By Eric Collins, Editor-In-Chief of “CITY BUSINESS Magazine”

Frank Leung is President of the Federation of Hong Kong Footwear Ltd. and a learning partner on the College of Business DBA programme. Mr Leung recently won the London GG2 Leadership Awards 2016 — Entrepreneur of the Year Award. With extensive experience of shoe manufacturing in Guangdong and Ethiopia, his story illustrates the contemporary shift of manufacturing away from China. Here he shares hisexperiences in starting up factories in Ethiopia.

At first, there were some customs I really didn’t understand,” Frank Leung recalls. His workers told him, “If there is no moon tonight, we will see you tomorrow. But if the new moon comes, we can’t be there.”

With 200 pairs of high fashion shoes to send to Milan by the end of the week, Ethiopia was not looking like the best choice for a startup.

“So, that night,” Leung remembers, “I went out and there was no new moon. I thought: Great, the shoes will be ready for Milan! Then the next day I went to the factory and nobody was there.”

“I said, where is everyone? They told me the new moon had been seen, not in Ethiopia but in Mecca. I said how do you know? They said, oh, everybody called us.”

Welcome to Ethiopia! The workers were celebrating the Eid festival for the next week, and the fashion shoes for Milan had to wait. And there were other issues.

“The fasting period affects us a lot. People don’t eat from sunrise to sunset, and we work right through Ramadhan. Some people have fainted from tiredness during their shift. At first, we didn’t know what to do. But now we have a rest room for workers.”

The world’s factory

It’s all a far cry from Leung’s trusted factories back in Dongguan.

When he started out in the early nineties, Dongguan was the world’s factory. From air conditioners to zip lock bags, everything was manufactured there. Heavy industry was to be found in larger cities. Shipping, and the motor industry were in Shanghai. One country, China, made everything.

But the investment environment was changing. Labour costs were rising, land was becoming expensive. So, manufacturers started looking elsewhere.

“Each industry looked for the best location to move to. Garments were the first to move out. Buckles can be easily imported. They don’t require a strong supporting industry. So, they tried many places, Sri Lanka, Vietnam, Malaysia, and now Myanmar.”

The toy industry is a bit more complex, combining injection mould-making and electronics. “Preliminary work is typically still done in China, but the bulk of manufacturing nowadays is often in Indonesia.”

Electronics has an even larger eco-system. This might include component making, circuit boards, and injection moulding. When more than two or three specialist factories have to move together, it is more complicated. So, a lot of higher-end manufacturing, especially if it can be readily automated, is staying put in China.

Getting to Ethiopia

“I have an Italian partner, and one day he told me he wanted to go to Ethiopia to source leather. After that, for two years, he kept asking me to come along, and finally I went with him. My first impressions of Ethiopia were very positive,” Leung remembers.

“I was surprised by how happy the people were, despite their suffering over the past 20 or 30 years. They didn’t have much. There were no mobile phones.”

“The first thing I did was buy leather to get some kind of connection to the place. After that I gave some orders to a government-owned factory to run production for shoes. Workmanship was good and we were happy. After two years’ experience, we decided to start our own factory.”

Logistics

Ethiopia is a landlocked country so logistics are a challenge.

“It took six months to get the machinery from China. We had to go through the port of Djibouti, then overland to Addis Ababa. At that time, port facility management was not up to international standards.”

“Now it is getting better. The journey takes only 35 days, and cross border transportation is improved with a new railway line between Djibouti and Addis.” Raw material supply or components is crucial as it affects delivery time. Leung has settled on a mix of sea and air freight.

Manufacturing

Setting up shop in Africa was also challenging compared to the predictability of home.

“China was a settled farming society, which works around seasons, and we share a common culture. At Chinese Lunar New Year, which is the biggest disruption to manufacturing, there are only three days’ official holiday, but it is understood that workers take off two weeks. I know exactly when my workers go away, and when they will come back. This is all agreed and known.”

It took time to adjust to Ethiopia. “Their new year is in September. It’s officially a one-day holiday but actually stretches to one week. Then the two main communities are Christian and Muslim, but they both take each other’s holidays! Manufacturing is more difficult to schedule.”

Work mentality

Ethiopia was partly an animal herding society. Adjusting to the demands of factory work has taken time.

“Herders take their animals to graze on the hillside. They would sit in the shade under a tree and guard their animals. The journey to the hillside and the sitting were all considered work. They were at work — but not necessarily doing things at work.”

“Then they come to the factory. Whether they move or they don’t move, whether they do or they don’t do, it is all still work in their mind. This was their mentality at first and it took time to change.”

Time was another issue. Almost all Ethiopians use a 12-hour clock, with one cycle of 1 to 12 from dawn to dusk, and the other cycle from dusk to dawn.

“At sunrise, people get up and at sunset they go back home. This caused difficulty with the idea of ‘overtime’. They really couldn’t understand it!”

Enter the Smartphone

But change came fast. In the last three or four years, young entrepreneurs from China have introduced smartphone manufacture to Ethiopia.

“The young Chinese are very ambitious and eager to try everything,” Leung says.

“They buy machinery and ship it to Addis Ababa and make an assembly line. It’s old, labour-intensive technology. But they buy at a low price, and make smartphones suitable for the local market.”

The result is that mobile phone usage has taken off in Ethiopia.

“They sell phones for about half a month’s salary.” And as Leung relates, the mobile is a real Trojan horse: “When they start using the smartphone they become more modern, they need more things and they are willing to work longer hours. One simple phone can change a lot. Now they don’t feel any suffering from working overtime! They feel enjoyment after they receive their wages.”

Made in Ethiopia

“When I started out in Africa, I didn’t factor in customer resistance to ‘Made in Ethiopia’. But for the first three years the buyers gave me very small orders. They were checking the product and they didn’t want to take risks. For their own job security, they want to buy shoes that guaranteed no problems.”

That has changed now, and Leung manufactures about 30% more shoes in Ethiopia than in Guangdong. Short-run production is still best in Guangdong. But anything from 20,000 up goes to Ethiopia.

“There are inefficiencies in starting-up a new model in Addis Ababa. It takes about one week to get up to speed with one style,” he says, explaining the strategy.

Tensions

Ethiopia is a federal government, not centralized like China. With a population of over three million, the footprint of Addis Ababa is still relatively small. But in the last 10 years, Chinese companies have built a lot of new roads, and now the city is expanding into the surrounding land. This is causing problems.

