By Bipul Chatterjee And Saurabh Kumar, Executive Director and Policy Analyst, respectively, at Consumer Unity & Trust Society International

China’s signature economic and foreign policy project – the ‘Belt and Road Initiative’ (BRI), also known as ‘One Belt, One Road’ (OBOR) – is the most ambitious global connectivity project ever launched by China or any country. The project aims to connect 65 Asian, African, and European countries comprising two-thirds of world’s population, through various subprojects. The estimated investment cost for realizing this project is $4-8 trillion.

The goal of BRI is to connect China with Asia, Europe, and Africa through a network of railways, highways, oil and gas pipelines, fiber-optic lines, electrical grids and power plants, seaports and airports, logistics hubs, and free trade zones.

The promise of BRI

First, a promising aspect of this initiative is the potential reduction in transportation costs which would reduce the price of trade more broadly. At a time when countries are looking for specific measures to reduce trade costs and shying away from free trade agreements, a reduction in transportation costs as a substitute for trade deals can effectively widen the volume of international trade. A Bruegel study pointed out that a 10% reduction in railway and maritime costs can increase trade as much as 2%, while the effects of a reduction in tariffs would take a much longer time to be felt. An Asian Development Bank and Purdue University study estimated that improvements in transport networks as well as trade facilitation measures could increase the gross domestic product (GDP) by 0.3 % for India and 0.7 % for the South Asian region as a whole.

This type of development is necessary for a country like India, where a lack of infrastructure and connectivity hampers cross-border trade. According to the Global Enabling Trade Report of 2016, India was ranked 102 out of 136 countries, which is indicative of its limited capacity to facilitate cross-border trade. The Doing Business Report of 2017 estimated that the cost to export (which includes border compliance and documentary compliance) is too high in India ($505) in comparison to other South Asian countries such as Nepal ($373), Bhutan ($109) or Sri Lanka ($424).

Second, BRI presents huge business opportunities for companies engaged in infrastructure development. A total of over $900 billion is expected to be invested in roads, ports, pipelines and other infrastructure as part of the project. This could immensely benefit countries suffering from inadequate infrastructure for their economic development.

Third, from the point of view of trade facilitation there are a number of factors that will create dynamic effects. China may accrue significant long-term trade benefits if it reduces tariffs through free trade zones, particularly on products from BRI countries. Beijing is also expected to reduce some of the non-tariff barriers hampering the prospects of foreign firms doing business in China including in those emerging areas such as internet banking and electronic commerce.

Potential Implications

Apart from the sheer number of participating countries, BRI appears to be both economic and strategic in nature. This became visible during the recently held Belt and Road Forum for International Cooperation in Beijing. The initiative came under scrutiny after European Union officials voiced apprehensions over transparency, labor, and environmental standards. This resulted in the EU’s refusal to endorse a trade statement tied to BRI. India’s non-participation due to sovereignty issues relating to the China-Pakistan Economic Corridor passing through part of Jammu and Kashmir also served as a serious dampener.

Even though BRI seeks to create trade infrastructure around India, it also encircles the country by creating a ring through land and sea routes passing through several countries with which India has sensitive relationships. However, India — with around 90% of its international trade through maritime routes and only 10% by rail and road — is comparatively less likely to see much benefit through enhanced connectivity under the initiative. Most of India’s maritime trade occurs from its western ports located in Arabian Sea and via land routes within the Bangladesh-Bhutan-India-Nepal network.

In presenting BRI, China appears to be unaccommodating with respect to political and diplomatic issues as well as economic concerns. Trade facilitation alone cannot drive trade flow upward. There needs to be smart and secure management of trade routes so that end-to-end supply and value chain networks can be strengthened. In recent times, piracy has emerged as a major potential threat for railways and highways as well as maritime routes. BRI does not address these challenges in a
meaningful way.

Although the project was launched around four years ago, it suffers from a lack of key information, operational strategy, terms of reference, and detailed work plan for the role of partner countries. This has eroded trust.

The Next Steps

While it is true that China’s economic and strategic interests are intertwined, it would have been beneficial for the BRI to be planned more holistically in order to give due consideration to the economic and political interests of other participating countries. For a large project like BRI, an international governance structure involving all the participating countries to institutionalize objectives and safeguard the interests of participants has to be established now with a particular emphasis on financial mechanism. The decision-making structure for the execution of BRI should be based on consensus.

Several sub-projects of various Chinese companies to receive political and financial support from the Chinese government are being touted as part of this initiative but have nothing to do with it and should be de-coupled so that ambiguity can be cleared and only official BRI projects can be materialized. Participating countries should also get equal treatment in the financing of BRI, so that they can also reap the long-term benefits of the project, a step in this direction could be the revamping of the New Development Bank. A clear operational strategy for the entire project with an economic and political matrix should now be made to increase trust and transparency. This should clearly indicate relative as well as absolute potential losses and gains of participating countries. Active participation of global institutions such as the United Nations, the International Court of Arbitration, and International Court of Justice should be included for reliability as well as to resolve a potential dispute.

BRI should be executed in a selective manner with focus on economically viable sub-projects developing trade and economic corridors, for example a Bangladesh-China-India-Myanmar Corridor in the case of South Asia.
 
This article was first published on the East-West Centre in the Asia Pacific Bulletin. Please click to read the full report.

A Plus Magazine, Hong Kong Institute of Certified Public Accountants

China’s Belt and Road initiative is heavy on mega-projects, but Hong Kong is positioned to provide vital “soft” infrastructure such as corporate, financial, accounting and legal services as well as insurance, risk management, capital markets and trade assistance. George W. Russell finds out about possible opportunities for CPAs who think strategically about this US$900 billion building boom.

Four years since Chinese President Xi Jinping announced the Belt and Road initiative – comprising a land route, the Silk Road Economic Belt, and a sea link, the 21st Century Maritime Silk Road – headlines are still trumpeting a seemingly unstoppable wave of huge project announcements.

From bridges in Ukraine to railways in Kenya and ports in Pakistan, the initiative has unleashed a flurry of infrastructure plans. The massive sums involved – and the global reach – have inspired awe, with comparisons to the United States’ Marshall Plan that rebuilt Europe after World War II.

“The Belt and Road initiative has become a central strategy for the Chinese government to boost domestic development and cross-continental collaboration,” says Hu Yifan, Chief China Economist at UBS, a major international bank.

As with all ambitious projects, there is some scepticism. For example, there are hazy ideas about what actually constitutes a Belt and Road project: the Chinese-built ports at Gwadar, Pakistan, and Piraeus, Greece, were under way long before the initiative was announced.

In addition, some of the flagship developments, such as the rail link between China and Europe, have doubtful revenue projections. (Recent loads have seemed just for show, hauling low-value goods like socks). Furthermore much of the land route is lawless. In May, several Chinese labourers were gunned down in Pakistan while working on the Gwadar-Xinjiang corridor.

Despite such setbacks, and whether or not some Belt and Road numbers are fudged, the optimism is real. A survey of large corporations by Standard Chartered Bank and Asset Benchmark Research in March and April indicated that 17 percent of those surveyed were already participating in Belt and Road projects, and a further 23 percent were considering the opportunities.

Hong Kong is also energized. For example, Mass Transit Railway Corporation announced on 18 May that it would team up with partners in China to explore Belt and Road-related opportunities. The company’s shares immediately rose on the news.

“I see Belt and Road as a huge, large scale outbound investment by China into multiple countries,” says Patrick Yip, National Mergers and Acquisitions Leader at Deloitte China and a Hong Kong Institute of CPAs member. “There will be this huge flood of funds, talent, expertise and technology.”

Indeed, Hong Kong businesses are already embedded into the initiative: projects announced in the Mainland include partnerships with Hong Kong companies, such as Hutchison Ports, and Hong Kong-listed subsidiaries of Mainland companies, such as Cosco Shipping Ports.

Hong Kong’s pavilion

The Chinese government says it sees Hong Kong as invaluable to the Belt and Road initiative. “Hong Kong is a global financial trading and shipping centre, home to the regional headquarters of many multinationals and a city extensively connected to the world,” explains Song Ru’an, Deputy Com¬missioner of the Ministry of Foreign Affairs in Hong Kong.

