Prospects for the development of China's foreign contracted projects in 2019

In recent years, China's foreign contracted engineering industry has performed prominently against the backdrop of a global industry slowdown. However, it should also be noted that under the general trend of global economic recovery, all kinds of contradictions and conflicts are more complex, which not only restricts the recovery of the market, but also increases the uncertainty and risk of engineering projects. It should be noted that change brings risks as well as development opportunities. Looking forward to 2019, China's foreign engineering contracting enterprises need to respond positively and enhance the ability of sustainable development with the concept of mutual benefit and win-win.

Global economic and trade environment still faces great challenges

Engineering News Record (ENR) analysis shows that the global market began to improve in 2018 after seven years of slow development, but it may be different in 2019. The foreign contracting market is closely related to the level of economic development, and the global economy as a whole will continue to expand in 2019, with the pace of economic expansion slowing down due to protective measures in some countries, putting pressure on the development of the contracting industry.

The International Monetary Fund (IMF) noted in its January 2019 World Economic Outlook (WEO) that the momentum of global economic expansion has weakened. The economy is expected to grow by 3.7 per cent in 2018, 3.5 per cent in 2019 and 3.6 per cent in 2020, and again by 0.2 and 0.1 percentage points, respectively, after the WEO report in October last year. If calculated at market exchange rates, the world economy will continue to decline from 3.2 per cent in 2017, with a decreasing growth rate of 3.1 per cent, 3.0 per cent and 2.9 per cent in 2018-2020. The decline in economic growth has led to a reduction in government revenue and a decline in private sector business activity, weakening the demand for engineering projects.

Global trade volumes are expected to remain stable at 4.0 per cent in 2018-2020, a 1.3 per cent slowdown from 2017. International trade is not only a reflection of the market supply and demand relationship between countries, but also greatly influenced by the international trade environment and system. In general, the impact of a reduction in the volume of trade due to economic demand on contracted projects is mostly short-term, while the impact of institutional changes such as trade barriers on the volume of trade is relatively long-term.

Commodity prices diverged. Overall, oil prices continued to rise by 29.9 per cent in 2018, building on a 23.3 per cent rise in 2017, bringing global oil prices to their highest level since the onset of the economic crisis. However, due to factors such as slowing economic demand and expanding oil production in the United States, global oil prices are expected to fall by 14.1 in 2019. In 2020, the price of oil is still likely to continue its downward trend, but the decline will narrow to 0.4 per cent. Based on the weight of global commodity exports, non-fuel commodity prices will fall by 2.7 per cent in 2019 and slightly increase by 1.2 per cent in 2020, remaining largely stable after increasing by 1.9 per cent in 2018. Changes in commodity prices are reflected in the willingness of companies to invest in the industry, and the decline in prices has led to a reduction in capital flows into the oil industry, resulting in a shrinking market for such projects. However, non-fuel commodities reflect the industrial demand of economic activities, and basically stable prices are conducive to the development of the engineering industry.

Consumer prices are the embodiment of inflation. In 2018, inflation in advanced economies was 2.0 per cent, largely meeting traditional policy targets, while inflation in emerging markets and developing economies was 4.9 per cent, with inflation slightly higher. Inflation in advanced economies is expected to be 1.7 per cent in 2019 and 2.0 per cent in 2020, while it is expected to be 5.1 per cent in emerging markets and 4.6 per cent in developing economies. Relatively moderate inflation reflects the basic balance between supply and demand in the economy and is conducive to the orderly expansion of the market. The contracted engineering market is greatly affected by inflation, involving equipment, raw materials to labor costs and other aspects. Relatively moderate inflation is conducive to industry cost control, short-term project costs are reduced, and the financial risks of medium and long-term projects are also reduced accordingly.

The cost of capital financing varies depending on the currency. Take the London Interbank Offered Rate as an example. The 6-month deposit interest rate of the US dollar will gradually rise from 2.5 and 3.2 per cent to 3.8 per cent from 2018 to 2020, while the 3-month deposit interest rate of the euro is expected to reach 0 per cent in 2020 from a stable -0.3 per cent from 2017 to 2019, and the 6-month deposit interest rate of the Japanese yen is expected to rise to 0.1 per cent in 2020 from a stable-0% from 2017 to 2019. The change in interest rates shows that the US dollar is still strong, the euro may rise due to the gradual introduction of quantitative easing by the European Central Bank, and the Japanese economy is still relatively weak in the short term. Differences in financing costs in different currencies have an impact on the currency of funds applicable to various types of projects and may also affect the cost recovery of existing projects.