“I have two facilities, one very close to the airport, the other was about 1 hour 40 minutes. But six months ago, a new road reduced that time to about 30 minutes. The government wants to expand the capital city area, acquire more land, and build more public housing. As it is made more accessible, the land is becoming more and more expensive. There have been tensions between the city authorities and the other provinces and village leaders leading to strikes. The state government is opposed to the provinces. And some provinces want to increase their seats in parliament.”

“During the strikes, my Chinese supervisors feared for their lives, but our workers assured them that it is only a show of support for local village leaders in their struggle with the city.”

Jobs for Africa

Frank Leung recently won the GG2 Leadership Awards 2016 — Entrepreneur of the Year Award, in London. “My story in Ethiopia was very relevant to what the UK was going through with Brexit. I told the panel judges that I thought the best way to deal with the refugee crisis in Europe was to help African and Middle Eastern countries like Ethiopia and Syria to develop their own economies, rather than focussing on stopping refugees crossing the Mediterranean Sea.”

“Some of the Ethiopians may even think about taking the boat to Turkey. I try to help them build their home better, and create more jobs. So, to a certain extent, I think my winning this award speaks to concerns around immigration and refugees at the time of Brexit.”

At peak season, from September to December, manufacturing for the US Spring market, Leung employs up to 1,700 people in Ethiopia, with about 30 Chinese supervisors. For the future, does he plan to expand into neighbouring countries?

“As a SME one can’t do too many things at the same time. If I can make a success of Ethiopia that will already be a great result for me.”

DBA

These days Frank Leung has an unusual monthly commute between Hong Kong, Addis Ababa and his home in London. In the middle of his busy working life, he has signed up for a College of Business DBA. Unsurprisingly perhaps, the theme of his research is Ethiopia. He is researching into why less developed countries with abundant raw material resources and cheap labour force receive less Foreign Direct Investment.

“The main problems in Ethiopia are resources and logistics, so dependency theory is very relevant, and how to bring all the resources together to make a successful business.”

In pursuing his vision, Leung is bridging both cultural and geographical distance. Differences in work concept and time keeping, infrastructure and logistics, with political instability thrown into the mix, make for a challenging life. As he puts it: “The DBA is talking about everything that I am suffering!”

This article was firstly published in “CITY BUSINESS Magazine (Spring 2017)” by College of Business, City University of Hong Kong magazine. Please click to read the full article.

By Zhang Ping, editor of “China-US Focus Digest”

In China’s view, relations with the U.S. were put on a steadier footing after President Xi Jinping’s meeting with President Donald Trump in Florida in April. The 100-day action plan, one of the outcomes from the summit, has reaped early harvests, dismantling fears of a trade war. Trump also sent one of his senior advisors to the “Belt & Road” international forum in Beijing, despite the lukewarm reception to the China-led initiative from the Obama administration. To prevent the situation on the Korean Peninsula from exploding, Beijing and Washington are working together more closely than ever.

Hiccups exist in the bilateral ties – the USS Dewey conducted a “routine” Freedom of Navigation patrol in the South China Sea in May, the first since Trump took office; China twice dispatched fighter jets to intercept U.S. planes along China’s shores during the month; the U.S. deployment of THAAD anti-missile system in South Korea, put on hold, still presents uncertainties.

There has been much talk in the news media and corridors of power and offices of think tanks in each country’s capitals, and among the public, about the prospect of a more assertive China filling the leadership void left by the U.S. Trump’s policy initiatives, including the U.S. withdrawal from TPP and his “America First”, as well of pulling out from the Paris Climate Accord, appear to point to a more isolationist America. Many seem to have also turned to China in the hope that it can step up to the plate to be the guardian of free trade and globalization and the chief cheerleader in climate change.

To some degree the hope and expectations are hyped. China has its eyes on the prize – that is growing its economy, managing a variety of domestic priorities, including an anti-poverty campaign and implementing the regional “Belt and Road” infrastructure plan that has a direct impact on the country’s economy. Its global role, while growing significantly, will be limited with its means, and aligned with its domestic priorities.

So far, there has been no indication that China is bucking its head against the U.S. in managing bilateral relations and global issues. Instead, China seems fine going along with the established rules within the existing global governance structure. Chinese initiatives, such as the “Belt &Road”, aim to improve upon the global system and bring about new opportunities. Our contributors Douglas Paal and Matt Ferchen suggest that China is largely a rule-taker rather than a rule-maker in many aspects of the international order.

For this issue, the highlighted commentaries are on the “Belt & Road” initiative. Chen Dongxiao, who chairs the Shanghai Institutes for International Studies, participated in the May 13-14 “Belt & Road” international forum. He calls for better expectation management when it comes to implementing the initiative and a “collective identity” among the participating countries. Paul Sedille and Vasilis Trigkas suggest that the initiative can be viewed as part of an emerging “Sino-centric” “Silk Road system” very symbiotic to the U.S.-shaped Bretton Woods.

Another theme is the 100-day trade talks between China and the U.S. He Weiwen, while lauding the “early harvests”, lists high-tech, energy, steel and infrastructure financing as bankable opportunities beyond the 100-day action plan. Christopher McNally pinpoints the transactional approach to the talks that he believes will lead to an impasse.

This article was firstly published in the China-US Focus magazine “China-US Focus Digest” June 2017 issue VOL 14. Please click to read the full article.

By Dr Isabel Yan, City University of Hong Kong

There is no doubt that the globalization project is set to travel a bumpy road in 2017. A number of unprecedented events are poised to stall its progress. Brexit and Trump’s protectionist agenda are significant obstacles, and will challenge the globalization project as we know it. On the other hand, China’s One Belt One Road (OBOR) based on open borders and boosting economic cooperation offers an alternative vision. Time will tell which of these countervailing forces will prove more influential. Are we witnessing the end of an era, or will globalization arise anew from the ashes?

The Trump Presidency

The cozy Clinton-Bush-Obama era Globalization project has already taken some hard knocks, and international policy since January 2017 has turned largely protectionist. The Trump-led administration consistently criticizes pre-Trump trade and immigration policies as insufficient in advancing US interests and in paying too little attention to the interests of US workers. As a result, it advocates policies that put major restrictions on two aspects of globalization: trade and immigration.

Restrictions on trade

As promised, one of President Trump’s first acts was to sign a presidential memorandum to withdraw the US from the Trans-Pacific Partnership (TPP). He also intends to renegotiate the North American Free Trade Agreement (NAFTA), crucial to North American economic integration since 1994. NAFTA abolished tariffs on over one-half of Mexico’s exports to the US and over one-third of US exports to Mexico. It also set up the CANAMEX Corridor that strengthens connection among the three member countries via telecommunications, railway and pipeline infrastructure. Nevertheless, Article 2205 of the NAFTA agreement gives a provision for members to withdraw with six months’ notice.

