Sid Meier’s Railroad Tycoon has always been one of my favorite video games. I wasn’t particularly good at it (it took too much time), but the idea was to build a corporate railroad empire in the US during some period in history. In addition to laying your own track and building your own depots and stations, you could also own the raw materials providers that depended on rail transport, as well as the processing plants that turned these inputs into finished goods. You could also buy out your competitors’ empires by astute stock market dealing.
Someone high up in the Beijing government must also be a Sid Meier fan. The president of Colombia, Juan Manuel Santos, in an interview with the Financial Times, says that his country is in advanced talks with China about constructing a 130-mile rail line running through Colombia connecting the Atlantic and Pacific coasts. Combined with a new port to be built on the Atlantic side, the project would serve as an alternative to the Panama Canal.
Talks are farther along than this on another Sino-Colombian project, which would expand the Pacific port of Buenaventura and build another 450 or so miles of track that would speed the flow of Colombian coal to the Pacific, and to China in particular.
what’s at stake
What does Colombia gain from such deals? …in the first instance, modern infrastructure and access to the Pacific Basin to market its natural resources (most of its existing rail capacity reaches toward the Atlantic), without much spending of its own (Colombia’s idea is to use build-operate-transfer concessions, in which China will make the capital outlays in return for the right to operate the ports and rail lines for a specified period of time).
And China? …goodwill; access to Colombian coal; the possibility of extending the rail network into Venezuela, where it is developing extensive oilfields; a way to get around the potential bottleneck caused by restrictive work practices at the Los Angeles area ports.
Is there more? Yes.
Much as a generation ago foreign firms used the UK as a jumping off point for the rest of the EU, Colombia may play the same role for China in the Americas. One could see a reverse flow to the natural resources traffic that would be headed to Asia–components shipped from China to Colombia for final assembly, to be sent from there to the rest of Latin America–and potentially to the Us and Canada as well.
For its part, Colombia is worried about catching the “Dutch disease,” meaning the economic distortions that excessive reliance on natural resources creates. With about half its citizens living below the poverty line and per capita GDP not much higher than China’s, Colombia would welcome the economic oomph that being China’s entrepôt to the Americans would bring.
where the US stands
Politically, the US may consider stronger China-Colombia ties to be a blow to its prestige. On the other hand, Washington is one of the biggest catalysts behind China’s moves. I don’t mean the AFL-CIO’s success since 2006 in blocking a bilateral trade deal with Colombia (which would result mostly in Colombia dropping its taxes on goods exported from the US–go figure that one out!), however.
Just as it did with Japan a quarter-century ago, Washington is vetoing any direct investment from China on “national security” grounds, effectively preventing Beijing from spending its huge dollar holdings on anything other than more Treasury bonds. China is also interpreting (correctly, in my opinion) the unwillingness of Washington to tackle the three largest sources of government spending–the military, Medicare and Social Security–as evidence the US has no real commitment to preserving the purchasing power of the dollar. So Beijing shouldn’t have a particularly high investment hurdle to beat–just not losing money would be enough–in considering projects like those in Colombia.
what should an investor do?
From an investment point of view, I don’t think there’s any need to rush out today and buy Colombian stocks (I don’t even know in practical terms how open the market, soon to merge with Chile’s and Peru’s bourses, is to foreigners). But that country seems to me to be the clear long-term winner from these developments. It may well also be that one or more of the Chinese port companies, which I think are attractive on their present merits, will end up with a significant Colombian exposure.