New changes in the market for foreign contracted projects

Global foreign contracting projects have emerged with regional changes. The developed economies as a whole are on a decelerating trend, with economic output falling from 2.3 per cent in 2018 to 2.0 per cent in 2019 and 1.7 per cent in 2020. Output growth in emerging markets and developing economies has been relatively stable, falling slightly from 4.6 per cent in 2018 to 4.5 per cent in 2019 and is expected to accelerate to 4.9 per cent in 2020.

The decline in output was most pronounced in the United States. The stimulus effect of tax reform on the economy is gradually weakening, and consumer confidence is greatly affected by trade frictions. The results of the 2019 232 investigation into U.S. imports of cars and parts that may affect its national security may cause broader tensions, further increasing economic and trade tensions between the United States and European countries and Japan. According to the WEO report, US output is expected to fall to 2.5 per cent and 1.8 per cent in 2019 and 2020 after surging to 2.9 per cent in 2018. Although the United States has completed the "North American Free Trade Agreement (NAFTA)" upgrade negotiations, it still needs to be reviewed and approved by Congress. With the two houses of Congress dominated by two parties, it will not be easy to pass the agreement. Infrastructure development is one of Trump's key campaign promises, but it has not made significant progress in more than two years. Trump's insistence on building the U. S.-Mexico border wall and his willingness to initiate a state of emergency has divided opinions within the Republican Party, making the funding for federal infrastructure construction in 2019 worrying. To take a step back, even if the United States starts large-scale infrastructure construction, doubts about China will make it difficult for Chinese companies to play their own advantages and participate in projects in the US market. Canada's output growth will also slow from 2.1 per cent in 2018 to 1.9 per cent in 2019 and 2020, affected by the weakening momentum of the US economy. In Canada's general election year, it is difficult to introduce a proactive fiscal policy. The impact of the Meng Wanzhou incident on China-Canada relations and Chinese companies' economic and trade cooperation with Canada is difficult to eliminate in the short term.

The European economy as a whole has entered a period of recovery, but economic growth is still weak. The impact of the financial crisis on the financial resources and market confidence of various countries is far from being eliminated, resulting in insufficient motivation for infrastructure investment. Eurozone output recovered to 1.7 per cent in 2020 after falling slightly from 1.8 per cent in 2018 to 1.6 per cent in 2019. Germany, France and Italy are performing similarly, while Spain is weak, with output falling from 2.5 per cent to 2.2 per cent and 1.9 per cent in 2018-2020. German Merkel's announcement to give up re-election as party leader and chairman has brought some uncertainty to German economic policy. The French "yellow vest movement" not only almost led to the stagnation of Macron's reform process, but also had a greater negative impact on the French economy. After the UK started the Brexit process, it had a great impact on the market. The original Brexit was completed by the end of March 2019. It is widely expected that the UK economy will begin to recover after reaching a trough of 1.4 per cent in 2018, with 2019 and 2020 rising slightly to 1.5 per cent and 1.6 per cent respectively. Although the market generally expects that the United Kingdom will be more active in seeking foreign economic and trade cooperation after Brexit, and will also be more favorable in terms of fiscal balance, due to the uncertainty of the Brexit process and method, market investors choose to wait and see, and many companies and Institutions have also transferred their business from the UK to other countries.

Russia's economic performance has remained basically stable. Output grew by 1.7 per cent in 2018, 1.6 per cent in 2019 and 1.7 per cent in 2020. Compared with the previous forecast, the IMF's growth rate for Russia has slowed this year and next. The slowdown in the Russian economy is mainly due to the expected decline in energy prices in international markets such as oil and gas, which may also weaken the development momentum of the Russian oil and gas contracting project market. At the same time, Russian President Vladimir Putin proposed in his 2019 State of the Union address to increase investment in the field of people's livelihood, which may create more opportunities for such contracted projects. With the increase of economic integration in Central Asia, the development of energy, manufacturing industry and regional infrastructure interconnection will still maintain a good development trend. Compared with Russia, the output of other CIS countries grew relatively fast, with a slightly faster growth rate in 2018 than in 2017, and a slight deceleration in 2019 and 2020, but also by 3.7.