Trump’s opposition to TPP and NAFTA is largely on the grounds of their effect on US employment. Trade liberalization enables large US corporations to outsource their production, which arguably leads to job losses and lower wages for US workers. Nevertheless, this argument has ignored at least three important stylized facts in economic development.

Firstly, trade liberalization can generally increase the welfare of low-income households by reducing the cost of subsistence manufactured goods like textiles or packaged food. It also broadens the choice of consumer goods available to US customers. Secondly, the comparative advantage of the US is in  knowledge-intensive services which are skilled labour-intensive rather than in manufacturing industries which are unskilled labour-intensive. Competing with developing countries in secondary industries will not be a suitable strategy to maintain long-term economic growth for the US. Innovations and technological improvements are well-documented drivers of sustainable long-term growth.

Product life cycle theory

Thirdly, product life cycle theory shows that any product will generally go through three stages during its production life-time. The first stage is the “new product” stage during which products are invented in advanced countries with abundant capital and skilled labour such as the US, and are marketed there at relatively high prices. Exports are predominately from the invention country. The second stage is the maturing product” stage in which there is growing consumption demand from other advanced countries and the invention country starts to set up production facilities there. The invention country’s exports to these advanced countries thus gradually reduce. The last stage is the “standardized product” stage during which the production of the product becomes more standardized and the price lowered. The invention country will take advantage of the lower production cost in developing countries (e.g. China, South Asia) and outsource its production there. The invention country becomes an importer at this stage.

Based on this theory, outsourcing production to developing countries is a natural evolution process in the product life cycle. To maintain its exports, invention countries should focus on continuing to invent new products, rather than restricting the production of mature products to itself which is against its best economic interests. Overall, withdrawing from international free trade agreements will do little to bring factory work back to the US. Instead, it will lead to a reallocation of direct investment to other developing countries and possibly retaliation from countries which are being discriminated against.

Allegations of currency manipulation

Trump’s administration also threatens to take a tough line on countries identified as having “violated global trade rules”. In particular, it declares an interest in bringing cases against major exporters who allegedly “compete unfairly”, including China. Trump accuses China of manipulating its currency to gain trade advantages, which, if confirmed, would allow other countries to impose trade restrictions against China’s exports. However, on 28th February 2017, Trump’s currency manipulation claim against China was dismissed by the US Treasury itself. In fact, the plot of China’s nominal exchange rate over the last two decades shows that the Renminbi broadly followed a persistent appreciation trend against the US dollar until early 2014. There was no evidence that China actively engaged in one-sided intervention to push down its currency value.

In fact, Trump’s radical agenda to restrict trade and immigration is not without potential downside. If the US were to start a trade war, affected countries would be likely to retaliate. And there has been a history of Chinese retaliation. In 2009, China responded to the US imposition of tariffs on its tire exports by taking antidumping measures against US’s food exports. Besides, any trade cases against China would require a formal dispute settlement from the World Trade Organisation (WTO), a process based upon the WTO’s past decisions.

Restrictions on immigration

In the first 90 days of his presidency, Trump has signed Executive Orders suspending entry of citizens of seven (later six) Muslim-majority countries for 90 days. Those countries were Iraq, Iran, Libya, Somalia, Sudan, Syria and Yemen. (Iraq later excepted). Trump’s future trade and immigration policy is uncertain, but the US’s more protectionist policy is expected to result in a redistribution of economic power. Nations whose global trade position is being jeopardized are likely to find ways to lock in their trade position by identifying alternative economic partners. The One Belt One Road Initiative provides just such an opportunity to build new economic connections.

Brexit

The outcome of the June 2016 British referendum on European Union (EU) membership shocked the world, and set the UK off on the path of departure from the union. The EU currently comprises 28 member countries, of which 19 are in the Euro area. The departure can potentially deprive the UK of four major freedoms with member countries: the free movement of goods, the free movement of services and freedom of establishment, the free movement of persons including workers, and the free movement of capital. These dramatic changes are set to start from the date of the UK’s entry into any withdrawal agreement with the European Council, or two years after its notification to the Council of the intention to withdraw.

Until new trade and economic agreements between the UK and other EU members are established, the UK’s net exports of goods and services to the European Single Market, especially in its key financial services sector, could decline significantly due to the loss of its passporting rights in the EU. In 2014, the UK’s trade surplus in financial services and insurance amounted to around £20 billion. Much of this can be attributed to the UK’s passporting rights for UK banks and investment companies to provide services to clients in other European Economic Area (EEA) states by establishing branches or providing services across borders without further authorization requirements. Moreover, the UK’s position as the top global euro trading centre (the UK accounted for 45% of total global euro trading in 2016) was challenged by the European Central Bank (ECB) whose “location policy” requires euro-denominated trades to be cleared by Central Counterparty Clearing Houses (CCPs) based in the Eurozone. A PwC report estimates a reduction of 70,000-100,000 jobs in the UK’s financial services sector as a result of Brexit. The future of a new UK-EU free trade agreement is still uncertain, and represents a backlash against the current process of globalization.

One Belt One Road

Counter to the prevailing protectionist trend, the OBOR plan lays down an economic framework that boosts economic cooperation. First introduced by President Xi Jinping in 2013, it is arguably the largest cross-region infrastructure development project in history. The project aims to connect countries in Africa, Central Asia, Eastern Europe, the Middle East, Russia, South Asia and South-east Asia along the Silk Road Economic Belt and the 21st century Maritime Silk Road. The total population in these countries amounts to about 4.4 billion, relative to 0.3 billion in the US, 0.5 billion in the whole EU and 7.4 billion globally (2016 figures). This multifaceted project includes the construction of port facilities, air transport facilities, IT infrastructure, retail and distribution networks, as well as communications, road, power, and rail networks. The success and widespread acceptance of the OBOR plan serves as a counterforce to Trump’s protectionist policy. OBOR is connecting countries in Eurasia interested in reducing poverty, attracting syndicated funding for infrastructure development, and forming ever-closer economic partnerships with China.

The globalization project in 2017 is facing a number of backlashes, but the need for greater cooperation among countries continues to be strong. It is essential that countries work collectively to arrive at win-win situations, not only in boosting mutual economic growth, but also in promoting good governance and environmental protection. For Eurasia and Africa, One Belt One Road is showing the way.

This article was firstly published in “CITY BUSINESS Magazine (Spring 2017)” by College of Business, City University of Hong Kong magazine. Please click to read the full article.

