Low cost diplomacy, high price gains (cont’d)

Economic Ties

The prominence of China in the Caribbean is a reality that the world will have to contend with, but most certainly the countries of Latin America and the Caribbean.  With three trade and investment initiatives under its belt, China could look forward to expanding further its economic ties with the Caribbean.  The Caribbean should certainly welcome investments from any quarter and develop trade ties with those countries that could help expand and improve standards of living.  That is the whole point of international trade and foreign investment.  The recently concluded economic and trade forum with China offers countries in the Caribbean one more way of pursuing those objectives.  As noted by the Prime Minister of host country Trinidad and Tobago, “China is emerging as a driver of the econo-mies of a number of developing countries…[and its] enhanced role in the Region as an economic partner offers significant potential for attracting substantial investment from Chinese businesses….”.

Rapidly

Not only does China welcome the opportunity to expand its reach into the Caribbean, it is solidifying its relations with developing countries in a way that matches the influence that it enjoys among them.  According to its own news agency, China plans to do that rapidly in the Caribbean using six policy initiatives that it intends to pursue as a means of deepening and strengthening cooperation with Caribbean countries.  All the areas of focus-tourism, environment, agriculture, human development and flows of goods and capital-contain the potential to yield tangible returns for Caribbean countries. China gives itself a 3-year window to meet its goals.  Making this a reality not only requires Chinese aid and loans, it will have to attract greater amounts of Chinese investment as part of China’s growing demand for various types of products.  It is unclear as to what strings might be attached to the new flow of Chinese resources to the region.

LUCAS STOCK INDEX The LSI recorded no gains in the third week of trading in September 2011. The stocks of Banks DIH (DIH), Demerara Bank Limited (DBL) and Demerara Distillers Limited (DDL) traded during the period but all remained stable. As a result, the spread between the index and the risk-free Treasuries due to mature in December 2011 remains unchained.

Many Caribbean countries have a very favourable outlook on the developing China-Caribbean relationship and there are high expectations about Chinese investment in the Caribbean.  With their traditional economic drivers either gone or in crisis, China is nothing less than a godsend.  It can boost the value of the single market and economy.  More importantly, it has the potential to help stabilize Caribbean economies and to provide them with leverage in their relationships with other centers of economic power.  If relations are as constructive as the language of the agreements reached, then the Caribbean should believe that their expectations for better economic times will be fulfilled.

Corruption

As the investments come, the issue of corruption was likely to rear its ugly head.  In the case of Guyana, accusations of corruption have dogged public officials for years and watchdog organizations harbour grave concerns about the true cost of doing business in Guyana.  Corruption has been seen as a principal hindrance to foreign investment in Guyana.  This dissatisfactory behaviour takes place even without stimulus from outsiders.

The issue of corruption has also plagued companies from China in many parts of the world.  It is an issue that seems to follow China wherever it goes.  Many of the corrupt practices that companies from China are accused of are carried out by companies from other countries.  Businesses from China do not hold a monopoly on this unethical activity. Economists and observers contend that some of the economic turmoil in Europe can be traced to questionable practices of past governments and investment houses.  With Chinese investment poised to take off in the Caribbean, it is not a bad time to look at how some of those investments are made.  The availability of information on China’s investment in the US market makes it a good example.

Reverse Mergers

In recent times, the names of some Chinese companies have been associated with various tactics that are helping to expand China’s reach into western markets.  The largest western market is the US economy with a gross domestic product (GDP) of US$14.7 trillion, almost three times the size of that of China.  It is a prize that China is after and appears willing to do anything to secure.

One tactic that stands out is the use of “reverse mergers”, means by which a private company can acquire a public company while avoiding the rules and requirements associated with making an initial public offering. The “reverse merger” also allows the acquiring company to side step the scrutiny of the regulators charged with overseeing the conduct and operation of the securities markets.  This device has been successfully used by a growing number of Chinese companies to enter the US market and to gain access to its stock markets.  The “reverse merger” is a legitimate method available to businesses to buy another business enterprise.

Suspend

While the reverse merger is an acceptable method for acquiring another business and the target company is legitimate, some ethical and questionable activities and business practices of companies controlled by China have raised alarm bells inside the regulatory and investment circles in the USA.  The scope and extent of the predicament is unclear but it has prompted the Securities and Exchange Commission (SEC) to suspend the trading of the stocks of some of these companies.  It has also led the SEC to warn investors about doing business with the suspended companies.

Sudden Resignation

Corruption among some of these companies appears to be extensive.  The SEC has expressed serious doubts about the size of some companies’ operations, the number of employees they claim to have and the existence of certain material customer contracts.  Information emanating from the SEC also reveals concerns over the lack of current and accurate information from these companies.  A common practice is to keep two separate and materially different sets of corporate books and accounts.  The concerns about financial fraud in some of these companies run very deep and have induced the sudden resignation of independent directors and audit investigators hired by the audit committees to investigate fraud.

One More Issue

The use of reverse mergers is not something that Caribbean countries will have to worry about.  However, given that Chinese investments have been linked to corruption in other parts of the world, no one should discount the possibility of it happening in the Caribbean.  Very few can argue that corruption is unique to Chinese companies.  This issue tears at the heart of all economic systems and focuses the attention of regulators in all parts of the globe.  Its impact on small and vulnerable states can be severe, as happened with the collapse of CLICO and Stanford investments in the Caribbean.

Controlling corruption could become one more issue that interferes with the relationship between Caribbean states and their traditional economic partners.  It can also become a tool for exerting pressure on Caribbean economies.  Given China’s economic might and growing global strength, it is something that was unlikely to phase it and curtail its push for economic supremacy.

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