Song defines Hong Kong’s prime position through an old Chinese proverb: “The waterfront pavilion catches the moonlight first,” he says, adding that Hong Kong “has developed into an intermediary facilitating two-way cooperation between the Mainland and the rest of the world.”

Carrie Lam, who takes office as Chief Executive on 1 July, wants co-operation agreements with the Mainland to build Hong Kong into a financial hub for Belt and Road projects. “We shall also encourage long-term asset funds to invest and finance Belt and Road infrastructure projects [and] enterprises will be encouraged to use Hong Kong as a platform for insurance and risk management for cross-boundary investments,” she said in April. Chinese companies, initially mostly state-owned enterprises, but later privately owned entities, will in most cases need a platform outside China for overseas investment, says Yip at Deloitte. “Why? Because not all of these companies are very familiar with outbound investments and many of the Belt and Road coun¬tries are not frequent investment destinations.”

These Mainland entities, he adds, will want to know how they can establish an overseas invest¬ment subsidiary conveniently and favourably from a return-on-assets perspective, and with an arrangement that will be acceptable to the host country.

“Then they look at Hong Kong and see it is an international financial centre,” says Yip. “Many Chinese companies have subsidiaries in Hong Kong. There are a lot of Mandarin-speaking people either from Hong Kong or the Mainland. Hong Kong has a great stock market, an established legal system and a very thriving accounting profession.”

The government is also pursuing legislation more friendly to Belt and Road activities. In the last Budget, it announced it would introduce bills to create open-ended fund company structures in Hong Kong and grant tax incentives for qualifying corporate treasury centres.
 
“Once enacted, this should help attract more group treasury and fund activities to Hong Kong,” says Tracy Ho, Tax Managing Partner, Hong Kong and Macau, at EY and an Institute member. “These activities should enable Hong Kong to play an active role as a financier and investor in the Belt and Road initiative.”

Billions to disburse

The big lure for investors is Belt and Road’s large scale infrastructure. The US$50 billion-plus Gwadar-Xinjiang corridor is a core feature, while other big ticket items include a US$4 billion high-speed rail line from Kunming to Singapore and a US$1 billion-plus port development near Colombo.

To fund such mega projects, Beijing has created a raft of new lending vehicles, such as the Asian Infrastructure Investment Bank, supported by 57 countries, which boasts more than US$100 billion of initial capital to be spent largely, though not wholly, on Belt and Road projects.

“Following the most recent financial crisis, governments around the world have understood the importance of infrastructure investment to raise long term economic productivity,” says Danny Alexander, Vice President of the AIIB and a former chief secretary to the British Treasury. “Hong Kong is a very important centre for many of the services the infrastructure projects and the related infrastructure finance need.”

In addition, the US$40 billion Silk Road Fund, launched in 2014 by China Investment Corporation, China Development Bank, Export-Import Bank of China and State Administration of Foreign Exchange, is dedicated to Belt and Road investment. In 2015, three banks – CDB, Export-Import Bank of China and the Agricultural Bank of China – were given a total of US$82 billion in central government funds to lend for related projects.

Among private companies, those that already have experience in infrastructure plan to leverage Belt and Road into more business. Geert Peeters, Executive Director and Chief Financial Officer of Hong Kong-based utility CLP, says the company has detailed knowledge of several Belt and Road countries. “We have established long term relationships with business partners, financial institutions and equipment suppliers in China,” he says. “They are keen to join hands with us.”

Smaller businesses in the Mainland are equally excited about what Belt and Road can do for the economy. “The initiative should be able to increase the influence of China in countries along the route and attract more customers to the China market,” says Stephen Wong, a Shanghai-based Institute member who is CFO of TTL Holdings, which operates high schools in the Mainland that follow a U.S. curriculum.

Beijing has already sought to attract companies to Belt and Road locations. “We see the benefits of tax incentives, easier financing and faster approval of outbound investment in Belt and Road-preferred sectors,” says Steven Li, Vice President (Accounting and Finance, International Division) of the diversified Sanpower Group conglomerate, and an Institute member.

Rocky road ahead

Some Institute members are more cautious. “As the Belt and Road initiative is a national strategy, it will definitely affect Chinese companies,” says Institute member Steven Li, CFO of Changzhou Xingyu Automobile Lighting Company in Changzhou. “The initiative may bring us more opportunities in export markets but currently there is no big effect yet.”

The vast scale of the Belt and Road means that other international financial centres will also be looking to cash in.

In Dubai, engineering, financial and legal firms are combining to build roads and bridges along the route. The design, construction, finance and operation of a Central Asian hydroelectric power plant were coordinated from London.

Yip at Deloitte echoes outgoing chief executive C.Y. Leung’s statement that Hong Kong should be a “super-connector” for the project. “This is Hong Kong’s hook into China to show the world that we are in a way quite indispensable in terms of getting all this financial capital, human capital and technology out to the rest of the world,” says Yip.

Belt and Road is likely to present unprecedented challenges. “The complexity mostly comes from bridging the very different systems involved,” suggests Ji Xiaohui, Beijing-based Partner at the Linklaters international law firm. “Bear in mind,” she adds, “that Belt and Road aims to expand funding to many countries in which the legal and financial infrastructure perhaps needs to catch up with economic growth.”

There will be myriad geo-political challenges: for one thing, not every nation shares China’s enthusiasm for the initiative. “The majority of the G7 group of countries is declining any involvement,” says Alan Woolston, Partner at the Fladgate law firm in London who works on Belt and Road projects. “And India remains suspicious of China’s motives.”

The U.S. and Japan are among major nations that have not joined AIIB. Yet the Belt and Road Summit in Beijing in May was marked by the last-minute attendance of delegations from the U.S. and its key Asia Pacific allies, Japan and South Korea. “This indicated improved relations since the meeting between Xi and U.S. President Donald Trump in April,” says Hu at UBS.

However complicated the initiative seems in the world’s halls of power, it is being embraced at more grassroots levels. “Belt and Road aligns with our group’s ‘get aboard and go big’ strategies,” enthuses Li at Sanpower Group. “We are very excited about it and definitively welcome it as a policy.”

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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.

By John West, Executive Director of the Asian Century Institute and a Member of the Official Monetary and Financial Institutions Forum (OMFIF) Advisory Board

The Belt and Road is an important Chinese economic diplomacy initiative which should boost development and reduce risks of terrorism in partner countries. Some have called it ‘China’s Marshall Plan’, likening the initiative to the multi-billion-dollar US aid programme which helped rebuild western Europe after the second world war. China’s total investment in the Belt and Road over the next decade is expected to reach $1.6tn.

Many have welcomed China’s bold initiative, which promises to address Asia’s massive infrastructure deficit and could provide a boost to economic growth through market integration. But according to some analysts, countries should avoid China’s infrastructure investment model.

Poorly managed infrastructure investments are one of the main causes of China’s current economic problems. Unless China shifts to a lower volume of higher-quality investments, the country is likely to suffer an infrastructure-led financial crisis.

The rating agency Fitch has highlighted the risks to China’s banking sector emanating from the Belt and Road plan. The agency notes ‘there is a risk that projects could fail to deliver expected returns’ and questions whether China’s banks can identify profitable projects: ‘Chinese banks do not have a track record of allocating resources efficiently at home, especially in relation to infrastructure projects.’

The asymmetries of size and power between China and the participating countries present further challenges. As countries like the Philippines, Vietnam and Japan have discovered, disagreements with Beijing can lead to reduced market access and diplomatic exclusion. China’s assertive behaviour in the East and South China Seas has made Belt and Road partners suspicious of Beijing’s motives.

The upgrade of Sri Lanka’s deep-sea port in Hambantota provoked street protests and opposition by legislators because of the perceived generous concessions to China. When the port became a loss-making burden, the Sri Lankan government entered into a debt-to-equity swap granting state-controlled China Merchant Holdings 85% of the port and a 99-year concession to develop its operations. There are reports of the Chinese navy using this commercial port for visits by military submarines.

Landlocked Kazakhstan could benefit from infrastructure improvements that open the country to Europe. But citizens are protesting against reforms that would allow foreigners to rent agricultural land for 25 years. There is widespread feeling that this would not bring benefits to Kazakhstan, especially since China would import Chinese workers for such projects.