By Chen Dongxiao, President, Shanghai Institutes for Int'l Studies

The much anticipated inaugural Belt and Road Forum for International Cooperation has been successfully concluded, producing a fair number of agreements. More importantly, Chinese President Xi Jinping announced at the closing ceremony that China would host the second Belt and Road Forum in 2019, marking the institutionalization of the forum as a brand-new platform for closer international cooperation.  As a formal attendee at this important event, I have witnessed the keen interest and enthusiasm on the part of all the participants and the press corps with respect to the forum per se and its positive outcomes.

Contrary to the doubts of some international media outlets and observers in the past few years, all the participants that I talked with praised the event itself and China’s relentless efforts to translate the Belt and Road vision into a detailed blueprint and remarkable achievements. In my view, this contrast between what naysayers had anticipated and the highly positive evaluations I heard at the conference is attributable to three factors. First, all the outcomes of the Belt and Road Initiative presented during the forum, including a long list of 76 items comprising more than 270 concrete results in five key areas, have far exceeded expectations and reinforced a sense of gain on the part of the countries and regions along the two routes, increasing their confidence and dispelling initial suspicions. Second, a new concept of international cooperation based on the principle of “extensive consultation, joint building, and benefit sharing”—the New Silk Road Spirit, or in my own phrase, a Belt & Road Initiative Doctrine — has begun to take shape as a governing norm for Belt and Road cooperation, creating a reassuring effect among all relevant parties. Third, the Belt and Road Initiative is now converging with other major development agendas, such as the United Nations’ 2030 Agenda for Sustainable Development and the Paris Agreement on Climate Change, indicating that instead of reinventing the wheel, Beijing’s effort aims to complement and enhance existing international economic cooperation and global economic governance. So the initiative is, to some degree, leading the way in strengthening current multilateral cooperation.

As a milestone event, the first forum has been not only about stocktaking but more importantly about sound planning for expanded international cooperation. In order to steer the Belt and Road Initiative toward greater success, I think greater efforts should be made in the following aspects.

First, improving expectation management, i.e., shaping, coordinating, and stabilizing domestic and international expectations concerning the Belt and Road Initiative will maximize the positive effect of economic policy and minimize possible negative side effects. Four years of achievements and experience have made it clear that as a “project of the century” with a vast span in time and space, the Belt and Road Initiative not only promises huge immediate and potential business opportunities and economic interests but also presents a variety of political, economic and security risks and uncertainties. As a market entity, the enterprise should strike a balance between seizing every opportunity available and guarding against possible risks. As a policy entity, the government should effectively and regularly communicate information and policies on the Belt and Road Initiative so as to help market entities reduce miscalculations in their decision-making.

Second, it is vital to reduce the constraining effect of institutional transaction costs on the Belt and Road Initiative. On the one hand, history shows that an essential indicator of the efficacy of international cooperation is whether such cooperation can substantially reduce the transaction costs between and among partners with diverse policies, regulations, standards and laws. Those incurred costs are also defined as institutional transaction costs. That is why policy consultation at the governmental level is always given precedence and “dovetailing” of policies, rules and standards is regarded as an institutional safeguard for enhancing further cooperation. On the other hand, as one of the means to reduce institutional transaction costs, policy consultation at governmental level involves potential resource re-allocation and interest redistribution among all stakeholders, and is sure to encounter considerable obstruction unless there is broad-based social consensus and approval.

Therefore, it makes strategic sense to working on the consensus-making and confidence-building by strengthening people-to-people bonds and promoting cultural, educational, science and technology, think tank, and personal exchanges between China and countries along the routes. Just like philosophy of traditional Chinese medicine goes, opening the human body’s main and collateral channels will ensure the smooth circulation of vital energy. Strengthened people-to-people bonds, which function as the social basis for reducing transaction costs, will facilitate the reconciliation of policies, rules, and standards among all stakeholders.

Third, sustain the provision of public goods for the Belt and Road Initiative. Such an epochal project requires the steady supply of public goods, including a peaceful environment and sound institutions, to create any positive “spillover” effect. Therefore, all stakeholders in the project, including national governments, international organizations, enterprises and nongovernmental organizations need to make their respective input. National governments should provide adequate security and legal safeguards by leading the efforts of policy coordination and strategy synergy. Meanwhile, international organizations, enterprises, and nongovernmental organizations should be actively involved in policy consultations on trade and investment connectivity in order to promote greater transparency and benefit sharing in rule-making and expand the institutional spillover effect of Belt and Road cooperation. Continued provision of public goods for the Belt and Road Initiative also requires recruitment of high-caliber thinkers and innovators to provide intellectual support, creating an “Intellectual Silk Road.”

Last but not least, a sense of collective identity needs to be fostered.  The history of the evolution of human society has shown that a common historical memory and shared experience of concerted efforts constitute the basis of a collective identity, which, if strengthened, can reduce or even resolve conflicting interests and ideas. Coordinating policy consultation, trade promotion, infrastructure connectivity, financial cooperation and people-to-people exchanges will enable all stakeholders in this grand project to raise their awareness of burden sharing and increase mutual trust. It is not only a viable way to break through the traditional pattern of international politics, which is all about interest, but also an integral part of the effort to build a community of shared destiny.

Please click to read the full report.

By Professor Frank Chen, City University of Hong Kong

Against a background of rising costs, Chinese manufacturing is on the move —— to the US and Southeast Asia. Professor Frank Chen, Head and Chair Professor of Management Sciences, investigates latest trends and how a record inflow of Chinese investment is helping revitalize the American economy.

When the then President-elect Donald Trump met Alibaba executive chairman Jack Ma in January 2017, he characteristically said he had a “great meeting”. They discussed one of the incoming President’s favourite topics, American jobs. The headline news? One million new US jobs to be created.

“We’re focused on small business,” Ma told reporters after the meeting. “We specifically talked about ... supporting one million small businesses, especially in the Midwest of America.”

Ma said that Alibaba’s expansion would focus on products like garments, wine and fruits, with a special focus on trade between the American Midwest and Southeast Asia.

Of course, Alibaba has clout. With more than 10 million active sellers as of 2015, the company estimates its China retail marketplaces has contributed to the creation of over 15 million job opportunities.

The meeting came against a background of stalled US reshoring (US companies returning to their homeland) whilst Chinese investment remains buoyant. Every year since 2012, Chinese investment in America has exceeded investment flows in the other direction. And in 2016 Chinese companies’ investment in the US economy was at a record US$18 billion. This embraced sectors from entertainment to micro-electronics, information technology, household appliances, and hotels. The investment went beyond financial sector mergers and acquisitions to include the building of new manufacturing plant on green or brown field sites.

