Chinese Billionaire Says Nicaragua Canal Has Found Investors
Comment of the Day

June 25 2013

Commentary by Eoin Treacy

Chinese Billionaire Says Nicaragua Canal Has Found Investors

This article from Bloomberg News may be of interest to subscribers. Here is a section
Work on the waterway should start by the end of 2014 and be completed within six years, Wang, chairman of Hong Kong-based HKND Group, a privately-held infrastructure development company he wholly owns, said at a press briefing in Beijing. He didn't identify any of the investors.

Nicaragua's Congress earlier this month granted a 50-year concession to Wang for rights to build the canal. The Central American country has attempted to construct an inter-oceanic channel on several occasions since the mid-1800s without success.

The project has political, financing and engineering risks, Wang said, without elaborating. Nicaragua's government estimates the cost will be $40 billion, or more than four times the country's 2011 gross domestic product. It will compete with Panama's century-old canal, which is undergoing a $5.25 billion expansion project that will allow larger ships to pass through a new set of locks.

Nicaragua government gave HKND “a lot of guarantees and a lot of benefits” in areas including land use and tax incentives, Wang said, adding that there is no relationship between HKND Group and the Chinese government. “Facing unprecedented challenges, we confidently head forward,” Wang said at a June 14 ceremony in Managua with President Daniel Ortega, according to a transcript on Xinwei's website. “Let us join hands to the great trumpet sound of human self-improvement.”

Eoin Treacy's view The widening of the Panama Canal has been underway now for a few years and by all accounts will be completed on schedule by 2015. This will allow for two-way traffic on the canal and will also permit larger ships to avail of one of the world's most famous short cuts. Plans are already underway to deepen Gulf of Mexico harbours to cater to larger ships and increased container traffic. A wider canal can only be viewed as a positive from the perspective of global trade and a second canal in a competing country would create competition which should help contain costs.

This article from the Panama Perspective newsletter highlights the fact that while HKND is a privately owned the company, the firm currently doing the feasibility study (CRCC) is a wholly owned subsidiary of the Chinese government. Here is a section:

Here is a proposed route for the canal to be built in Nicaragua if it is built. Recent events have lead many to believe that it could become a reality. The company chosen to do the feasibility is China Railway Construction Corp . CRCC is one of the largest integrated construction companies in China by revenue. The company, which has a market share of approximately 50% in railway construction, has participated in the construction of some of China's most important and landmark railway projects. It is also the sixth largest contractor in the World. It helps that it is 100% owned by the Nation of China. This has huge implications for the project that was thought to be a long shot and touted as a project to be undertaken by numerous countries including Russia. Here is the story.

A Chinese state heavyweight is the company contracted to carry out the feasibility study for the Grand Canal of Nicaragua.

Panama has benefitted enormously from the canal since it took over management and has employed the additional cash in a wide number of infrastructure projects. A great deal of the country's budget planning is tied up in the prospects for the canal expansion and therefore potential competition represents a significant threat. On the positive side, an alternate canal even in a best case scenario is probably a decade away.

Panama's BBB 6.5% 2036 bond yields compressed from a peak near 9.8% in 2008 to a low in October near 3.6%. In common with other emerging market bonds, yields have rallied sharply over the last month. On a price basis the iShares JPMorgan Emerging Market Bond ETF has a similar pattern. While emerging market bonds are short-term oversold, their trends have lost uptrend consistency. Sustained moves back above their respective 200-day MAs would be required to question medium-term potential for additional weakness.

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