The China-Pakistan Economic Corridor (a $44.5bn package of investment projects) is facing security troubles from the Pakistani Taliban and other militant groups that threaten construction and trade. Meanwhile, provincial administrations and the central government are arguing over the allocation of investment.

As India’s former defence minister, Pallam Raju, remarked, there is a need for more information sharing. ‘China is not necessarily a benign power, and it should be more transparent,’ said Raju. Indian government officials have criticised China’s unilateral, rather than co-operative, approach.

During a 2015 visit to Beijing, Indian Prime Minister Narendra Modi reportedly told Chinese leaders that the China-Pakistan Economic Corridor is ‘unacceptable’ because it passes through Pakistan-occupied Kashmir, an area claimed by India. India fears that Pakistan’s port of Gwadar could become a Chinese naval base, rather than a commercial hub, and understandably fears encirclement in the Indian Ocean by Chinese-financed ports. At the same time, Modi has not offered his neighbours any meaningful alternatives to China’s Belt and Road initiative.

According to Paul Keating, former Australian Prime Minister and now adviser to the China Development Bank, ‘What we’re going to see is a reasonably obvious economic colonisation of the 50-odd states between the western border of China up to at least western Europe.’

Beijing may be able to get some of what it wants by buying the influence of administrators suspected of corruption. But Keating may be underestimating the force of public opinion and popular opposition to China’s perceived colonial ambitions. To realise its goals, the Chinese government will have to take greater account of the concerns and sensitivities of local populations.

Please click to read the full report.

By PwC

The role of international platforms in the Belt and Road initiative

Besides adopting a risk-sharing approach, planning contingency strategies, and strengthening capabilities with key partnerships and government relations, foreign companies can leverage existing international platforms to further position for success. For one, such international platforms help to connect organisations with similar commercial interests, and to facilitate business collaborations and complementary partnerships. Second, they are a resource to gather more knowledge, especially in the case of the B&R initiative, for which portals have been set up to offer more information.

Platforms have been set up by various government bodies and business associations to cater specifically to B&R activities, such as those in Hong Kong and Singapore. In these cities, the platforms are run by government bodies, business associations and non-profit public organisations. In Hong Kong, platforms are offered by the Hong Kong Trade Development Council (HKTDC), a statutory body, and the Federation of Hong Kong Industries (FHKI), a business association. In Singapore, they are organised by government entity International Enterprise (IE) Singapore, and the Singapore Business Federation (SBF), a business association. In United Arab Emirates, the Dubai Chamber of Commerce and Industry, a non-profit public organisation, facilitates B&R partnerships, while the Dubai International Financial Centre (DIFC), a government administered financial hub, provides investors with expertise, legal and regulatory certainty. From the United Kingdom, its business association, the China-Britain Business Council (CBBC), organises events to encourage companies to take up opportunities stemming from the B&R initiative.

Local business communities are well represented at these platforms, as are many global companies, and they play a key role in connecting players across value chains. Their wide international networks often comprise international chambers of commerce, professional services companies and media companies through to infrastructure management consultancies, and private investors and financiers, including venture capital firms and private equity funds, among others. The network of professional services available via these bodies work to provide services from deal making, due diligence and tax structuring to post-deal integration and management.

With a global network of international businesses and professionals, these platforms are meeting points for companies with similar commercial interests. As such, foreign companies that want to establish contacts and look for partners to collaborate in B&R opportunities can leverage these platforms to connect with other global organisations, private investors and local companies from the B&R countries, or network with Chinese enterprises.

Especially with the B&R initiative being led by the Chinese government, international platforms can further play the role of bringing together public and private sector stakeholders ‘with a view to facilitating more efficient and sustainable investment flows into the B&R countries.’

Perhaps more importantly, these platforms are free of government influence and are purely driven by commercial interests and shaped by market demand. Given that the B&R initiative is a strongly China-centric plan, international platforms play a crucial role which is uninfluenced by political interests. In return, this undivided focus then attracts more international participants.

Hong Kong and Singapore as attractive international platforms

Hong Kong and Singapore have positioned themselves as regional hubs for B&R activities. In fact, both countries are already very actively involved in facilitating China’s B&R plans.

Both cities have also traditionally been recognised as excellent gateways for international businesses wanting to do business in their respective regions. This also means that they would have much experience to share in connecting and facilitating a wide established network, having played the role of an international platform and regional hub for many years.

Established international networks of business communities are further key strengths of both Singapore and Hong Kong, in addition to being highly business-friendly, free trade, economically open, low tax regimes, with an absence of foreign exchange controls, a level playing field, a diversified talent pool, world-class infrastructure, and sound and independent legal systems.

They are both strong financial services hubs – with Hong Kong being stronger in RMB currencies while Singapore has the largest foreign exchange centre in Asia Pacific. Also, the Hong Kong Monetary Authority (HKMA) has set up an Infrastructure Financing Facilitation Office (IFFO) to facilitate infrastructure investments and their financing. Singapore already manages about 60% of infrastructure project finance transactions in Southeast Asia.

Despite sharing many of the same strengths, Hong Kong and Singapore also each bear unique propositions as B&R activity hubs.

Hong Kong

Hong Kong’s proximity to mainland China has supported its role as a gateway with access to mainland cities for many global businesses. In the same way it has also been serving as a springboard for Chinese outbound investments and expansion into international markets.

China and Hong Kong have historically had close economic and investment ties, and are bound together by the Mainland and Hong Kong Closer Economic Partnership Arrangement which has boosted trade in the industrial, energy, technology, infrastructure and tourism sectors. According to the HKTDC, about 60% of outbound investments were directed to, or channelled through, Hong Kong. Hence the largest source of foreign direct investment into China in 2015 came from Hong Kong, to the value of US$1.24tn, or 48% of total investment.

Specifically, the key offerings of Hong Kong include a few areas. First, it provides services in global offshore RMB trade settlement, financing and asset management service centres which ‘connect regions along the B&R’ with experience in assisting Chinese mainland enterprises, project sponsors, lenders and private equity funds in structuring and financing public-private partnership projects such as ports, highways and power plants.

Another area is in legal services including arbitration centres and platforms. Also, Hong Kong offers access to information via access to Google Search and channels that may be restricted in China. In some cases, its organisations such as HKTDC have connections to Chinese business stakeholders based outside China. The presence of professional service firms that provide accounting, consulting and tax advisory services is also vital to any B&R project. To date, the HKTDC has connected over 6,100 mainland investors, more than 5,700 overseas project owners and Hong Kong service professionals, and organised close to 4,000 business matching meetings.

Another lesser-known involvement of Hong Kong in the B&R initiative is its expertise in infrastructure management. For example, along the Eurasian Land Bridge economic corridor, a Hong Kong company that originated in Canada was involved in traffic facilitation and logistics management for part of the China–Europe transnational train.

Hong Kong currently plays a key role in B&R activities, which is somewhat overshadowed by other major infrastructure projects in faraway developing countries along the B&R routes. It is almost playing a ‘subject matter expertise’ role in the B&R, and caters to more ‘mature’ B&R activities.

Singapore

With respect to the B&R initiative, Singapore plays a pivotal role as gateway to the Southeast Asia region, which is a key part of the Maritime Belt route. The route connects southern China to Southeast Asia, then connects by sea to South Asia, the Middle East and North Africa.

In addition to being located in the heart of Southeast Asia, Singapore and its corporate enterprises have also always been highly involved in many Chinese-led activities overseas. The country has also been one of China’s largest investors, and had invested up to US$5.8bn in over 700 projects by 2014. On the other hand, it is also one of the top overseas investment destinations for Chinese companies.

Singapore possesses an outstanding business environment that enables it to facilitate investments into Southeast Asia, into which many B&R investments are flowing. As such the Singapore government is positioning the city as an infrastructure financing hub for the region, where a critical mass of international banks is based with project financing capabilities. An estimated 60% of ASEAN project finance transactions are arranged by Singapore-based banks.

Complementing its role as financing hub, Singapore hosts a full suite and increasingly growing ecosystem of players across the infrastructure supply chain – from project developers and EPC firms to professional services providers and development finance institutions. For these Singaporebased businesses, the B&R initiative also presents collaboration opportunities with Chinese companies for infrastructure, logistics, and other projects in the region.

