【Global Times】Loan rate for China-Thailand rail project reflects market conditions

Date:2016-5-12 From:Global Times

Illustration: Luo Xuan/GT

China is hoping to build high-speed railways in India, even though the country’s first bullet train project on the Mumbai-Ahmedabad route went to Japan, media reports said Tuesday. It adds to the evidence that China is increasing its footprint overseas with its cost-effective homegrown rail system. 

China is vigorously seeking breakthroughs overseas for high-speed railway projects, but getting these projects off the ground is not that easy. The latest setback saw China’s involvement in a high-speed project in Thailand reduced when Thailand decided in late March not to seek loans from China to build a high-speed rail line connecting Bangkok to the provincial hub of Nakhon Ratchasima; instead the country may only contract Chinese engineers to build it. The twists and turns in the project can offer some guidance for China’s future high-speed railway projects with other countries.    

The center of contention over the China-Thailand project was that the two countries could not agree on the terms of funding, with Thailand contending that the 2.5 percent interest rate offered by China was too high. 

The interest rate offered by Chinese policy bank China Development Bank (CDB) is higher than the rates that might be offered by banks in some European countries or the US or Japan. But the interest rate China set reflects market conditions. 

First, the interest rates on national loans are basically determined by the supply and demand for funds. Lending interest rates were determined by market forces rather than government policy before China scrapped the ceiling on deposit rates last year, ending a long period of restrictions on interest rates. That means that when the supply of funds is limited and demand rises, the interest rate rises accordingly. In contrast, when the supply of funds is ample and demand is small, the interest rate will be low. 

Compared with developed countries, China has huge demand for funds amid its modernization and urbanization drive. In other words, there are many areas that Chinese banks’ funds can be lent to and the funds are more valuable. Therefore, the Chinese interest rates on loans have long been kept at a relatively high level. The lending interest rates of big Chinese banks such as CDB are around 4.8 percent and sometimes even goes beyond 6 percent. Although Thai authorities may find the interest rate offered by China high, the rate is quite reasonable among Chinese banks. And if the funds are not used to finance the Thai project, they can be invested in other projects, with similar gains to be expected.           

Second, the interest rate on loans for foreign-related projects is usually determined based on the bank’s assessment of the potential risks and gains from the project. Normally, the riskier the project is, the higher the interest rate. Chinese banks have limited experience in assessing the risks in foreign-related projects, so they tend to play safe and take into account all possible risks, and therefore set a higher interest rate on loans accordingly. Compared with their Chinese peers, banks from the US, Europe and Japan are more experienced in overseas investment and more confident in their ability to assess the risks of overseas projects. Therefore they tend to be bolder and set a relatively lower rate. With growing expansion of Chinese banks’ overseas investment and their ability in risk control improving, China may make more flexible arrangements in future as it sets interest rates for overseas loans.   

The reason why the Thai authorities balked at the interest rate set by China is that it is higher than the rate offered to Indonesia last year for a high-speed rail project. Some observers in Thailand believed that China was not treating Thailand and Indonesia equally. However, the sentiment is largely caused by a misunderstanding of the different projects in the two countries. The reason why China offered a lower lending rate to Indonesia is that the cooperation between China and Indonesia is more than about a high-speed railway; it also involves a package of infrastructure projects, including a dozen airport projects that were granted to Chinese investors. So Indonesia’s high-speed railway project was naturally entitled to a lower interest rate on loans from China as part of the package. 

Unlike Indonesia, which totally relies on China for its projects, Thailand is seeking to strike a balance between China, the US and Japan. China cannot get as many projects as it did in Indonesia, making it difficult for China to make greater concessions in a single project in Thailand. 

Some Thai politicians who insisted on a rate similar to that offered to Indonesia believe that China’s "One Belt, One Road" initiative is a political task that China must accomplish at any cost. They dreamed that no matter how low Thailand pushes the project cost to be, China would eventually accept it. However, to their surprise, China’s unwillingness to budge on interest rates indicated that China will not play against market rules, and will weigh risks and gains from projects in order to maximize returns. The "Belt and Road" initiative is not equivalent to foreign aid. China seeks cooperation under the initiative, which involves sharing of risks and benefits. 

So the twists and turns in the Thailand project have not necessarily led to a bad outcome. It can help China more naturally project its "Belt and Road" initiative to the world and help other countries better understand the initiative.  (By Chu Yin) 

The author is an associate professor at the University of International Relations and a researcher at the Center for China and Globalization.

From Global Times, 2016-4-25