Hungary wants to become regional hub for Chinese railway construction

Hungarian radio reported that the government’s spokesman said it was “not a secret” that Hungary wanted to become the regional hub for Chinese railway construction. Negotiations were underway with the Chinese and Serbian governments to upgrade the Budapest-Belgrade railway at a cost of $3 million.

Advertisement

China’s railways minister under investigation

On 12 February, Xinhua reported that China’s minister of railways, Liu Zhijun, has been placed under investigation. It is presumed that he will be charged with corruption and replaced.

Although there have not been any indications that the case relates to contracts overseas, it is likely that the recent scandal surrounding the Mecca Light Railway, which made a huge loss and was one of the high-profile cases seemingly leading the State Assets Administration to issue a new directive on state enterprises’ overseas investments, has played a role. Compared to that, the award of the Lao railway construction contract to the mysterious Xiaoxiang Company is small fry, but it again signals that the ministry and its affiliated parastatals are likely involved in murky and possibly unprofitable transactions abroad. (In an article published three days after Liu’s fall, Xiaoxiang’s chairman, Li Zhanqun, commented that it was much easier for a private company to get the contract because state companies’ offers needed to be approved by the Development and Reform Commission.)

Liu’s innovations included the involvement of provincial governments as shareholders in the construction of railways in exchange for land provided by them. This made provinces eager to compete for high-speed railways. This is the model that seems to be applied now to Laos.

Private contractor gets China-Lao railway contract

 21st Century Economic Herald reports that a private company called Yunnan Xiaoxiang Pan-Asia Investment Co. got a BOT contract for constructing the Lao section of the much-talked-about China-Singapore “Pan-Asia” railway. The company, whose name suggests a connection to Hunan Province, was registered in 2010, and its chairman, Li Zhanqun, is unknown but claims to have spent many years in Southeast Asia. The company’s registered capital is $1 million, and the shareholders are three private individuals. There are currently many Hunanese migrants in Laos, but they tend to be very small businessmen.

The total investment in the Lao part of the railway is estimated at 40 bn yuan. According to Li, some of this will come from the $3 million provided to the Lao government by UNDP, about 15% will come from Chinese government aid, and the rest, about $2 bn, will be raised overseas. This clearly raises questions: first, China has not previously provided direct grants-in-aid of anywhere near this scale. Second, how and why would an unknown person able to and entrusted with raising two billion dollars overseas? It is almost certain that someone who does not want to reveal their identity is behind Li, but it is not clear why. Perhaps because the Chinese subcontractors who will carry out the construction and will certainly benefit from state loans would rather deal with a Chinese contractor? Or perhaps because the real investors are connected to high officials and do not want this revealed?

A Chinese manager at the Golden Triangle Special Economic Zone in Laos suggested that the investors might be gambling barons, like the owner of Malaysia’s Genting resort. He thought that, among the legal industries, only gambling tycoons have the cash to pay $2 bn, and it would be in their interests to get more Chinese gamblers via the railway.

But from my perspective the more interesting aspect of the deal is this: Li says that Xiaoxiang  will operate the railway and get all the income for it (he doesn’t mention the time period), and that in return for the investment it will also receive logging, mining and industrial concessions. He also says that the project will need 40-50 thousand Chinese workers. In other words, he pictures a massive concession along the lines of the China Eastern Railroad, constructed by Russia at the beginning of the 20th century, which remained under Russian control and whose employees enjoyed extraterritorial rights until the Japanese occupation in 1937. These Russians built and ran the city of Harbin, even though technically they had no concession rights, unlike, say, foreign powers in Shanghai.

So if the construction of the Golden Triangle SEZ, with a 99-year lease and Chinese management, recalls Hong Kong, the railway would hark back to another form of extraterritoriality.

The question is how much of this is true, and whether Peking likes it. The construction may well be embarrassing and unwelcome for the national government. Conflicts between Yunnan Province and Peking about how to deal with neighbouring countries are routine, with the former looking more at profit and the latter more at the long-term strategic fallout.