In fact, Singapore itself is an investor in the B&R initiative, having committed about S$90bn (roughly US$64.5bn) worth of financing services for B&R projects across the region, signing off on an MOU with some of the largest Chinese banks last year.

As part of the B&R initiative, Singapore and China have launched a joint project, Chongqing Connectivity Initiative (CCI), which aims to ‘catalyse the development’ of Chongqing in Western China, as well as in Singapore. The initiative focuses on four areas for bilateral collaboration including finance, aviation, transport and logistics, and infocommunications technology. In the financial sector, more than US$6bn-worth of deals were concluded in 2016. In the aviation sector, Changi Airport will work with Chinese authorities in the development and operations of the new Chongqing Jiang Bei Airport. The plan also includes building a transportation and logistics ‘multi-nodal’ hub in Chongqing.

Knowledge and expertise exchange is another key area of collaboration in the B&R initiative. Being renowned worldwide as a clean and green city that has well-integrated urban skyscrapers and highways with greenery and nature, Singapore can work with China to exchange urban planning expertise, complementing China’s strengths in construction and financing.

Evidently, Singapore and Hong Kong are well positioned to facilitate and help companies navigate through the B&R activities, also offering ideal business environments to support business transactions and having set up entities specifically catered to B&R activities. This could greatly support a foreign company in its risk mitigation strategies and to better position itself for success in B&R activities.

This article was first published in the PwC report “Repaving the ancient Silk Routes” June 2017 issue. Please click to read the full article.

By PwC

Whilst the opportunities for foreign companies to participate in B&R projects are numerous and diverse, such projects are frequently developed under conditions which are complex and often beyond a company’s control. Particularly in the growth markets in which most of the B&R projects are planned, institutional voids can prove to be very disruptive to project completion.

Foreign companies may well find their usual project management evaluation and approach inadequate amidst the institutional voids which characterise many of the countries along the B&R routes, such as inconsistency in regulatory regimes and underdeveloped credit markets.

Regulatory regime inconsistencies

Inconsistency in regulatory regimes affects many B&R projects, as many such projects are involved in monopoly sectors (e.g. power grids), or operate assets of national security interest (e.g. oil refinery and storage tanks) which require close regulations to avoid abuse of monopoly power or compromise of national interest. The investor returns are also closely tied to public subsidies for projects such as public transportation, therefore posing a direct impact on the firm’s ability to make revenue and service the loans. Given the direct and substantial impact of regulatory regimes on the projects, any inconsistency in the policy development and implementation could cause problems in project operations.

Underdeveloped credit markets

Even though China is committed to financing the B&R projects, many private investors are still concerned about the underdeveloped credit markets in many of these countries. Limited visibility for fund monitoring and the weak enforcement of contracts which is typical in a developing market can be amplified if the company gets involved in a large-scale B&R project which involves the management of a complicated and constantly-changing network of contractors and subcontractors. If not managed properly, companies risk getting trapped in a labyrinth of financial turmoil, which could eventually lead to cost overrun or even unbankability.

Therefore, acknowledging that these voids exist in a variety of forms depending on the specific growth market, it is important for companies to proactively identify, evaluate and manage the different types and scale of risks they might face when participating in B&R projects.

In this section, we will be highlighting three pertinent risks – geopolitical, funding and operational – which are most
associated with B&R projects, and how they manifest themselves.

Geopolitical risks

Geopolitical dynamics have a significant influence on regulations, which play a central role in many infrastructure projects. In addition, the long gestation periods that outlast political cycles, the significance to bilateral relationships and the cross-territorial involvement of B&R projects further heighten geopolitical risks.

Long gestation period

Infrastructure projects usually take a number of years to complete and they often outlast political mandates, exposing the project to potential policy changes under different administrations. With a long asset lifetime and contractual relationship, as well as the payback beyond political terms, companies need to be assured that the government currently in power meets the commitments so that their investments will not be adversely affected by future administrations. Therefore companies need to get a good grasp not only of the regional, but also the local political goals. The positions of the opposition parties are also critical, especially in understanding what they will support and block and their goals if successful in gaining power.

It takes consistent political will with sustained focus and a positive relationship with China to see the project through. Yet political will and sustained focus remain a greater challenge for many B&R projects, which are inevitably influenced by the changing local political dynamics in the host country. Governments need to assert their efforts against adversary consistently to ensure the progress of B&R projects.

Significance to bilateral relationships

Many B&R projects play a significant role in bilateral government relationships as they are often keynote projects pivotal to the economic development of the host countries. One such example is the Standard Gauge Railway project in Kenya. The US$3.8bn project, with China Road and Bridge Corporation as the prime contractor, plans to connect the relatively large economy with a port of East African importance to a number of landlocked economies, unlocking intra-Africa trade opportunities. In another instance, Laos will be embarking on a US$6.8bn high-speed railway project as part of the B&R initiative, which represents more than half of the impoverished country’s GDP. The B&R initiative projects are therefore regarded as a much-needed investment and economic stimulus to economies distressed by depressed energy prices and weak global demand.

As China’s B&R investment addresses critical developmental bottlenecks in host countries, it is often perceived as an affirmation of the political ties between the two countries. However, these ties cannot be taken as guarantees of success. As such, these government to government agreements can potentially draw reactions from opposition parties and private sector bodies.

Cross-territorial involvement

Aside from typical bilateral government relationship factors, the geographically expansive nature of the B&R initiative raises geopolitical concerns. Some countries have expressed concerns as to the dominant foreign ownership and presence across the different trade routes. Connectivity, the concept that the B&R initiative expounds on, was identified by India’s Foreign Secretary Subrahmanyam Jaishankar as having ‘emerged as a theatre of present-day geopolitics’. It is also noteworthy that the countries where B&R projects are planned and the nations which have concerns suffer from varying degrees of vulnerability from the lack of developed institutions and political stability.

B&R projects tend to straddle multiple territories, with the eventual objective of establishing a connection across large stretches of land and sea, and some of these projects are in the middle of cross-territorial disputes such as the Amu Darya River between Tajikistan and Uzbekistan. Therefore, given the projects’ influence on both internal political dynamics and unilateral relations, companies might see themselves in the nexus of greater geopolitical currents as the B&R projects reflect China’s relationship with the host country and its region.

Funding risks

Large infrastructure projects often hold a high financial risk. The high capital intensity of these projects leads to a high debt service ratio, long pay-off periods, and uncertainty of forecast demand. The challenges are often exacerbated in cross-border projects where the structuring of finance needs to take into account different currencies and national financial capacities.

Financial risk takes on a different facet in B&R projects. There are typically three main sources of global financing for B&R infrastructure – the Chinese government (mainly policydriven state funding), the host government and private institutions. Multilateral banks such as the World Bank, Asian Development Bank, and the AIIB also contribute some funds to B&R projects amongst other mandates.

To date, the Chinese government has taken on the lead financing role as many developing countries have limited means to fund the B&R projects in their country. Projects also vary in their ability to provide profitable returns.

Private funding is also still limited as many companies are concerned about the transparency of fund management, the effectiveness of the cross-border regulatory framework and the bankability of some of the projects. This funding gap therefore creates the most pertinent financial risk which needs to be addressed for B&R projects to take off.

Chinese government taking the lead

To date the Chinese government has taken the lead on B&R projects. Until 2016, there was at least US$186bn worth of investments or loans into B&R countries, of which a significant portion originates from China. However it only makes up a fraction of the potential infrastructure demand in the developing markets. PwC’s Strategy& estimates the potential infrastructure demand in the developing markets to be around US$10tn from 2015 to 2025, of which the main sources of financing identified only constitute about 2% of the financing needed to fulfil the infrastructure demand. While China might potentially increase its funding, it is unlikely to finance the B&R initiative entirely.

Host countries’ ability to pay

The host countries’ varied ability to pay is another concern. The B&R initiative is a debt-financed infrastructure development strategy. In contrast to aid packages or foreign direct investments, China’s lending plans place greater ownership of the financial risk on the recipients of the investment, most of which are developing countries with varied ability to finance them. Sixteen of the 65 countries on the B&R initiative are not rated on a sovereign basis. And of those that are rated, the countries’ creditworthiness ranges
from AAA down to B-.

The host countries’ varied ability to repay could also potentially lead to a network of interdependence guided by the exchange of resources and asset ownership. Some African countries are already approaching China to reschedule, freeze debt repayments or to pay back with resources for previous infrastructure projects.

