China spends billions to fund Caribbean ambition

Added on 16/06/2014

China's rising interest in the Caribbean is being backed by billions of dollars in fund flows that are giving Beijing a strategic foothold on the doorstep of the United States, reports the South China Morning Post.

While loans for infrastructure projects are being extended across the region, boosting China's economic and political clout, funds in the form of outward foreign direct investment are typically finding their way back to China after being rerouted from the offshore financial hubs of the British Virgin Islands and Cayman Islands.

The two jurisdictions account for the bulk of Chinese investment in the Caribbean, with a US government body saying that of the US$62.1 billion in such flows amassed by 2012, all but US$282 million went to the British Virgin Islands and the Cayman Islands.

Excluding the two hubs, Chinese investment flows to the Caribbean amounted to only US$31 million, the US-China Economic and Security Review Commission said, highlighting the growing appeal in China for investments targeted at home and elsewhere in the region to be facilitated through companies set up in the Caribbean centres.

Reflecting the scale of the fund flows, the British Virgin Islands has become the second-largest destination for mainland Chinese overseas direct investment after Hong Kong.

"It is clear that [British Virgin Islands] companies are not only the vehicle of choice for structuring investments into Asia, but also a preferred vehicle in structuring investments out of Asia," said Stephen Adams and Kristian Wilson, lawyers for Bedell Cristin, in a report.

In 2010, British Virgin Islands companies were responsible for US$111 billion, or 10 per cent, of foreign direct investment in China, the report said.

Chinese firms invested US$69 billion overseas, of which 75 per cent was handled by companies registered in the British Virgin Islands, Cayman Islands and Hong Kong, it said.

In 2012, such flows to the British Virgin Islands reached US$2.24 billion, while the stock of these investments amounted to US$30.85 billion.

For the Cayman Islands, the inflows came to US$827 million, with the accumulated investments sitting at US$30.07 billion, China's Ministry of Commerce said.

The surge in fund flows comes as the British Virgin Islands, which set up its Asia headquarters in Hong Kong last year, courts Chinese clients.

At the China Offshore Summit in Beijing in May, more than 300 Chinese financial intermediaries, international trust companies, bankers, lawyers and corporate service providers learned about the financial services sector in the British Virgin Islands, according to the islands' government website.

"The [British Virgin Islands'] relationship with China goes back more than a quarter of a century and the success of both our jurisdictions is closely linked," said Elise Donovan, a director of BVI House Asia, the offshore hub's Asia headquarters in Hong Kong.

The review commission said China's ties with the Caribbean had strengthened over the decade. "[They] are likely to continue to expand under President Xi Jinping, who has emphasised relations with the region more than his predecessors. Beijing likely views the Caribbean as strategically important by virtue of its proximity to the US and major maritime trade routes and infrastructure, such as the Panama Canal and the region's ports," it said.

Evan Ellis, an associate professor at the National Defence University's William J. Perry Centre for Hemispheric Defence Studies, wrote in a report last year: "The explosion of Chinese bank-financed infrastructure and resort projects in the Caribbean and the Andes is fuelling a wave of work by Chinese construction companies in the region. An estimated US$75 billion in such loans have been made in the past two years, with the use of Chinese companies typically a key condition for the funding."

Xi reportedly promised 10 Caribbean nations US$3 billion in loans when he visited Trinidad and Tobago in June last year.

From 2005 to 2012, state-owned Export-Import Bank of China and China Development Bank lent US$4 billion to the Bahamas and Jamaica, of which US$2.5 billion from Exim Bank financed much of the construction of the US$3.5 billion Baha Mar resort and casino in the Bahamas, the commission said.

The resort's development company, Baha Mar, expects the project to boost the country's gross national product by 10 per cent. The resort is due to open late this year.

The loans to Jamaica mostly financed projects such as roads and shoreline reconstruction, the commission said.

"Caribbean populations have become increasingly critical of the local economic impact of Chinese-invested projects, particularly China's insistence on using large numbers of Chinese subcontractors and labourers on construction projects," it said.

The commission cited the Baha Mar resort, which was expected to employ about 7,000 Chinese workers, which were later reduced by almost half. "Discontent over imported Chinese labour appears to be a major driver of change in Chinese labour practices in the region," it said.