The world’s workshop?

As early as 2010, Bloomberg Business Week ran the title “Why Factories Are Leaving China”. Chief Economist at the Industrial Bank, Lu Zhengwei, dates the shift to 2012, when China’s services sector overtook manufacturing for the first time as the biggest contributor to nominal gross domestic product. At the time this was heralded as a milestone towards industrial restructuring.

“The process began to get serious a long time ago… When we spoke highly of the increasing role of the service industry in our economic structure, it had already kicked in. That was 2012,” Lu said, adding that China’s high taxes and high land costs are now turning business away.

China’s manufacturing base is indeed transforming. Lower end manufacturing is moving offshore to Southeast Asia countries such as Vietnam, Indonesia and African countries such as Ethiopia, whilst higher value added manufacturing is encouraged against a background of increasing automation. The heyday of China’s manufacturing boom is long gone. These were the 1980s and ’90s, and especially the years after China joined the World Trade Organisation in 2001. In these years, the gains to China’s manufacturing base can often be directly correlated to losses in the US. Some sources state that the US trade deficit with China cost 3.2 million jobs between 2001 and 2013.Manufacturing was eager to relocate from the advanced economies, and within a decade China was the world’s second-largest economy.

Southeast Asia boom

A confluence of political and economic factors is now producing another decisive shift — away from China. On both sides of the Pacific, government policy is playing a role. In China, Beijing has encouraged labour-intensive businesses to move elsewhere as it tries to steer the economy towards higher value-added services and automation. In the US, President Trump has suggested that a tariff barrier may be placed between the two countries, and encourages “Made in America”. The question remains, who by?

For China, the new policy means less emphasis on shoes and apparel. Vietnam has overtaken China to become the largest producer for Nike shoes. Garment exports from Southeast Asian nations to the EU, US, and Japan have been very strong in recent years, sharply contrasting with the performance from China. Companies such as Eclat Textile, Taiwan’s largest apparel company, are pulling out of China completely due to deteriorating business conditions and surging wage costs.

Even the high-tech sector is affected. More than 50% of Samsung smartphones are now assembled in Vietnam, and one more Samsung factory is currently under construction. It is reported that 80% of Samsung’s China capacity will be moved to Vietnam. When such giants move, so do their immediate supply chain partners, sooner or later, followed by secondtier and accessory suppliers. The result — many Vietnamese companies are also intensifying investment in the electronics supporting industry.

Exodus

The exodus of Chinese manufacturing goes hand-in-hand with a surge of outbound investment. This is up more than 50% in the first 11 months of 2016 from a year earlier, with manufacturers involved in more than a third of China’s overseas mergers during that period. At the same time, China’s private sector investment at home rose just 3.1%.

The prospect of reaching a Trans-Pacific Partnership (TPP) agreement accelerated such supply chain shifts. TPP would make Vietnam an open economy and a favourable destination for FDI. With other ASEAN countries intent on joining too, a pattern similar to 1990s’ Pearl River Delta was emerging with countries such as Indonesia introducing economic stimulus packages to encourage foreign investment, and keeping currency at low levels. The whole regional block was poised to replace the Pearl River Delta region, benefit from lower labour costs, and emerge as the world’s low cost manufacturing centre.

President Trump’s abrupt cancellation of TPP has now thrown doubt on the viability of importing to the US. In the short-term, reshoring and FDI in the US should gain renewed impetus. But one thing is for sure, these manufacturers will not be returning to China.

FDI trumps reshoring

Ironically, Foreign Direct Investment seems to be playing a much greater role in the American manufacturing revival than the much-vaunted US reshoring phenomenon.

“The US Reshoring phenomenon, once viewed by many as the leading edge of a decisive shift in global manufacturing, may actually have been just a one-off aberration,” says Patrick Van den Bossche, A.T. Kearney partner and co-author of an April 2016 Reshoring Index study. Industries vulnerable to rising labour costs in China have been successfully relocating to other Asian countries, rather than returning to the US, the report confirms. Vietnam has absorbed the lion’s share of China’s manufacturing outflow, especially in apparel. US imports of manufactured goods from Vietnam in 2015 were nearly triple the level of imports in 2010.

2016 Record - breaking Chinese investment in the US

January In the largest China-Hollywood deal to date, conglomerate Dalian Wanda Group Co. acquires production and finance company Legendary Entertainment for US$3.5 billion.

April Omnivision Technologies, whose camera sensors have been used in Apple Inc.’s iPhone, is acquired by a consortium of Chinese private equity firms including CITIC Capital Holdings, Hua Capital Management and Goldstone Investment Co. for US$1.9 billion.

April Tianjin Tianhai buys Ingram Micro for US$6.07 billion. The deal marks the largest Chinese takeover of a US information technology company to date.

June Qingdao Haier Co. spends US$5.6 billion to buy the appliance division of General Electric, giving the Chinese appliance manufacturer an opportunity to boost its presence in the US market.

September Anbang Insurance's, one of China's largest insurance companies, completes a US$6.5 billion deal for Strategic Hotels and Resorts.

October Chinese conglomerate HNA agrees to pay private equity firm Blackstone Group US$6.49 billion for a 25% stake in Hilton. The move is part of HNA's efforts to enhance its global tourism business.

'Made by China' in America

China companies are entering manufacturing in the US in a variety of industries.

Paper In June 2014 Shandong Tranlin announced it would invest about US$2 billion to build a pulp and paper factory outside Richmond, Virginia.

Textiles The Keer Group has built a US$218 million cotton yarn factory in South Carolina, and “are now hiring in places where cotton was king”.

Construction Machinery SANY has made a US$60 million investment in office and manufacturing space for construction machinery in Georgia.

Computers Lenovo opened a computer production plant in North Carolina in June 2013.

Auto Parts China's largest auto parts maker, Wanxiang Group, has 28 factories in 14 US states with 6,500 employees.

Garments In October 2016, Chinese garment manufacturer Tianyuan Garments Co. made a US$20 million investment to produce clothes for brands like Adidas, Reebok and Armani — the first Chinese manufacturer to make clothing in the US.

Paper In April 2016, Chinese paper products maker Sun Paper Industry said it was opening its first North America factory in South Arkansas, investing more than US$1 billion to construct a new bio-products mill that would create 250 local jobs.