Private funding cautiousness

Given that China is unlikely to fund the B&R initiative entirely, and host countries have varied ability to finance the projects, private capital is much needed to close the funding gap. However, the bankability of the B&R projects remains a pressing concern to the private investors. Many investors are still adopting a wait and see approach to see how the state capital will be deployed, and whether the initial investments will deliver their benefits. Private investors need to gain assurance in the transparency of fund management and the effectiveness of the cross-border regulatory framework supported by market principles to support a business case for business returns. China also needs to allay concerns that institutions might get entangled in projects where commercial logic and demand for public transportation are perceived to be secondary to political considerations. Until then, companies need to be mindful of the financial risk in many B&R projects.

Operational risks

Large-scale infrastructure projects are vulnerable to going off track whilst being executed with many suppliers and contractors over several years. The different legal frameworks, volatility of exchange rates, potential incompatibility of technical specifications, differences in trading terms and greater likelihood of political interference further exacerbate the challenges in multi-territorial projects. Many of these lead to risks of delay, cost overrun or even un-bankability of the projects.

These risks may be compounded in B&R projects where key stakeholders are still gaining experience in infrastructure development and international projects of the complexity of the B&R initiative. These struggles are prevalent across different phases of the project life cycles: before starting, during project delivery and after construction.

Before starting

As an unprecedented endeavour that covers multiple underdeveloped territories, the B&R initiative brings many projects into new markets. It is therefore critical to appreciate how labour resourcing, construction equipment, logistics and scheduling in multi-country projects can be affected by the culture, traditions, labour productivity and technical proficiency in the host country before a project begins. However, these are often learned in retrospect. It becomes even more challenging in some B&R projects, where assessment of economic viability and project governance sometimes play a supplementary role in the larger context of the high-profile government-to-government negotiations that are taking place.

During project delivery

As many B&R projects are being built in developing markets, companies have to contend with the fluidity of business in developing markets, such as a reduced sensitivity to timelines, having agreed positions re-opened, suggested recourse at every hurdle or sudden retraction of credit lines during project delivery. The gap in international experience could potentially make it even more challenging as the Chinese SOEs and the host countries work on improving their project controls, resources allocation and communication with stakeholders during project delivery. As a result, much of a firm’s finances and capabilities can risk getting caught in myriad project lapses.

After construction

Operational risks also go beyond the capability of defining and delivering the project. In many instances, it is not possible to extract the long-term value of the investments due to gaps in the development of consistent policies and supporting institutional arrangements in developing countries, which most B&R countries are. Without the establishment of a sound strategy which prioritises catalyst projects that set the economic activities in motion, or the development of supporting facilities and local competencies to maintain the asset, the project could easily descend from hyped expectations into a debt burden.

In summary, a B&R infrastructure project is not a one-time investment. Companies need to consider whether a cohesive programme of initiatives is planned to support the project during the evaluation, or they will face greater headwinds in operating profitably. It is therefore critical for companies to remain vigilant in operational planning, because without proper management of operational risks, even strong policy and financial support will not guarantee success.

B&R holds rich promise but has associated risks. The nature of B&R projects also further accentuates the geopolitical, funding and operational risks. Only with a clear understanding of the potential risks that B&R projects operate in, can companies find the best ways to manage them.

This article was first published in the PwC report “Repaving the ancient Silk Routes” June 2017 issue. Please click to read the full article.

By PwC

International partnerships

Since the late 1990s, China has sought to internationalise in order to enhance its competitiveness on the global stage. Its increased focus on overseas acquisitions has been a progressive approach to build on existing capabilities and create access to new markets, which has been further emphasised in China’s 13th Five-Year Plan announced last year.

From the Growth Markets Centre’s conversations with the Chinese players, we have found that they continue to be keen on partnering with global players, especially those from developed markets. Such partnerships not only help further push the boundaries of capability development for Chinese enterprises, but also offer a way to work with experienced companies across the value chain, in order to drive the optimisation of asset management. Partnering with other international players which have prior experience in markets can help Chinese enterprises benefit on many fronts.

Collaboration between China and foreign companies on B&R projects offers benefits for both parties in two main categories: ‘knowledge exchange’ for Chinese SOEs and ‘access to new mega projects’ and the associated ecosystems for foreign companies.

With this in mind, we believe that foreign companies, MNCs and financiers can partner with Chinese companies in B&R activities on three levels: supplies, construction partnerships, and financing and/or divestment.

1. Investment of assets

International investors and financiers can also tap into the opportunity to partner with Chinese companies by providing capital and investments. Belt & Road projects are usually explicitly or implicitly backed by the Chinese state and therefore there is an improved risk-return ratio in many situations. Furthermore, given that host governments along the B&R will have received significant financing and support from China and multilateral banks, these governments will take more care to minimise disruptions. However, it must be acknowledged that not all B&R projects are guaranteed sound investments, even with Chinese and host country support, as some projects will be deemed strategically important even if they are not obviously profitable. Nevertheless, it has been seen that China does welcome investment support, to bridge the funding gaps on many infrastructure projects.

For example, Qatar’s Al-Mirqab Capital partnered China’s SOE SINOHYDRO Resources with a 49% share in the construction of a thermal power plant in Port Qasim, Pakistan under the US$ 46 bn China – Pakistan Economic Corridor owing to the attractive returns and significantly mitigated risks made possible because of backing by SINOSURE to cover a wide scope of risks. As a result, the ‘multilateral publicprivate partnership (PPP)’ project built on a Build-Own-Operate (BOO) basis offered attractive returns with significantly mitigated risks, attracting further investments from Qatar’s Al-Mirqab Capital.

Foreign MNCs can also explore opportunities to invest in Chinese instruments such as entering into limited partnerships in a Silk Road Fund or CITIC fund, or by coinvesting
in Chinese led projects.

There have been several examples of private equity funds set up to invest in B&R projects, such as the US$4.8bn Green Ecological Silk Road Investment Fund. This is the first ever Chinese PE fund aimed at improving the environment, backing projects on solar panel construction, clean energy and ecological remediation in China and B&R countries. Investors were made up of top Chinese enterprises such as China Oceanwide Holdings Group, Huiyuan Group and Sino-Singapore Tianjin Eco-city.

General Electric has pledged a US$1bn infrastructure fund in Africa to help finance projects in the continent following the growth of its orders from Chinese SOEs and its increasingly close cooperation with Chinese EPC firms in the electric power, railway, and healthcare sectors in Africa.

Similarly, Maersk Group, a Danish container shipping and oil conglomerate, also has plans to co-invest to offer transport services to its Chinese partners on B&R projects in the next ten years. The company sees the B&R initiative as a platform to tap into growth opportunities both inside and outside China, after being hard hit by the decline in container freight rates and oil prices in recent years. One of its first ventures was with China’s Qingdao Port Group to jointly invest in a new port terminal in Vado Ligure in Italy, due to be opened in 2018.

China is also currently Maersk’s largest export market, accounting for 35% of the Danish company’s export volumes. It is seeking to further ‘develop closer links with Chinese companies involved in these two trading routes’. Its terminal arm, APM Terminals, is also working with the state-owned China Communications Construction Co. (CCCC) to build a port in Tema, Ghana, and has awarded lead contractor status to a subsidiary of CCCC.

2. Partnerships in Engineering, Procurement and Construction (EPC)

The B&R initiative also provides foreign companies with the opportunity to be an EPC partner with enterprises from both China and countries along the B&R in order to share their globally renowned technological expertise. This experience is even more valuable when it relates to knowledge of certain key geographies along the Belt and Road, which companies from China and the B&R countries might be new to. This has been seen to be successful with traditional Spanish partners in Latin America or French companies in Francophone countries.

Global partnerships also offer Chinese SOEs legitimate opportunities to learn about cutting-edge standards, technologies and solutions for developing markets. For example, foreign MNCs’ best practices on the environmental front – featuring environmentally-friendly designs and engineering, efficient buildings, advanced waste processing and energy-efficient transportation hubs. Chinese players can benefit and gain a competitive edge with host governments and constituents that increasingly care about the environment.