India has great potential for economic development and abundant labor resources, and huge demand for infrastructure construction. India's economic growth is expected to accelerate from 7.3 per cent in 2018 to 7.5 per cent and 7.7 per cent in 2019 and 2020, requiring more contractors to participate in infrastructure construction, including power, transportation and livelihood. In recent years, the Indian economy has performed prominently among the major economies, and economic output has continued to grow rapidly. The reform of the financial system has provided better support for squeezing out the gray economy and releasing growth potential. However, it should also be noted that the general election in May 2019 may bring uncertainty to India's future development direction. The cancellation of the GSP arrangement by the United States to India will increase the cost of Indian exports to the United States and have a certain negative impact on the Indian economy. Some Indian public opinion still has different views on China, which is not conducive to the participation of Chinese enterprises in the Indian market. If India can participate more actively in the negotiations of the Regional Comprehensive Economic Partnership Agreement (RCEP), form a low-cost environment for regional factor flows as soon as possible, and increase the construction of infrastructure interconnection projects with neighboring countries, it may provide more effective economic expansion. Support is in the common interests of all parties concerned.

Latin America and the Caribbean is expected to accelerate significantly in 2019 and 2020, with output growth likely to increase from 1.1 per cent in 2018 to 2.0 per cent and 2.5 per cent, but still 0.2 percentage points lower than the 2018 WEO forecast. Among them, Brazil and Mexico are both in the early days of the new president's inauguration. It is expected that with active policy support and confidence in the new leader, economic growth will accelerate, which is conducive to the acceleration of infrastructure construction. However, the situation in Venezuela is still facing uncertainties in the short term, the attitude of the United States in Latin America is not clear, and the regional integration process is difficult to effectively advance, which is not conducive to infrastructure construction.

The economy of the Middle East is greatly affected by oil prices. While Saudi output is expected to grow by 1.8 per cent in 2019 and 2.1 per cent in 2020, a modest decline from 2.3 per cent in 2018, growth in 2019 is a significant 0.6 percentage points lower than the 2018 WEO forecast. The situation in Syria and the conflict in Yemen have shown no signs of stabilization. The Khashoggi incident has pushed Saudi Arabia and the United States to the forefront. The United States moved its embassy in Israel from Tel Aviv to Jerusalem, which led to the intensification of the Palestinian-Israeli conflict and anti-American sentiment. The impact of the situation is difficult to eliminate in the short term, and may even evolve into a more serious security risk. The withdrawal of the United States from the Iran nuclear agreement has led to more turbulence in the region, and sanctions against other countries that conduct normal trade with Iran will inevitably cause a chain reaction among relevant parties, including Iran. The increase in contradictions and conflicts in the Middle East as a powder keg has caused more difficulties for the smooth progress of infrastructure and other engineering projects.

African countries have largely maintained growth, with output in sub-Saharan Africa accelerating to 3.5 per cent and 3.6 per cent in 2019 and 2020, and the two largest economies of Nigeria and South Africa. The recent efforts of African countries towards regional economic integration have provided a better environment for economic development in the region. Western economies such as the United States, Japan, and Europe have increased their interest in Africa, and the flow of funds to this region has increased significantly. The results of the China-Africa Forum have promoted the continuous improvement of Africa's infrastructure network. Projects including roads, railways, airports, ports and electricity have continued to advance, bringing vitality to the contracted project market. It should also be noted that the endogenous driving force for the overall development of the African region is not strong enough, the economic diversification of many countries has not yet been formed, and the strong dependence of economic development on industries such as the exploitation of energy and resources has led to a greater impact on economic development by the international market.

China's contracted engineering enterprises need to speed up the adjustment

China's foreign contracted engineering industry encountered no small challenge in 2018. Statistics show that in 2018, my country's foreign contracted engineering business completed a turnover of 1.12 trillion yuan, and the amount of newly signed contracts was 1.6 trillion yuan, a year-on-year decrease of 1.7 and 10.7 respectively. In dollar terms, the two indicators of China's foreign contracting industry have fallen less, by 0.3 per cent and 8.8 per cent, respectively. As can be seen from the figure below, whether it is the completed turnover or the amount of newly signed contracts, the amount of almost every month in 2018 is lower than that of the same period last year. As a leading indicator, the decrease in the amount of newly signed contracts is greater than that of completed turnover, which directly indicates that the completed turnover in 2019 will bear greater downward pressure.

January 2017-December 2018 China contracted project business volume

Data source: According to the statistics of the Department of Cooperation of the Ministry of Commerce.

In the face of the pressure of the global economic slowdown, the market environment may become increasingly severe. China's foreign contracting enterprises need to make greater adjustments in the competition, improve their efficiency in specific industries and regional markets, and achieve high-quality development.