Steel Pipe Tianjin Pipe has invested more than US$1 billion in a steel pipe plant in Texas, designed to produce 500,000 metric tons per year of steel pipe that is used in the oil and gas industry.

This article was firstly published in “CITY BUSINESS Magazine (Spring 2017)” by College of Business, City University of Hong Kong magazine. Please click to read the full article.

By Sourabh Gupta, Senior Fellow, Institute for China-America Studies

In September 2013, a five-point proposal to jointly build a New Silk Road Economic Belt was unveiled by President Xi Jinping in Astana during his 10-day visit to Central Asia. A month later he also outlined a complementary vision of a 21st century Maritime Silk Road during a speech to the Indonesian parliament.

On May 14-15, the presidents of Kazakhstan and Indonesia were both on hand in Beijing, along with 27 other heads of state or government, to collaboratively chart the next steps forward with President Xi at the Belt and Road Forum for International Cooperation. Earlier in March 2015, a Vision and Action Plan listing a set of guiding principles and cooperation priorities and mechanisms had been released.

When the Belt and Road Initiative (BRI) is fully realized, it will comprise a far-flung network of highways, railways and connectivity corridors, both brick-and-mortar and digital, as well as a set of port infrastructure and blue economy projects that link China by road and sea as far as Europe and Africa via South, Southeast and Central Asia and the Middle East. Tellingly, it is being billed as the “project of the century.”

The logic of the initiative is at once both simple and revolutionary. In resurrecting the ancient silk routes that had embodied the spirit of peace and cooperation, openness and inclusiveness, and mutual learning and mutual benefit, China aspires to preserve and consolidate the ideals of the United Nations-centered, post-World War international order that it had fought to create. Equally, by reviving the spirit that underlay these ancient routes, China also aspires to write – and share – a bright new chapter in global development that is informed by the growth model that facilitated its meteoric rise and lifted hundreds of millions out of poverty. This emphasis on growth and development is particularly apposite at a time when the global economy is constrained by a relative lack of growth drivers.

International cooperation on production capacity-sharing and between China and other middle income, developing and less developed countries forms a core element of BRI. Detractors have branded this as a barely transparent attempt to offload its excess and outdated production capacity to susceptible neighboring countries. Such criticism is misplaced. To the contrary, such production capacity cooperation is informed by China’s own successful post-1978 model of industrial development and upgradation. That model was premised on two cardinal tenets.

First, as an agrarian, labor abundant but capital and resource scarce economy, China’s industrial structure needed to conform to its prevailing – not preferred - factor endowments. Corresponding investments that would jumpstart growth, notably direct investment in human and physical capital rather than soft institution-building, too, had to be geared to near-term domestic realities rather than abstract rich society prescriptions or a one-size-fits-all model. As this investment in human and physical capital accumulation translated into a virtuous cycle of growth and poverty reduction, industry would need to upgrade its existing structure and scale the production value-chain at a rate that was as swift as China’s rapid level of development.

Second, trade liberalization and market forces were to be the primary mechanisms for resource allocation. Yet due to infrastructure deficiencies, institutional shortcomings, rent-seeking, and a general lack of competition, industrialization-led development could not be left to market forces alone. Active industrial policy was a necessary complement. As industry scaled the product-sophistication ladder, government’s interventionist touch and its accompanying hard and soft infrastructural enhancements, too, needed to evolve to facilitate such an upgrade of the production base. And until China attained middle-income status, this symbiotic relationship between activist policy and production structure would need to flexibly adapt to the country’s rapid level of development.

The success of China’s three decade-long experience with production capacity management can be originally attributed to the international production capacity transfer that it received at the outset from its foreign partners as it opened-up to the outside world. Huge competitive strengths have been amassed over the past decade-and-a-half in sectors such as electronics, construction materials, railways, machinery, aviation and maritime engineering. By moving these production lines abroad as part of BRI, China can now pay it forward and assist its developing and less-developed country partners to create jobs, improve industrial capacity, and stimulate growth on lines that bear a resemblance to China’s own industrial jump-start in the 1980s.

In Central Asia, such production capacity cooperation could range from co-funding and construction of strategically important trans-border transportation corridors, and industrial and digital logistics hubs, as well as fertilizer and synthetic fuel plants. In Africa, production capacity cooperation could crack the development bottlenecks of backward infrastructure, human resource limitation, and inadequate finance. By facilitating agricultural modernization and industrialization, it could also rid these countries of overdependence on commodity exports as their solitary growth driver.

Much as the relocation of East Asian labor-intensive industry to lower-wage China stirred a virtuous economic cycle that went much beyond mere capital accumulation, so also China-Africa production capacity cooperation and transfer can create a sum bigger than its parts. Far from being a new form of colonialism, as the critics have panned it, the transfer of industrial capacity and world-class infrastructure will reduce transaction costs in Africa and enable these countries, as ex-chief economist of the World Bank Justin Yifu Lin has pointed out, to unleash a dynamic upward spiral of growth and development in sectors where they enjoy latent comparative advantages.

The open-ended design, the level of ambition and the long-term vision that underpins BRI attests to President Xi’s resolve to elevate peaceful development to the forefront of China’s economic diplomacy. The reference to the ‘belt’ and ‘road’ concepts in the reform document that was unveiled after the 3rd plenary session of the 18th Central Committee meeting in November 2013 also attests to the transitional imperatives facing the Chinese economy – particularly the need to derive domestic growth drivers beyond its successful but dated producer-side model. That model, which China now seeks to export to its developing-country peers, had been authored by Deng Xiaoping exactly 35 years earlier at the 3rd plenary session of the 11th Central Committee meeting in November 1978.If the ‘belt’ and ‘road’ is to be Xi Jinping’s lasting legacy 35 years down the line, he must engineer an analogous rebalancing of the Chinese growth model to a more consumption-led one with the same political acumen and zeal that Deng displayed four decades earlier. When China ultimately serves as a ‘consumer of last resort’ for the increasingly sophisticated industrial-goods exports of its rapidly growing developing and less-developed country partners, BRI will truly have bolted the development strategies of numerous countries, sought out complementary win-win advantages, and realized the common development and prosperity that it had envisioned for a vast chunk of humanity. Success abroad must first begin at home.

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By Professor Houmin Yan, Dean of the College of Business at the City University of Hong Kong

As the protectionist spirit takes hold across the North Atlantic, Dean Houmin Yan describes how China’s One Belt One Road project is promoting connectivity and collaboration across Eurasia using the Public-Private-Partnership model, and how China is emerging as a surprise champion of global free trade.