The benefits certainly go beyond the B&R project itself on both sides. The partnerships which are formed on the B&R project can often extend in home countries to provide foreign companies with strong partners for access to the China market and vice versa. It is necessary to strike a balance between collaboration and competition from a long-term perspective.

In other cases, partnerships with local EPC firms are sometimes favoured. KazMunayGas (KMG), a Kazahstani oil and gas company involved in the exploration, production, refining and transportation of hydrocarbons, has made a joint venture with the CEFC China Energy Company (CEFC China) to develop oil refining and gas station networks in Europe and Silk Road countries. Apart from possessing critical knowledge and experience of local EPC firms with infrastructure construction in their own countries, partnering with Chinese players also supports technology and know-how transfer, making it possible for the local firm to also eventually operate and manage the infrastructure.

In another example, Northern Railways, a subsidiary of Aspire Mining, an Australian exploration company focused on Mongolia, won the contract to build and operate a 546km railway to extend Mongolia’s national rail network from the city of Erdenet to to Ovoot, the site of the Ovoot Coking Coal Project, a large scale project in Mongolia. The project has since been included in the Northern Rail Corridor connecting Tianjin port on China’s east coast with Russia via Mongolia, and opens up the possibility of funding by the SRF and China Export and Credit Insurance Corporation (SINOSURE), etc.

3. International Project Management

The need for strong project management is even more pronounced when infrastructure projects straddle multiple territories or are based in remote locations. Although many enterprises from those countries along the Belt and Road, including China, may have plenty of experience in constructing large and complex infrastructure projects in one country, they might not have as much experience in doing so across multiple countries in remote locations. It is in this instance, that foreign companies with the experience of overseeing and managing complex infrastructure projects involving multiple countries and stakeholders have a potential role in partnering with companies along the B&R.

In remote locations, the regional community might have limited experience in supporting large projects with adequate services, such as sub-contracting work, supplying equipment and providing international banking services. Furthermore, lapses in the data communication infrastructure could potentially hinder communication between the work site and the decision making office. Given these risks, partnerships with foreign companies with proven experience in the delivery of cross-territory projects in remote locations will be critical for success.

4. Supplying construction equipment and machinery

Chinese EPC players have already been working closely with foreign MNCs on B&R projects, especially those which possess global expertise in manufacturing technologically advanced equipment and solutions as well.

Equipment and technology suppliers can support Chinese companies’ overseas infrastructure and industrial projects in much the same way as they have been supporting Chinese customers’ projects within China for the past decades.

General Electric, which supplies construction equipment to Chinese EPC companies, reported that its total orders from Chinese EPC companies – of which 40% of equipment will be manufactured in China – have increased threefold from a year ago. Its involvement and cooperation with Chinese SOEs is also deepening, from being an equipment supplier to an integrated solutions provider in financing and operations.

General Electric’s most recent order was to supply equipment including steam turbines, boilers and generators for a power plant along the China–Pakistan Economic Corridor. According to the general manager of the joint venture established for this project, General Electric was chosen for its ‘global expertise in manufacturing key equipment for coal-fired power plants’ and ‘proven track record in Pakistan’.

Such partnerships with Chinese customers outside China, as described above, can sometimes bring benefits to foreign companies’ business inside China.

5. Operation of assets

The experience and skills needed in constructing a new railroad, highway, dam, port or airport as compared to operating it efficiently and profitably are very different. This is accentuated in Belt & Road projects due to the numerous geographies, governments and stakeholders involved. This therefore provides an opportunity for operators with experience in managing such complex facilities. For example, the operators of foreign airports such as in Europe, may find that their knowledge and expertise is of value to governments along the Belt & Road, who have built new airports, but need support in running them effectively and profitably.

Operators can bring their expertise in managing not only the infrastructure facility itself, but also aspects of the supporting ecosystems such as key suppliers, labour unions and key customers. Experience in effectively managing these aspects will help to ensure that the facility operates effectively, meets its expected targets and also is well maintained, thereby ensuring its projected lifespan is met. Both of these factors lead to the increased effectiveness and profitability of the facility.

6. Divestment of assets

In addition to supplies and sales, foreign companies can also leverage Chinese outbound investments as sources of financing for their divestments. This falls in line with China’s progressive acquisitions to enhance capability in its enterprises, and at the same time offers the foreign company a way to liquidate its assets for financing.

For example, Gamesa Corporacion Tecnologica, a Spanish manufacturing company principally involved in the fabrication of wind turbines and the construction of wind farms, sold its 28MW Barchin project to one of China’s five largest state-owned electricity providers, China Huadian Group Corporation, at US$161mn. The Barchin project, located in Cuenca in east central Spain, features 14 Gamesa G90 2MW turbines and began operating in 2012. For Gamesa, the deal was a way to unload its assets and reduce debt. Beyond this, the deal could also help Gamesa cement its ties with Huadian, another long-standing customer and partner in China, possibly even opening up access to China’s growing offshore wind market.

This article was first published in the PwC report “Repaving the ancient Silk Routes” June 2017 issue. Please click to read the full article.

By Frans-Paul van der Putten, Senior research fellow, Clingendael Institute

On 24-26 May 2017, the first Balkans and Black Sea Cooperation Forum took place in Serres, Greece. The forum aims to strengthen cooperation throughout this region in various regards, including in terms of transport and infrastructure. One of the topics debated at the forum related to the role of China and its Belt and Road (also known as ‘One Belt, One Road’ or OBOR) initiative to build a modern-day silk road.

It is in the Balkans and Black Sea region that the contemporary equivalents of the silk road on land (via Central Asia) and the maritime silk road (via the Indian Ocean and the eastern Mediterranean Sea) meet each other and connect to Europe. A land route via the Black Sea region would provide China with a transport corridor to Europe that avoids areas that are part of, or militarily controlled by, Russia or the United States. It is to China’s strategic benefit if it succeeds in decreasing its dependence on trade routes that can easily be disrupted by other great powers. The greatest relevance of the Balkans peninsula at this time relates to the port of Piraeus in Greece, which is the main Mediterranean base of China’s largest shipping company, COSCO Shipping. China’s involvement in Piraeus may develop into a greater Chinese role in trade, finance and manufacturing throughout the Balkans and Central Europe. This would then further strengthen China’s interest in developing the Black Sea region as a part of the China-Central Asia-Europe trade corridor.

China’s focus points

The Chinese government engages with countries in the region mostly on a bilateral basis rather than collectively. There exists a platform for cooperation between China and 16 countries of Central and East Europe (the so-called CEEC 16+1) that involves the Balkans region and that is strongly focused on OBOR, but most actual projects between China and Balkans countries are the outcome of bilateral interaction. A similar regional platform for engagement between the Black Sea region and China does not exist. The Organization of the Black Sea Economic Cooperation (BSEC) could potentially fill this gap, but the Chinese government has so far not yet made use of this platform to discuss OBOR multilaterally.

Notable focus points for Chinese companies and the Chinese government in the Balkans and Black Sea region are port management in Greece, infrastructure construction in the Western Balkans and Turkey, agricultural production in Ukraine and the energy sector in Romania and Greece. In addition, Chinese companies are also active in the region in telecommunication, manufacturing and banking.

Two key countries in the region are Greece and Serbia. Both countries were visited by President Xi Jinping in recent years. They provide China with footholds within the region from where it can build up its OBOR activities by way of a step-by-step approach. Progress is slow: the privatization of the port of Piraeus met with substantial delays until Cosco was able to acquire a majority share in the port in 2016. Currently the construction of a new railway track between Belgrade and Budapest is also being delayed as a result of concerns from the European Commission as to whether the agreement between Hungary and China follows EU government procurement rules. Under this agreement Chinese entities will finance and build the railway. The Chinese government and Chinese investors appear to be waiting until the so-called Land Sea Express Route (the transport corridor from Greece via the Western Balkans to Central Europe) has progressed further before engaging in major new OBOR projects in other parts of the Balkans.

With regard to the Black Sea region, the involvement of the Chinese government in OBOR projects is more limited than in the Balkans region. China seems to be cautious not to antagonize Russia and to be taking into account Russian geopolitical sensitivities in the Black Sea region. Given their location, both Georgia and Ukraine could potentially be close diplomatic partners and hosts to major China-funded infrastructure projects. However, they are also former Soviet republics that have strained relations with Russia. Judging from maps with projected railway links that circulate in China, the Chinese government seems to favour a transport corridor to Southeast Europe from China via Iran and Turkey rather than via Georgia or Ukraine. This suggests that China's approach cannot be understood exclusively on the basis of economic factors: geopolitical considerations should also be taken into account.

