Blowback: China's vendor financing brings its own problems

After awarding a no-bid contract to ZTE, Ethiopian telecom officials are now complaining about the high financing cost.

The news doubtless set off the schadenfreude meter at Ericsson, but bigger issue explored in this Wall Street Journal piece is the problematic role of Chinese state financing of offshore telecom contracts.

The billions of dollars in credit extended by China Development Bank (CDB) and the China Ex-Im Bank are the not-so-secret weapon behind the offshore success of Huawei and ZTE.

That’s not just my opinion. A People’s Daily editorial in March 2010 (reproduced here in Chinese on the CDB’s own website), proudly declares that “the contribution of CDB’s financial support to the international expansion of Huawei and ZTE cannot be ignored.”

According to the Journal, ZTE won the network contract ahead of western vendors in 2006 by offering $1.5 billion in low-interest financing through the state-run banks.

A World Bank investigation last year found that in awarding the contract to ZTE the Ethiopian government, which enjoys close ties with Beijing, appeared to ignore its own procurement rules that require competitive bidding. The WB report also criticized the government for giving such a big project to a single company.

Last year when Ethiopia Telecom issued network extension contracts it split them between ZTE and Huawei, putting itself another $1.6 billion in hock to Chinese banks. Yet even prior to that officials had been complaining that ZTE had charged too much for the original network.

Jia Chen, the head of ZTE Ethiopia, said ZTE had to charge more in Ethiopia because of the project loans' large size and the long repayment period.

Western firms also can get funding to help customers buy their equipment but, unlike their Chinese counterparts, western banks have signed an agreement to limit such lending, especially to countries with a history of debt problems.

Chinese officials routinely dismiss these arrangements as foreign ‘interference’ and insist their financial aid comes with no strings attached.

Huawei and ZTE are just as disingenuous. Eric Xu, now one of Huawei’s three rotating CEOs, told me in an interview in 2010 that the tens of billions of dollars available on credit had nothing to do with Huawei. It was merely something that banks announced for publicity purposes.

Yet it’s the vendors who are liable for repayment of the loans, as firms like Nortel and Lucent discovered after the telecom bubble burst in 2001.

Such massive amounts of easy money offer the temptation for feather-bedding, as Ethiopian officials obviously believe.

In another case, also involving ZTE, the Kenya government last year cancelled a police radio system contract. A review found ZTE had tendered its gear at double normal market prices.

China provided $50 billion in financing in Africa from 1995 to 2012, at least three or four times that provided by the US or Germany over the same period, according to Johns Hopkins University estimates.

Despite the blowback, there’s no chance that this torrent of cash will dry up. But let’s see if Chinese banks and vendors can learn the obvious first lesson and become introduce some transparency in the way they deploy these funds. A little straight talking wouldn't go astray, either.