A Potential US-China Win-Win Partnership: Foreign Investments for Trump’s Infrastructure Plan
Trump’s administration sees infrastructure as one of the key areas to boost U.S. economy. However, the newly published Infrastructure plan has been criticized for lack of money and is highly dependent on private capital.
China, with its strong infrastructure achievements and the largest amount of foreign exchange reserve, is constantly looking for low-risk long-term investment projects to achieve asset preservation and appreciation.
Infrastructure development collaboration between US and China would create a win-win situation. China balances its foreign exchange levels while accelerating the rejuvenation of American infrastructure. This may also transform China into a job creator in the U.S.
But under current trade tension, things aren’t that easy.
The American’s needs
Infrastructure development in the U.S. is facing problems, such as federal, state and local fiscal deficits and political battles between parties. Public funding is very difficult to be primarily used in infrastructure development.
The White House’s budget, which was also released in March, proposed a 19% cut to the US Department of Transportation. This includes taxing grant programs for transit and other competitive projects proposed by local governments.
The Washington Post reported that 31 states have used up political capital since 2012 to address the transportation infrastructure.
Pennsylvania, which has the highest gasoline tax in the country, passed Act 89 in 2013 to finance long-term development of transportation infrastructure. The bill had a five-year rollout to generate $2.4 billion in additional funds per year available to the Pennsylvania Department of Transportation (PennDOT)
However, the bill only helped Pennsylvania meet $2.4 billion of the $3.5 billion it need in 2010. According to the Transportation Funding Advisory Committee’s (TFAC) estimation, it fell $6 billion short of funding the “Twelve Year Plan,” which was expected continually grow.
The gap between federal funding and states and local transportation and infrastructure needs is clear.
According to American Society of Civil Engineers (ASCE) 2017 Infrastructure Report Card assessment, Infrastructure in the U.S. had an overall D+ rating, with a B rating for railroad and D- for transit, indicating some areas are lacking investments. As calculated in the report, some of the economic consequences are:
$3.9 trillion in losses to the U.S. GDP by 2025
$7 trillion in lost business sales by 2025
2.5 million lost American jobs in 2025.
On top of those costs, hardworking American families will lose upwards of $3,400 in disposable income each year — about $9 each day.
“The time to invest in our nation’s infrastructure is now. The longer we wait, the more it costs,” the ASCE report wrote.
Private capital and foreign investments are the key to solve this situation. Many foreign investors form Australia, Canada, Europe and Mid-East began to invest in U.S infrastructure projects.
Early in 2014, the US Department of Transportation under President Obama announced the “Build America Investment Initiative”, aiming to expand opportunities to invest in US infrastructure.
Based on Rhodium Consulting Group’s data, China has invested over 9. 45 billion dollars in US infrastructure projects. In some deindustrialized cities, Chinese corporations already made contributions in building facilities and creating job opportunities.
What can China offer
China has accumulated tremendous experiences in infrastructure development and financing infrastructure projects in past decades, especially with the “One Belt One Road Initiatives”.
Since there is trade tension between U.S. and China, cooperation in infrastructure development is likely in 3 major ways: construction, investments and loans, project management and construction services.
Many Chinese companies have participated in the U.S infrastructure project bidding as an Engineering, Procurement, and Construction (EPC) partner.
According to the Engineering News-Record 2017 ranking, there are 65 Chinese construction firms on the list. China Construction America (CCA) went from no.42 in 2016, out of 400 construction companies in the US market, to no. 37 in 2017. Its posted revenue was $1.7 billion in 2016.
The Alexander Hamilton Bridge that connects Manhattan and the Bronx was built by China Construction America and was ranked the third out of ten major bridge projects selected by Roads & Bridges Magazine in 2013.
Investment opportunities in U.S infrastructure projects are attractive to Chinese investors, because infrastructure projects tend to have stable cash flow that may create long-term excess investment returns and guard against inflation.
The capital needs for each U.S. infrastructure project is tremendous. The large amount of foreign exchange reserves that China holds would bring benefits to both parties.
The level of business and geopolitical risks investing in U.S infrastructure is fairly high. Creating innovative investment mode, such as combining with Greenland investment, creating demonstrative projects to drive a breakthrough, or divide the project into a different stage, may reduce risks and bring investors more financial returns.
Credit rating and research company Moody’s wrote in its PPP development report that the United State will become the largest and most potential PPP market, for its current infrastructure scale and increasing city population.
List of some US infrastructure projects with great capital needs
A newly minted Sino- California infrastructure investment and development task team was formed last October, aiming for both parties to collaborate on infrastructure projects in California including major railway expansions and potentially, bullet trains.
Barriers and Risks in the collaboration
When President Xi visited the United States last April, he strategically discussed with President Trump about infrastructure investments and collaboration with US companies.
However, the collaboration is facing both business and political challenges.
The “America first” President will require China grants greater reciprocal access for US companies in China. Beijing needs to convince President Trump that China is willing to work with the US.
The political environment between federal, state and local government brings more risks to foreign investors.
The China Construction American executive, Yuan Ning, mentioned that investment returns in the US infrastructure projects is hard to assure, since in many states, PPP projects are still not legalized. He mentioned that investors must be very familiar with the market players, otherwise they may face loses.
American financial services company Cowen Group CEO, Peter Cowen, said that social capital, other than public capital, requires higher returns. In order to attract more capital into infrastructure development, the federal and local government needs to design a better PPP mode.
Many market players from both countries hold conferences and openly discussed the potential future cooperation opportunities.
Michael Bloomberg, the founder of Bloomberg L.P., at the 2018 International Finance and Infrastructure Cooperation Forum held jointly by Bloomberg L.P. and China General Chamber of Commerce-U.S.A. (CGCC) on April 18th, said no country in history has undergone such extensive economic reforms and with as much success as China, adding that success is not only good for China, but also good for China’s trading partners including the United States.
The Financial Times Chief Economics Commentator, Martin Wolf, once wrote in his article “China and the US: an odd couple doomed to co-operation” that “Mr. Trump wants an infrastructure boom in the US. China is by far the world’s greatest exponent of fast infrastructure delivery. It must be possible to marry China’s capabilities to Mr. Trump’s objectives.”
The Financial Times Chief Economics Commentator, Martin Wolf, wrote in one of his article “China and the US: an odd couple doomed to co-operation” that “Mr. Trump wants an infrastructure boom in the US. China is by far the world’s greatest exponent of fast infrastructure delivery. It must be possible to marry China’s capabilities to Mr. Trump’s objectives.”