Seizing the initiative

In terms of geography, the potential of the Balkans and Black Sea region is promising but the Chinese government and Chinese investors seem hesitant to commit to major projects in the region apart from the current flagship projects in Greece (Piraeus port) and Serbia (railway to Hungary). To realize this potential, local governments, regional organizations and the private sector could take the initiative. The new silk road is being shaped not only by China but also by non-Chinese actors. By investing in infrastructure and facilitating east-west (across the Black Sea) and north-south (across the Balkans) corridors, regional actors can enhance their role in OBOR and stimulate engagement by China.

Geopolitical implications

The new silk road will increase China’s influence in the region. This could further complicate the unstable relationship between Russia and the West. In the longer run, Sino-US and/or Sino-Russian geopolitical competition could destabilize the region. However, China is careful to avoid this outcome, and its growing influence also provides new opportunities for Russia, the EU and the US to work with China towards regional stability. The formula used to stabilize Sino-Russian relations in Central Asia, by way of the Shanghai Cooperation Organization, could provide a starting point for a joint mechanism for the Black Sea region that involves regional countries as well as Russia, NATO and China.

The European Union needs to signal clearly that it favours regional development and that it is open to cooperating with China to this end. If OBOR can contribute to the economic development of the Balkans and Black Sea Region then the EU should take an active approach that seeks to maximize this contribution within its strategic interests. There is a danger that countries in Southeast Europe and around the Black Sea, whether they are EU member states or not, will increasingly feel that their interests are ignored as a result of geopolitical and economic competition between China and the EU as a whole, and between China and Western Europe in particular. If these sentiments are not adequately addressed the EU’s south-eastern flank will be vulnerable to destabilizing forces such as great power competition and conflict in the Middle East.

Please click to read the full report.

By Suan Teck Kin, CFA and Ho Woei Chen, UOB Group

Belt & Road Forum Reaffirms China’s Stance On Mutual Cooperation

In the recently concluded Belt and Road Forum for International Cooperation (“BRF”, held in Beijing on 14-15 May), attended by more than 1,500 delegates from over 130  countries and some 70 international organizations, Chinese President Xi Jinping noted the need to join hands to meet the global challenges in the principle of extensive consultation, joint contribution and shared benefits. Therefore the Belt and Road Initiative (B&R) will be one means to align countries’ policies and integrate economic factors and resources in a global scale to create synergy to promote world peace, stability and shared development.

Chinese President Xi Jinping noted that Belt and Road Initiative (B&R) is about building partnership and not forming alliances, suggesting the initiative is leaning largely towards a trade/commerce approach rather than from political angle. Another contrast is the position China has taken with B&R, that is towards more open, inclusive, and globalized trade, investment, commercial, cultural, and peopleto-people exchanges, compared to increasing trends towards inward looking, nationalistic, exclusionary, and populist policies adopted by some major economies. The BRF also serves as a checkpoint for the Initiative first mooted by President Xi in 2013, to gauge the successes and challenges as it moves forward. The next BRF is scheduled to be held two years later in 2019.

Size Of B&R A Force To Be Reckoned With

As seen in the table below, B&R countries along with China, are an economic force to be reckoned with as its size is equivalent or even larger than some of the trade blocs. While B&R is not a trade bloc, its economic size is equivalent to that of the TPP (including US) at 40% of global GDP, though with the US’ withdrawal, TPP will be just a shadow its former self. B&R countries also have access to large block of population at 4.4bn, which is the largest compared to other potential trading blocs. This means that with infrastructure especially transportation and communications network being built up, B&R will indeed present large scope of opportunities for commercial and people-to-people exchanges.

As nearly 40% of the global economy consists of emerging economies (in 2016, vs. 20% share in 1996), a more inclusive and open arrangement such as B&R, will be beneficial to their development, as that allows for greater participation of opportunities.

Lining Up Financing Support

Financing is at the centre of B&R Initiative and the Chinese government has announced a list at the BRF 2017 session in Beijing (see table below). Based on the figures disclosed, China will be committing at least RMB780bn at this stage. Two questions arise: what is
the source of funding and whether this figure is sufficient for the B&R Initiative.

As for the source of funding, the bulk of the funding is in denominated in RMB, which means that Chinese government is eyeing greater use of the domestic currency in this project. With the Chinese central government debt ratio well below 20% of China’s GDP, there is room to leverage up should there be a need to do so.

In terms of sufficiency, there is certainly much financial gap to fill as ADB estimates that Asia alone needs to spend US$1.7tn per year in infrastructure investments until 2030. As the B&R Initiative is meant to be a mutual cooperation project, financing is expected to be coming from different sources, including multilateral agencies such as AIIB, ADB, World Bank, and private sector participation.

B&R By The Numbers:

• B&R which was first unveiled in 2013 consists of 6 economic corridors and spans 68 countries representing more than 60% ofthe global population and around 40% of global GDP. The B&R will connect Asia, Africa, the Middle East and Europe.

• Chinese investments related to the B&R Initiative have totalled US$60bn since 2013 and set to pick up with US$600-800bn investments planned for the next five years – equivalent to US$120-130bn per year over the period. Although the amount is large, it dwarfs in comparison with Asian Development Bank’s (ADB) estimates that developing Asia alone needs to spend US$1.7tn per year in infrastructure investments until 2030 of which Southeast Asia’s annual requirement is US$210bn. The greatest requirements will be in the power and transport sectors. China is expected to fill a large part of the infrastructure investment gap.

• China’s annual trade with countries involved in B&R is expected to exceed $2.5tn within a decade, from US$954bn in 2016 (25.7% share of China’s total cross-border trade) and US$877.2bn in 2012 (25.1% share of China’s total cross-border trade volume).

• Top 10 largest B&R trade partners with China (total trade): Vietnam, Thailand, Singapore, UAE, Russia, Indonesia, Philippines, India, Malaysia, Saudi Arabia.

• The investment and trade opportunities arising from the B&R Initiative will lead to economic development and jobs creation. Between 2013 to 2016, more than 180,000 local jobs were created and paid US$1.1bn in tax to local governments.

• The China-led Asian Infrastructure Investment Bank (AIIB) which was launched in early 2016 with US$100bn of initial capital, has granted US$1.7bn loans for nine projects, while the government-backed Silk Road Fund has lent about US$4bn of funds, including for a water dam project in Pakistan. Shanghai-based New Development Bank is another source of funding with US$50bn initial capital.

• China Development Bank has granted US$168.2bn worth of loans for more than 600 projects since the Initiative was unveiled in 2013 while Export and Import Bank of China has loaned out about US$100bn.

• China has committed to inject at least RMB780bn (US$113bn) via its state funds and banks to finance projects in the B&R Initiative. This comprises RMB100bn increase to the Silk Road Fund, increase special overseas loans by China Development Bank and Export and Import Bank of China by RMB250bn and RMB130bn respectively, and encourage Chinese banks to set up overseas funds worth about RMB300bn to help belt and road funding.

Potential Beneficiaries Of B&R Initiative

RMB Internationalization

From trade and investment flows’ perspective, increased activities in B&R would naturally lead to greater scope for RMB usage and internationalization. Of note is that the Chinese government has committed RMB300bn to Overseas Fund Business in RMB to promote the usage of RMB, according to official document.

Expanded goods and services trade (“current account” flows), financing the supply and demand gap for infrastructure investment in B&R countries coupled with increased outward direct investment (ODI) by Chinese enterprises, banks and government (“capital account” flows) are likely to provide enlarged RMB flows going forward. The share of
total goods trade by B&R countries accounted for about 34% of world’s total trade. B&R countries’ total trade with China accounted for 25.7% share of China’s total trade in 2016. China’s total services trade with B&R countries reached US$122.2bn in 2016, accounting for 15.2% of China’s total services trade, and 3.4% point higher than in 2015. According to one estimate, from January 2012 to September 2015, the amount of China’s ODI settled in RMB increased from RMB 0.2bn to RMB 20.8bn, the latter accounting for 20% of China’s total ODI as of September 2015.