The globalization project is due for a reset. With the United Kingdom’s impending exit from the EU and the accession of the Trump Administration in the United States, the two countries who have held aloft the torch of free trade over the past two centuries are lurching onto an opposing tack. Protectionism rather than free trade is the new mantra. As globalization enters a new era, the mantle of free trade champion is passing — surprisingly — to China.

Europe is in flux. For the people of the United Kingdom, the conflation of the four European Union freedoms — the free movement of goods, of services, of capital and of people, was one freedom too many. In a continent with widely disparate economies, that fourth freedom — and the reality of open borders — was stunningly rejected by Brexit. Whether the peoples of Europe will follow suit is now down to this year’s elections in various European countries.

Walls or open markets?

On the other side of the Atlantic, President Trump is putting America First. Symbolic of the new  protectionist spirit, a wall is being built. Peter Navarro heads up the White House National Trade Council with a strategy to renegotiate existing trade deals and scrap bad ones. This means “no” to the Trans-Pacific Partnership, and at the very least a renegotiation of the North American Free Trade Agreement. Meanwhile, at the Davos Economic Forum in January, China President Xi Jinping upheld the benefits of globalization and open markets. In the midst of the Brexit and America First mayhem, China’s One Belt One Road (OBOR) project is emerging as a bulwark of world free trade.

China's first direct freight train to UK

Seamless logistics are central to the free trade project. The day after British Prime Minister Theresa May stood up to finally offer a definition for Brexit in January 2017, the first direct goods train from China to the United Kingdom arrived in London. The end of an 18-day journey, of 12,000 km, with two changes of gauge, the service passed through Kazakhstan, Russia, Belarus, Poland, Germany, Belgium and France before entering the UK via the Channel Tunnel. The train hauled 34 containers packed with £4 million worth of clothes, visible proof that One Belt One Road is reaching out to the metropolitan heartlands of the United Kingdom and Europe. This train is just one of 14 dedicated rail routes linking China directly to European nations.

Win-win scenario

At the heart of the OBOR project is China's strategy to promote connectivity and collaboration across Eurasia. “Vision and Actions on Jointly Building Silk Road Economic Belt and 21st century Maritime Silk Road” by the National Development and Reform Commission (NDRC), released in March 2015, speaks a language very different to the Trump protectionist mantra. It talks of mutual benefit, and seeks “a conjunction of interests and the ‘biggest common denominator’ for cooperation so as to give full play to the wisdom and creativity, strengths and potentials of all parties.” According to Beijing, this is the classic win-win scenario. OBOR fosters collaboration, leveraging each country’s advantages in technologies, management and resources. Overall, the vision is to reform production structure. China’s high quality of services and resources will flow to the OBOR countries, and push forward supply-side structural reform to the benefit of all.

Public-Private-Partnerships

The driving force behind the new Silk Road is the tried and tested Public-Private-Partnership (PPP) model, which is being pursued at full steam ahead. According to a joint statement released by the China Securities Regulatory Commission and NDRC in December 2016, PPP infrastructure projects established for at least two years may now raise funds by issuing asset-backed security products. Given that there are more than 10,000 China PPP projects, with an investment of more than US$1.85 trillion, PPPs are set to gain significant leverage along the Silk Roads in 2017.

The PPP model has been chosen for several reasons. They are excellent vehicles for underpinning the finance and management of large scale infrastructure projects. Their transparent tendering mechanisms facilitate the OBOR project selection process, and the variety of models available such as build-operatetransfer (BOT) or concession, can be adapted to suit various kinds of project. Risk management is another area where the PPP model scores. Governments tend to be more expert in areas of legally related risk, whilst the private sector excels in managing financial and operational risks. Finally, the long-term framework of OBOR projects, typically some 20 to 30 years, means that government plays an important role as guarantor to underwrite the project’s success.

Chain morphs to matrix

As North America, the Pacific region and the United Kingdom face uncertain and increasingly protectionist futures, OBOR is a major growth point for international trade with China at its fulcrum. China is building on existing strengths. Some of the fastest rates of growth in GDP are in countries along the OBOR corridors, and China is already the largest trading partner of many of these countries. The growth points are at the European end destinations, and that is where the dedicated direct goods train services are beginning to play their part.

This is not however merely a new version of the traditional supply chain system, to produce in the east and consume in the west. The recent Fintech surge, the advancement of logistics systems, the use of multi-channels in marketing, and the ubiquitous presence of e-commerce, are resulting in more fragmented, diversified demand in the production process. Both production and consumption are going global. The chain is morphing into a matrix.

Is the loss of manufacturing really a loss?

As part of this process, many countries along the old Silk Roads are reinventing themselves as major producers. Take Bangladesh, a lead player in the manufacturing industry in South Asia. Its population of 160 million has enjoyed strong economic growth, with a GDP of over 6% p.a. over the past six years. Garment factories have moved here from China in large numbers. Protectionist wisdom would see this as a threat to the incumbent manufacturing nation. But is China really suffering?

As the world’s largest importer of textile raw materials, China possesses a high level of automated textile processing industry and has excess capacity. The shift of the manufacturing industry to Bangladesh actually benefits China's export of textiles. It releases excess capacity in production, and accelerates the transformation of manufacturing industry towards higher value added industries. From a classic supply chain perspective, allocating the production process to a low-cost country, enhances the overall efficiency of the chain. So, the OBOR infrastructure investment, reduces the cost of logistics and trade, and encourages industry transformation.

The Marshall Plan

How should we understand One Belt One Road, compared to two other global projects, the 1946 American Marshall Plan and the 2014 European Union “Juncker Plan”? Opinion remains divided on the post-World War Two Marshall Plan. Some view it as an American act of benevolence, helping a  devastated Europe to get back on its feet. Others as an expedient means to creating a market for America as it retooled its factories from war production to domestic goods. The plan certainly also had a political dimension, acting as a bulwark for supporting western democracies at a time when the Iron Curtain was coming down over Europe, and the threat of Soviet expansion was very real. It necessitated strong leadership from the US, who provided support in finance, technology and facilities, and spawned international institutions. The plan created a template for stronger European cooperation, later enshrined in the EU, and has proved influential down to the present day.

The Junker Plan

The 2014 Junker Plan arose in very different circumstances. This large-scale infrastructure investment plan was designed to unlock public and private long-term investments in the “real economy”. After seven years of stagnation, the aim was to kick-start the European economy by investing in energy, transport infrastructure and other socially-beneficial assets. So far there are seemingly positive consequences: A European Fund for Strategic Investments to develop the real economy has been set up. New investment has flowed to the 27 member states to the tune of EUR138.3 billion in the first 18 months. But mid-term the jury is out. Europe remains in crisis. There are unprecedented levels of youth unemployment in Greece and Spain, and vast flows of refugees have entered Europe from Syria and Africa at levels that cannot be comfortably assimilated under a multicultural model. Looking ahead, a stagnating European economy and the rise of nationalistic political parties with overtly protectionist agendas threaten regional unity.