Concentrate their own advantages of resources, improve profit margins. With the slowdown of the total market growth, Chinese enterprises, as the world's important contracting business providers, are facing stronger tightening pressure. The difficulty of continuing to expand the volume of business has increased significantly, and the marginal effect of continuing to expand the business has decreased significantly. At the same time, with the cancellation of qualification requirements for foreign contracted projects, more and more domestic enterprises are participating in the international engineering market, and enterprises from developing countries are becoming more and more active in market competition, which further reduces the profit margin of the international contracted engineering industry. Contracting engineering enterprises need to re-examine the global market layout, choose areas that are more suitable for themselves and have more sustainable development potential in the industrial chain, and appropriately compress the scope of business.

Increase the construction of global networks to achieve complementarity and synergy. Foreign contracting enterprises should speed up the adjustment of industry management mode, and increase coordination with domestic and foreign enterprises in an open and cooperative mode, so as to reduce costs and improve efficiency. With reference to the development experience of the manufacturing industry, in order to reduce development costs, multinational companies need to carry out more effective cooperation with relevant international and domestic companies, and use alliances or intra-industry coordination to give play to their respective advantages and achieve common development.

Effective use of foreign investment to enhance the competitiveness of enterprises. According to the development experience of leading enterprises in the industry, the growth of relying solely on their own development is slow. Chinese engineering contracting enterprises should plan their development from the perspective of multinational companies and pay attention to the role of capital. Companies should look for opportunities to enhance their competitiveness in the global market, integrate resources with industry-related companies including the host country with a more open attitude, and explore the development path of direct investment such as mergers and acquisitions to improve market development capabilities.

Increase technology research and development efforts to achieve sustainable development. Innovation is the source of excess profits and the driving force of industrial progress. The innovation of contracting engineering enterprises is diversified. We should not only explore practical innovation, improve the response ability and efficiency to diversified market demand, but also actively explore and practice in the field of basic innovation in combination with new technologies. Appropriately adjust the organizational structure and expenditure distribution methods of enterprises, increase investment in technology research and development, and drive the long-term stable development of enterprises with innovation. With the refinement of the division of labor, contracting engineering enterprises can put forward more accurate requirements for the intelligence and specialization of construction machinery and equipment, and realize collaborative innovation.

Entering a New Stage, Intensive Cultivation of "the belt and road initiative"

After more than five years of development, the construction of "Belt and Road Initiative" has been widely recognized, but also questioned. The phase transition from "freehand painting" to "meticulous painting" requires more and more detailed consideration. In 2019, the second "Belt and Road Initiative" International Cooperation Summit Forum was held, which created an important platform for all parties to explore ways to promote the construction of "Belt and Road Initiative" and to solve the concerns of all walks of life in the construction of "Belt and Road Initiative. As an important part of the "five links", foreign contracting enterprises need to play a more important role.

Reasonable participation in the host country's pre-planning. Give full play to the advantages of the enterprise and actively participate in the planning and discussion of infrastructure. Combined with their own experience and lessons, with the host country related parties to discuss the local characteristics of the infrastructure layout and development progress, reduce the negative impact of the project on the economic development of the host country. The resource endowment and industrial structure of different countries determine the differences in the effective path of infrastructure construction. Business recommendations need to be as much as possible based on the needs of the host country, both to enhance its development momentum through infrastructure development and to avoid the unsustainable burden of launching too many projects that exceed current development needs.

High quality infrastructure projects. Enterprises in the implementation of the project, should strengthen the project quality awareness. Design enterprises should fully consider the local economic and social needs and bearing capacity, minimize the impact of infrastructure on the environment, and improve the maintainability of the project. Construction enterprises should explore the use of advanced technology to complete the design requirements with high quality while improving the efficiency of project completion and shortening the construction period. During the construction process, the impact on the environment should be minimized, and the environment should be restored after construction. Actively undertake the necessary social responsibility, respond to the concerns of the host country, and strive to gain more recognition from the local community through the participation of the project.

Explore multiple forms to achieve full-cycle development. Pay attention to the whole cycle management of the project, and actively cooperate with relevant parties in view of the development characteristics of "Belt and Road Initiative" countries. Pay attention to the differences in energy policies of various countries and strengthen cooperation with upstream and downstream enterprises. In addition to the stable development of traditional energy projects, we should also strengthen our participation in new energy projects, cooperate effectively with equipment suppliers, and increase synergy. Under the premise of legal protection, construction enterprises can increase the intensity of capital contracting, find a differentiated development model, and create better conditions for the host country to effectively play the role of the project and the construction enterprises to improve the sustainable level of future profits.

(The author of this article is Zhou Mi, deputy director and researcher of the Institute of International Trade and Economic Cooperation of the Ministry of Commerce)