barrels of oil supply a day for the remaining nine. Similarly, in the same year Russian oil and pipeline giants, Rosneft and Transneft, took a combined loan of $25bn from the China Development Bank. Needless to say, this loan was tied up on assured supply of 15mn tons of oil a year, or 300,000 barrels a day, over 20 years. Thus the Chinese are locking precious supplies at lower rates, that too without any equity commitment. One wonders why China did not offer to bail out Kingfisher Airlines for some quid pro quo arrangement – it could have gained a foothold in the aviation sector.

This is a very dangerous trend. When China finances a power plant, it expects all equipment orders to come to China; when it funds oil projects, it ties up for assured oil supply at discounted rates. Such one-sided interdependency could put the company and its shareholders at major risk. Typically, companies which are fully leveraged (thus desperate) are the ones which are seeking loans from China – Essar and ADAG are perfect examples of the same. But in this bid to tide over the debt crisis in the present, are these companies risking the future? Brazil has learnt its lessons and its Govt is tackling this by hiking duty on imported equipments – thereby protecting the domestic manufacturers too. India too needs to raise a wall and protect itself from too much Chinese incursion into all our vital sectors.

The Chinese are indeed a formidable force to reckon with and unless Indian manufacturers keep a watchful eye on what they are signing in for, we could end up putting the entire country in jeopardy. Yes, somehow, every deal with the Chinese does evoke a sense of doubt….such has always been the relationship.