Domestic firms need to learn about risks before investing abroad: experts
The Chinese government and companies should not rush to accept Sri Lanka's debt-to-equity swap, experts said Sunday, after the South Asian country offered equity stakes in exchange of some of the debt it owed to Beijing.
Sri Lanka will introduce legal reforms to attract much-needed foreign investment, as the Indian Ocean country asked China to swap some of the $8 billion debt for equity in infrastructure projects, AFP reported Sunday, citing a Sri Lankan official.
Sri Lankan Prime Minister Ranil Wickremesinghe, who returned home Sunday after a four-day visit to China, said that Chinese investors would be offered equity stakes in loss-making projects - a second international airport and a deep sea port in the island's south, the report said.
Wickremesinghe said during his visit to China that his indebted country was suffering due to complicated global economic context, Reuters reported Saturday.
"We've been talking with some companies and also the government of China about the possibility of some infrastructure projects becoming public-private partnerships, in which part of the debt will become equity held by the Chinese companies," Reuters said, citing the Prime Minister.
There are preconditions attached to Sri Lanka's demand for debt-to-equity swap - if there are no predictable profits and stable investment returns, the swap will be hard to materialize, Bai Ming, a research fellow at the Chinese Academy of International Trade and Economic Cooperation, told the Global Times on Sunday.
"Actually, the request needs to be further assessed to see whether the profits brought by the swap are higher than the cost in a bid to secure the Chinese capital," Bai noted.
Zhuang Rui, deputy dean of the Institute of International Economy at the University of International Business and Economics, said that Sri Lanka's request is, in fact, not beneficial to China as it is a kind of move to "repudiate a debt."
The lenders, including the Chinese government and enterprises - some private and some State-owned, may have to accept the debt-to-equity swap, according to Bai.
Risk control awareness
Some differences emerged over an agreement between the two countries in March 2015 when Sri Lanka ordered a halt to a Chinese-backed construction project in capital Colombo, on the ground that "the Chinese State-owned company appeared to lack required approvals," the Wall Street Journal cited a government spokesperson as saying in March 2015.
The suspension of the $1.4 billion mega Port City project was lifted in March 2016 after an Environmental Impact Assessment was obtained, the Xinhua News Agency said Thursday.
"The contract of the Port City project was signed by the previous government of Sri Lanka, and some changes occurred after a new president took office," said Zhuang, the deputy dean, noting that politics was also a factor behind the equity swap request.
The Port City project, which includes apartments, hotels, shopping malls and marinas, was funded by China Communications Construction Co (CCCC).
But CCCC has sought compensation of $125 million after it estimated that the shutdown would result in great losses, the Reuters report noted, but Sri Lanka has said it couldn't pay, and wants to negotiate.
This case can serve as a warning to an increasing number of Chinese investors who are seeking to expand their business overseas, noted Zhuang.
"Chinese firms need to be aware of how to prevent risks when investing especially in countries and regions along the "One Belt, One Road" due to the underdeveloped economies of those areas. Situations like Sri Lanka could arise again," she noted.
Chinese companies should also try hard to learn about the target countries and regions before making investment decisions, such as the local political situation, culture, traditional customs as well as laws, Bai added.
China and Sri Lanka are important partners in the construction of the "Belt and Road" initiative. The two countries would further advance their strategic cooperation partnership in many sectors such as trade, infrastructure, manufacturing and technology, Chinese President Xi Jinping said during his meeting with Wickremesinghe, Xinhua reported Friday.
