Moving Along with Belt & Road

07 Nov 17

By Gabriel Wong, PwC China Corporate Finance Leader

The Silk Route once stretched across the entire Asian continent centuries ago but was resurrected after Chinese President Xi Jinping’s state visits to Southeast Asia in 2013. The modern-day Silk Route, which is part of the Belt and Road (B&R) initiative, is redefining economic activities in the greater Asian continent, with its need for economic cooperation and promotion of trade in emerging markets.

Composed of the Silk Road Economic Belt (SREB) and the Maritime Silk Road (MSR), the initiative is expected to become an express lane to facilitate increased trust among neighbour countries and integrate economic collaboration.

Developments are taking place fast. Shaanxi Province, a strategically indispensable area for trade promotions and cultural exchanges, has taken the lead by implementing preferential tariff measures for trading items originally made in or exported to B&R countries.

At the same time, funding has been swiftly and generously put in place. In 2014, Mainland China poured US$40 billion into the Silk Road Fund in hopes of investing in B&R projects, and the following year, provided another US$40 billion in founding capital to the Asian Infrastructure Investment Bank (AIIB) to support infrastructure projects. In the four years from the planning stage to now, Mainland China has started a number of projects including the 420-kilometre China-Laos railway and a US$1.4 billion reclamation project for Colombo Port City, Sri Lanka.

Yet despite all the positive results and effort put into the initiative, some critics still question the intentions behind B&R. Many people believe that this framework is nothing more than a political gimmick by the Chinese government and a geopolitical manoeuvre – yet these accusations are not consistent with the latest news in some of the B&R countries.

Simply put, B&R is not a political tool but a platform to attract countries to join and gain. The long-term goal is to achieve more trade flows, more connectivity, and cultural exchanges.

In April 2017, the London-Yiwu Express train left for Mainland China carrying 30 containers filled with U.K.- made products. This provides a middle ground between costly air freight and time-consuming sea transportation. The London-Yiwu rail trade will help the U.K. expand its foreign trade network and will ultimately come in handy when Brexit becomes effective within the upcoming two years.

While B&R smoothens bilateral trading cooperation, it is also changing the political landscape in Asia. This April, India offered another attractive financing package to Bangladesh, a US$5 billion low-interest loan allowance specifically for national defence and key infrastructure projects. India has actually been investing in the infrastructure sector for decades but has significantly upgraded its competitiveness following China’s B&R announcement. Since then, the country has participated in 17 infrastructure projects including airport and highway construction. The B&R initiative has pushed India to assert its determination to compete with regional superpowers and to have a major defining say in the current economic situation in Asia.

Most importantly, B&R’s core aim is not as an infrastructure program, nor is it an investment portfolio. Although currently at a very preliminary stage, B&R also aims to export Chinese artworks and literature overseas. Since Book of Silk Road Project’s launch in 2014, the organization has entered several inter-translation arrangements with B&R countries including Sri Lanka. These agreements, plus the rising export of classic Chinese literature to over 190 countries, will noticeably increase the presence of Chinese culture in B&R countries and raise cultural exchanges in Asia to a higher and more engaging level.

Bearing this in mind, Hong Kong sits on a prime spot along the Maritime Silk Road and can act as a “super connector.” As a financial megacity situated at the center of international shipping routes, and partially independent of the Mainland under the “One Nation, Two Systems” arrangement, Hong Kong can utilize its unique strategic qualities as a fast track for Mainland China to explore trading opportunities and facilitate RMB internationalization. Ranked no.1 as the freest economy in the world for 22 consecutive years, Hong Kong has accumulated significant experience in capital markets and can serve as a textbook tutorial for mainlanders along the B&R development path. And lastly, not to be overlooked: the unique east-meets-west cultural environment the city has successfully sustained in the past two decades that will be used as a successful city governance example when integrating Chinese culture with B&R countries in the future.

From a long-term perspective, the outlook is bright for B&R trade. The healthcare sector has an optimistic growth outlook due to increasing hospital capacity. The energy sector will likely see significant ramp-ups in national power demand. However, more recent potential can be identified specifically in the railway industry. The trans-Europe rail networks, planned to connect Mainland China to Western Europe, will dramatically reduce the transportation time between Mainland China and European consumer markets. From a more macroeconomic perspective, market expectations will see M&A infrastructure construction rebound in the near future. While the rate of increase will be limited and subject to the outcome of the Communist Party 19th Congress later this year, maturing and consolidation of the Chinese economy should help B&R markets continue to offer riskier but more attractive returns with higher potential for organic growth.

This article was first published in the HKGCC magazine "The Bulletin" May 2017 issue. Please click to read the full report.

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