ASEAN

Due to geographic proximity, historic relations, availability of resources and an emerging market, ASEAN is expected to benefit as activities pick up in B&R. This is already reflected in the top 10 trade partners’ list with China, where ASEAN countries comprised of 60% of the share. In addition, under B&R, China has a range of arrangements and agreements with ASEAN, including the China-Indochina Peninsula Economic Corridor (as one of the 6 B&R economic corridors), China-ASEAN Free Trade Area, ASEAN and China Production Capacity Cooperation, and in areas such as maritime, port development,
connectivity, tourism, health, environment, among others.

Industries/Sectors To Benefit In B&R Initiative

While it is obvious that infrastructure-related development would be the first areas to benefit from B&R, the Initiative is more than just infrastructure such as sea/land/air transport, energy, water, information communications, and pipelines. Greater flows of commercial, cultural and people-to-people exchanges will help boost demand for tourism-related industries such as F&B, hotel, recreational, and shopping, education, and healthcare.

Closer Integration Amidst A Protectionist/Anti-Globalization Environment

Amidst a rising protectionist, populist, and anti-globalization tendency in parts of the world, the B&R Initiative stands in sharp contrast as it aims to promote peaceful cooperation and common development around the world to promote efficiency in the flow of production factors and integration of markets, in order to achieve diversified, independent, balanced and sustainable development. As such, the Initiative should bring about greater level of economic activities among the participants as compared to an isolationist approach.

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By Richard Ghiasy and Jiayi Zhou, Stockholm International Peace Research Institute (sipri)

The EU and China both have an interest in promoting greater connectivity and stability in Eurasia. In China’s case, this is largely achieved through its visionary Belt and Road Initiative (BRI). So far, the EU has given the initiative a lukewarm welcome and is still pondering how to engage it strategically. This is partly because the BRI remains operationally uncoordinated, and the EU remains concerned about commercial feasibility, transparency, sustainability and environmental issues.

But differences in need, interest and strategic planning among EU member states in relation to China also hamper a common response. While the EU’s cautious approach could certainly lead to a more well-informed and gauged response, an overly long delay may come at the risk of the EU being left behind as China takes a stronger lead in shaping the Eurasian landscape.

The various EU interests in the Belt and Road Initiative

The BRI is China’s vision for comprehensive connectivity and economic cooperation, mostly focused on, but not limited to, the whole of Eurasia. The initiative has generated diverse degrees of interest throughout the EU. Member states in Central and Eastern Europe, as well as Greece, Portugal and Spain have mostly reacted enthusiastically to it. Given their own poor economies, these states have welcomed Chinese investment in large infrastructure projects, and they see Chinese investment as a way to boost their local economies and employment.

In Italy, commercial prospects have led local business communities to take active steps towards engaging with the BRI, and at the national level the Italian Government itself is seemingly becoming more interested. Ahead of the Belt and Road Forum held in Beijing on 14–15 May, Italian Prime Minister Paolo Gentiloni said that Italy is ‘enormously interested’ in the BRI.

France’s policy community interest in the BRI seems to have peaked already, although the incoming Macron administration could revisit the initiative. Many regional and municipal governments in Germany have indicated a strong desire to engage with China on the BRI, but at the national level the response has been more restrained. The German and Dutch Governments do not want to engage too closely without a better understanding of the BRI’s long-term strategic implications, and do not want to sideline the EU in the process. Nordic governments have so far not indicated much interest in the BRI, although interest in Denmark is starting to pick up.

At the supranational level, the EU has established together with China, the EU-China Connectivity Platform, through which the two have agreed to cooperate on a number of investment projects within the EU and China. This has been the EU’s most progressive response to the initiative.

But beyond this limited economic cooperation, the EU has not so far not engaged with China’s BRI on a more strategic level, despite it having strategic implications for the EU’s political, economic and security interests abroad.

‘A Global Strategy for the European Union’s Foreign and Security Policy’, the EU’s policy document of June 2016, obliquely references the BRI, positing the need for a ‘coherent approach to China’s connectivity drives westward’ and improved connectivity between the EU and Asia.

The Global Strategy also refers to the need for improving the ‘resilience’—the ability of states and societies to withstand and recover from internal and external crises—of EU neighbouring states, including those stretching into Central Asia. This is a core BRI region, and improving the resilience of these ‘fragile’ states is in fact explicitly pursued by China through the BRI.

Both China and the EU see economic development as a pillar of stability, but their development support approaches differ. China has tended to emphasize physical infrastructure and no-strings-attached investment, while the EU has tended to promote institutional reform, good governance and rule of law as pre-conditions for inclusive economic growth. Both approaches are necessary but neither are alone sufficient achieve sustainable development. And while these different approaches in theory are complementary, the EU emphasizes normative values such as human rights, democracy and civil society in a way that makes it more difficult for the two sides to engage in cooperation.

Indeed, that divergent approaches and standards are a major sticking point for cooperation was made apparent at the recent Belt and Road Forum. The EU rejected a key trade statement because it did not include commitments to free trade, social and environmental sustainability and transparency on tendering processes.

Nevertheless, to foster the kind of developmental outcomes sought, the EU needs to engage not only with states in Eurasia, but also with other larger powers, in order to build a common and coordinated agenda. This includes not only China, but also major actors such as India, Japan, and the USA, as well as multilateral organizations such as the Association of Southeast Asian Nations (ASEAN). Of these actors, however, it is China that has the most ambitious vision for Eurasian connectivity and development, along with the financial and political clout to back much of it.

Influencing the BRI through engagement

As the BRI unfolds over the next few years and decades, the EU needs to be aware that China’s BRI efforts and stepped-up presence in Eurasia will probably be a significant shaper of future regional governance in economic, financial, political and even security terms. As China’s overseas investments and economic footprint grows, so will its political and security presence. The Chinese naval base in Djibouti is one such example of how China’s overseas interests have evolved in recent years.

Leaving China so much space to pursue the BRI alone may eventually impinge on the EU’s long-term strategic interests. Thus, it is even more pertinent for the EU and other Eurasian stakeholders to engage strategically with China in order to jointly shape the vision of the BRI and its practical implementation. China has actually welcomed such involvement: Chinese President Xi Jinping reiterated the aim and need for inclusiveness at the recent Belt and Road Forum.

There are several ways in which this engagement might be achieved, some more feasible than others. In the medium-term, EU-based companies and investment banks, such as the European Investment Bank or European Bank for Reconstruction and Development, could pursue joint investment projects in third countries outside of the EU and China. This kind of concrete economic cooperation could help align Chinese and local investment standards with EU and global regulatory, environmental and labour standards, and increase transparency and reduce corruption.

Beyond engaging with China bilaterally, the EU could also work multilaterally to participate in joint consultations with relevant stakeholders. A consultation and coordination mechanism with BRI stakeholders, including China, could allow for more information sharing, joint planning and monitoring, and also mitigate some of the more political and geopolitical tensions related to the BRI. Such consultations could take place within existing mechanisms, such as the biennial Asia–Europe Meeting (ASEM).

The BRI also represents an opportunity for the EU to work towards more formal development cooperation with China and other stakeholders. One such cooperation platform could, for instance, be through the United Nations Sustainable Development Goals (SDGs). China has already partnered with the UN in the context of the BRI, and the SDGs—being universal in scope and in acceptance—are a relatively apolitical development framework worth much further exploration.

Of course, there remain concerns: namely, that the BRI ultimately serves China’s geostrategic aims, and is unilateral (or at best bilateral) rather than multilateral in nature—at least so far. Moreover, many EU policy advisors and policymakers are still not quite sure of the BRI’s political longevity, or the BRI’s financial and commercial feasibility.

Furthermore, several (sub)regions in which BRI projects will be implemented are politically and economically fragile, conflict-affected, or marked by poor governance. This puts into doubt the degree to which these investment projects will be successful.

At the same time, however, the public goods that the BRI intends to provide could certainly catalyse socioeconomic development and a spirit of cooperation throughout Eurasia and further many of the EU’s own strategic aims. Admittedly, EU–China cooperation, and that of other stakeholders, on improving third states’ resilience might take place only gradually given geopolitical realities and varying values and norms.

That said, the EU should recognize that influencing an initiative such as the BRI is easier done from the inside than from the outside.

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