Rail & Infrastructure, Talking Point

Tango and cash

Railway deal cements Beijing’s ties to Buenos Aires

Tango and cash

Got a train to catch: President Kirchner in the Chinese capital

“For a few days, war with Britain seemed possible, and even imminent,” wrote Winston Churchill. The surprise is that the war in question was set to be with the United States of America.

The little-remembered spat arose in 1895 over a disputed border between Venezuela and the then British colony of Guyana. President Cleveland heightened the prospects of hostilities when he told Congress that the US would define the boundary unilaterally – and resist any aggression by Britain should it move troops across the newly determined border.

Britain quickly adopted a more conciliatory stance but as Churchill’s biographer Martin Gilbert notes, the incident was a serious one: “This was the last time that war between Britain and the United States was even a remote possibility.”

What had led to American belligerence – and to its promise to come to Venezuela’s defence – was Cleveland’s interpretation of the Monroe Doctrine – a foreign policy formula which declared that it would prevent non-American powers from meddling in the American continent.

In more recent times, US foreign policy has been far more focused on the Middle East and Afghanistan than on its own backyard, Latin America. And that’s given a non-American power the opportunity to make its move – diplomatically and economically – in the region.

That power is China, of course. Were he alive, James Monroe would no doubt be dismayed by China’s increasing ties with Brazil and Venezuela. Likewise the former US president might be perturbed by a deal signed by Argentina in Beijing last week…

What was the deal?

Argentine President Cristina Kirchner signed an accord with China’s leader Hu Jintao last Tuesday, which will see the Asian superpower invest $10 billion in the South American country’s railways. Specifically, China will invest in 10 separate train projects over the next five years, sending construction teams to build them and providing the rail equipment.

Financing is coming via a soft 19 year loan from the China Development Bank. Given that Argentina has been shut out of the international credit markets since its 2001 default, Kirchner recognised that it is the kind of low rate financing “that doesn’t exist anywhere in the world”.

A badly-needed investment?

Yes, much of Argentina’s train system was built by the British in the nineteenth century, as a means of getting agricultural exports to the coast. Now its piecemeal network and dilapidated rolling stock needs updating, says the Beyondbrics blog. Rising airfreight costs and the flat pampas terrain also make rebuilding the rail network “a smart bet”.

Chinese firms – such as China North Railway (CNR) and China South Locomotive and Rolling Stock Corporation (CSR) – will build a modern, electrified train system. No one’s arguing about their qualifications to get the job done: China now has 86,000km of rail track and plans to add 42,000km more – of which 18,000km will be high speed. Such economies of scale have – in short-order – rendered the Chinese railway experts.

The first priority is to rehabilitate the critical Belgrano Cargas line which runs through Argentina’s agricultural heartland. Cynics say there is more than an element of self-interest in the Chinese offer, as much of the Argentine foodstuffs are headed for Chinese consumers. That project alone will gobble up $1.85 billion of the promised funds.

But self-interest is not the whole story. China has also committed $4 billion to improving the Buenos Aires subway and to creating a metro in Cordoba. As the Transport Politic website states: “These projects provide no clear economic benefit to China.”

Sino-Argentine ties have been strengthening. Trade between the two countries grew from $4 billion in 2004 to $14 billion in 2008, and that is only set to rise. Argentina is now China’s fourth largest trading partner in Latin America. China has now passed the US as Argentina’s second biggest source of imports (trailing only Brazil).

Argentina is also part of a broader Latin American strategy. Deloitte & Touche thinks that Beijing wants to grow trade with the region to $280 billion by the end of this year (versus $140 billion in 2008). And Kirchner wants to capitalise on the ambition: “Argentina is not only important in and of itself, but also as a springboard to Latin America,” she said while in Beijing.

High-speed ahead?

Two years ago Argentina inked a deal to build a high-speed train link (with France’s Alstom) to connect Buenos Aires with Rosario. It has since been delayed.

Will China step in? A CNR insider told Shanghai Securities News that it had signed a deal to provide its own high-speed trains as part of the cooperation. But it seems clear that the first wave of train investment will be about rejuvenating the current rail system, rather than leapfrogging directly to 350km/h train travel. It’s more likely Argentina will get its first high-speed track down the line in five years time.

Not just rail…

Railways have grabbed the headlines. But the Hu-Kirchner deal also had other key aspects. China – which plans to build 100 nuclear reactors to fuel its own energy needs – has offered to build Argentina’s fourth nuclear power station. There were also partnerships announced in shipbuilding and pharmaceuticals.

And in the background was Argentina’s oil. Back in March, CNOOC bought a stake in a firm that owned 40% in Pan American Energy, one of the Argentina’s largest oil producers. CNOOC is rumoured to have approached the British multinational about buying its 60% stake in Pan American and assuming full ownership.

Not all rosy, mind you…

Kirchner arrived in Beijing with one issue very much on her mind: soya oil. China had banned its import in April, supposedly on quality grounds. However, many in Argentina saw it as retaliation for ‘anti-dumping’ measures the South American country had instigated against Chinese textiles and shoes – a move designed to protect its own manufacturers.

No headway was made on the soya oil issue during Kirchner’s trip but it was evidently discussed at length – Argentina is the world’s biggest exporter of the product and China its single biggest customer, buying $1.4 billion of the stuff last year. Argentina’s ambassador to China Cesar Mayoral remains confident the ban will be lifted. “This is going to be resolved, because they need it,” he remarked.

But back to trains…

“China has become an increasingly global player in railroads,” writes the Wall Street Journal. In what might be termed ‘railway diplomacy’, the country has been building lines in Africa, and earlier this month signed an agreement with Turkey to construct a high-speed railway.

Not everyone is pleased by these moves. As the Financial Times reported, the Japanese are upset that core parts of their shinkansen technology have been grafted onto Chinese bullet trains. Kawasaki Heavy signed a deal with CSR in 2004, with its technology transferred to a JV that the Japanese firm hoped could capitalise on China’s coming high-speed boom. But not much of the new trains’ parts are being sourced from Japan, reports the FT and thanks to the transfer of technology the Chinese train manufacturers have become competitors to the Japanese internationally – offering to build high-speed lines for a fraction of what the Japanese charge. The Chinese even hope to beat the Japanese in the greatest prize of all: selling high-speed trains to the US. As one rueful Japanese rail executive told the FT, “we couldn’t imagine the Chinese would catch up so fast”.

But it’s not all gone according to plan for the Chinese either. Its most recently opened high-speed route – Shanghai to Nanjing – is failing to lure passengers due to its higher fares. The rail authorities ‘temporarily’ suspended ticket sales three weeks ago. A hiccup in China’s grand vision for railways? Or an early indicator that not all its infrastructure spending is going to be productive?

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