In a sense, the Sicomines resources-for-infrastructure agreement in the Democratic Republic of the Congo has been just another underperforming deal in a country with no shortage of them. But it is also more than that — namely, a window into the flaws at the heart of Chinese international economic policy, which is already costing its economy dearly.
At the turn of the century, the Chinese government started implementing its “Go Out” policy, which sought to incentivize domestic firms to look for business overseas. Chinese firms would invest and seek contracts abroad, which would make them more competitive globally while alleviating some of the pressures of a domestic market that was starting to saturate. At the same time, the move would allow Chinese firms to secure new markets for their exports. The policy was supported by cheap and easy credit from China’s policy banks.
Chinese firms responded to these incentives. Fueled by easy credit and the impetus to go out, many of them have been taking increasingly risky projects. Unsurprisingly, many of these projects have underperformed massively. And the impacts for Chinese banks, and through them the Chinese economy, are now becoming visible.
Consider Congo’s Sicomines agreement. In 2007, the Congolese government signed an enormous resource-for-infrastructure deal originally valued at $9 billion with a consortium of Chinese companies. According to the fleshed-out version of the agreement, signed in 2008, more than 10 million metric tons of copper and some 600,000 metric tons of cobalt were ceded to the newly minted Sicomines, of which the major Chinese state-owned enterprises China Railway Engineering Corp. (CREC) and Sinohydro had majority ownership. In exchange, Sicomines would build $6 billion (later adjusted to $3 billion) worth of infrastructure and invest $3 billion in the mine itself. China’s Export-Import Bank agreed to finance the whole thing, with the guarantee that the mine’s output would serve to repay its loans down the line.
Ostensibly, the deal was good for China. Through Sicomines, it would gain a new friend in Joseph Kabila. (Relevant here is that in 2007, unlike today, Kabila had just won Congo’s first ever democratic election and was portrayed as a figure of hope for stability, democracy, and development.) The Chinese side of the agreement would also secure massive mineral reserves. Finally, China would offload some of its domestic overcapacity by carrying out $9 billion worth of investments halfway across the world. According to new
research — based on dozens of interviews and an in-depth financial model of the agreement — the deal had a net value more than $10 billion to the Chinese consortium when it was signed. But the deal soured.
The Chinese consortium misjudged the market it was entering. As can be expected from any venture in one of the world’s least stable countries, also infamous for its infrastructure deficit, massive delays plagued the development of the mine. For example, after failing to secure electricity from the Congolese grid at the agreed-upon price, Sicomines had to import electricity from Zambia. It is now in the process of building a hydroelectric plant, without which the mine cannot produce at full capacity. Sicomines also got unlucky. In 2013, news broke out that the total estimated copper reserves in its concession had been adjusted down to 6.8 million metric tons — a 35 percent drop. Mirroring this drop, the consortium readjusted its copper production targets down by 37.5 percent. To make things worse, in the years following the signature of the deal, the price of minerals took a hit. Copper now costs under $7,000 per metric ton, down from about $9,000 when the deal was finalized in April 2008. As things stood in late 2016, Sicomines may result in a substantial net loss for the Chinese consortium.
The Sicomines case is not unusual. China’s mammoth firms frequently make massive losses on foreign investment ventures.
