China versus nativism in the battle for global water
Published June 9th, 2016
In two weeks’ time I will be rushing home from a meeting of the Water Supply and Sanitation Technology Platform in Brussels to vote in the referendum on Britain’s exit from the European Union.
There are no prizes for guessing which way I would be voting. You can’t run a magazine with the name “Global” in the title and support nativism in politics. I think our side will win on 23 June, just as I suspect that globalism will prevail over nativism in the US election in November. That said, the rise of nativism – which I would define as nationalist politics which oppose free trade and immigration – is one of the most significant political movements of our time, and it is going to have an impact on the water business.
The French Front National leader Marine Le Pen has the best analysis of the situation. She says that the contest in politics is no longer between left and right, but between nationalists and globalists. This true fact is tearing apart established political parties all over the world.
Water was always a latecomer to globalisation, and in that sense it is more vulnerable to nativism than other industries such as oil and gas or high-tech. It is largely controlled by local government, and the supply chain is heavily weighted towards local businesses involved in digging trenches or pouring concrete. The global part – the part which makes Global Water Intelligence necessary – is that 5% of the business which involves high finance or advanced technology. As the challenges confronting water utilities and industrial water users continue to mount, these two aspects of the business have been growing faster than the market as a whole. That said, there remains an underlying hostility to foreign water companies, which becomes most acute when they are involved in utility operations.
The next chapter of the globalisation story in the water sector is going to be about the integration of China, and its success or failure could make all the difference to the industry. To a large extent, the rise of China has been a major driver of the growth of nativism. It is blamed by Trump, Le Pen and Brexit supporters alike for stealing jobs and depressing wages. From a water perspective, there are two things that China can offer: a market for high-tech water technology to address the horrifying industrial water pollution problems the country is facing; and the opening of a new front on international project finance.
We are running a workshop on each of these two issues in Shanghai next week (look here for details). We have some of the top officials involved in the Water Ten Plan for cleaning up industrial pollution in China, as well as a full house of major Chinese industrial water users signed up to speak in the morning, while in the afternoon we have brought in some of the key international players involved in projects and finance in the Middle East and Central Asia, the focal regions of China's One Belt, One Road initiative.
Although I am sure that most international readers of GWI would appreciate a better understanding of the opportunities in the Chinese industrial water market, I suspect that there are some who would raise their eyebrows at facilitating the expansion of Chinese companies into the international market.
While I agree that this is already a highly competitive market, I think that structurally, the Chinese companies have something to offer that the rest of the world currently cannot, and that is a fresh approach to capital investment. The major players in the European and North American water markets don’t have much appetite for capital exposure. The French companies stick to capital-lite strategies, and the US engineers don’t like to expose their balance sheets to capital risks. By contrast, the Chinese companies now looking at international markets have by and large got to where they are by investing their own capital to develop projects. Additionally, the stratospheric valuations which are still enjoyed by Chinese water companies in comparison to their international peers means that the rewards for deploying capital are far greater for Chinese companies. My feeling is that the most important driver of a market is the existence of companies which want to make that market happen, and these Chinese companies re-introduce an ambition to the sector which has been flagging since the global financial crisis.
Besides a bolder approach to capital deployment, I also believe that China can make a significant contribution to the development of the international water market by ending the dollar monopoly on finance. This is a more controversial issue. At the moment, all international infrastructure investment is contracted in US dollars, which means that water projects are highly exposed to currency risk, because they have no opportunity for foreign currency earnings. The risk is exacerbated by the fact that emerging market currencies tend to trade as a block – and directly against the dollar. Renminbi finance would change all this. As the renminbi has moved away from the dollar peg, it has started to trade in a pattern similar to other emerging market currencies. This means that when there is a flight to quality and everyone is buying dollars, the renminbi is more likely to remain affordable. Facilitating renminbi finance could enable governments in emerging markets looking to finance water projects to diversify their currency risk more effectively.
Although I can see that there is scope for Chinese companies to revitalise the international water market, I think that there is still some way to go before Chinese companies are truly competitive on the international market without the support of international partners. Contracting models and risk management is very different in China than elsewhere, and if you are building a project 5,000 miles from home, low Chinese labour costs don’t count for so much. The key to winning any project is understanding the client’s needs and innovating to meet those needs most effectively. No country has a monopoly on those skills.
What matters for globalists in the battle against nativists is proving that globalisation works for everyone, and the great thing about water is that it is something that benefits everyone, and not just the global elite of the nativists’ imaginations.