One Belt One Road

One Belt One Road differs from the Marshall Plan in that it was not prompted by an outright crisis. There was however an economic slowdown in China post-2009, and the OBOR initiative can be seen as a stimulus to China’s flagging State Owned Enterprise sector. Like both predecessors, it is ambitious and of vast scope. More than 60 countries from Asia, Africa and Europe are involved, including many developing countries with diversified economic environments. Funding infrastructure is vital. A Silk Road Fund and Asian Infrastructure Investment Bank have been set up to encourage private companies to invest, and produce a flow of policies, infrastructure, trade, finance and capital, connecting people of many countries. The new Silk Roads seek to create win-win situations within expanding regional economies.

Long-term PPP

OBOR is powered by long-term PPP agreements between government and private entities for the provision of public services and the development of infrastructure. Responsibilities and returns are shared by both sides. A private sector strong in analysis, innovation, operation, and risk control provides funds. And long-term PPP contracts will address the issue of under-maintenance of public infrastructures.

Results are impressive: To date, the People’s Republic of China Ministry of Finance has approved 232 model projects, with a total investment of 802.54 billion Yuan. The total number of archived projects is 9,285, with a total investment of 10.6 trillion Yuan. Overall, the private sector accounts for nearly 40% of project participation.

Hong Kong

In all of this, Hong Kong has a crucial part to play. The region’s well established financial and legal systems, together with mature logistics and retail service sectors, provide an excellent platform. In partnership with countries possessing less developed systems, Hong Kong can be a leader in OBOR. And the College of Business at CityU is set to play a key role. The new International PPP Specialist Centre of Excellence for Public Transport Logistics will develop OBOR research projects, international policy briefs, and share PPP best practices and international PPP standards in public transport logistics.

The Wheels of Commerce

It has been said that a volume of Jewish history is equal to half the history of Western civilization, a volume of Henan history is equal to half of Chinese history, and a volume of Silk Road history is equal to half of the history of globalization. But the Silk Roads are not confined to history. A new chapter is being written, and in a disrupted world, One Belt One Road policies, infrastructure, trade, finance and capital, are lubricating the wheels of commerce. At odds with the North Atlantic protectionist zeitgeist, and driven by a still expanding China economy, OBOR is a vital contributor to global economic growth. As the world reaches for the global reset button, China and the countries of the ancient Silk Roads play a pivotal role in keeping the wheels of commerce turning.

This article was firstly published in “CITY BUSINESS Magazine (Spring 2017)” by College of Business, City University of Hong Kong magazine. Please click to read the full article.

By Gerard Burg, Senior Economist, National Australia Bank

In May, China hosted a summit for a range of global leaders to promote the Belt and Road Initiative – the multi-decade, global infrastructure plan first outlined in 2013. Despite positive rhetoric surrounding the initiative, it has achieved only modest results to date – with competing priorities both domestically and internationally impacting on the project.

What is the Belt and Road Initiative?

The Belt and Road Initiative (BRI) is a broad (and somewhat loosely defined) infrastructure program (including roads, railways and ports along with power generation and fuel pipelines) linking China and a broad range of countries in Asia, Europe and Africa. It is intended to develop land based trade links across Asia to the Middle East and Europe (which has been likened to the Ming Dynasty’s Silk Road) and maritime links with South East Asia and East Africa.

The initiative has economic and political goals – supporting growth and development (particularly in underdeveloped parts of Asia and Africa) and fostering closer relations between these countries and China. The decision by the United States to withdraw from the Trans Pacific Partnership and the likely increased importance of the Regional Comprehensive Economic Partnership may support these efforts.

Finally, the BRI also has a role in China’s domestic policy as well – aiming to address excess industrial capacity through both increased demand for Chinese products in neighbouring countries (although this may only occur over the longer term), as well as the potential to transfer excess industrial capacity to these regions – similar to the early stages of China’s industrial development in the 1980s, when it imported surplus capital equipment from Germany and Japan among others.

How Effective Has the Initiative Been?

The relatively short history of the Belt and Road Initiative makes it difficult to objectively assess the success of the program. This is particularly the case where political and economic objectives of the initiative can diverge.

From a trade perspective, there has been limited increase in trade values since the BRI was introduced. Two-way trade with BRI countries rose from 24.8% of the total in 2012 to 25.8% in 2016 – albeit this was slightly below a peak of 26% in 2014. The share of exports has gradually risen over time – up from 24.5% in 2012 to 27.9% in 2016 – while import values from BRI countries have fallen. At least some of this decline reflects commodity price trends over this period.

Trade with BRI Countries

Similarly, investment in BRI countries is yet to substantially increase – with total non-financial investment in 53 BRI countries falling by 2.0% in 2016 and contracting further in early 2017 (down by 19% yoy in the first four months of the year). This may reflect the competition between short and longer term priorities at a governmental level – with Beijing implementing tighter controls last year to curb capital outflows. It is also worth noting that the large cost and long lead times of major infrastructure projects means that year-on-year comparisons may not provide the most accurate picture of growth in the BRI.

Investment in BRI Countries

Investment in BRI countries is not entirely infrastructure related. Singapore received the largest level of investment for a BRI country in 2016 – despite the country’s highly developed and sophisticated infrastructure. Similarly, authorities have recently cracked down on investment by Chinese firms in unrelated sectors – most notably the purchases of European football clubs. More generally, poorly invested funds increases the risks associated with China’s already high debt levels, along with the often higher levels of sovereign risk associated with some BRI countries.

China’s state-owned enterprises have been heavily involved in BRI investment, with data from the State-owned Assets Supervision and Administration Commission noting that 47 central government SOEs have been involved in almost 1700 projects in BRI countries since 2013. There have been concerns that government pressure has influenced SOEs to invest in unprofitable projects – raising long running concerns around both the sustainability of Chinese debt and the reform of SOEs. This means that there are substantial risks (in addition to the much touted benefits) to China’s economy from the initiative.

Who is Supplying the Funding?

Data published in the Financial Times suggests that the China Development Bank – one of the three state-owned policy banks – is the single largest source of funding for BRI investment – with outstanding funding of US$110 billion at the end of 2016 – around 38% of the total. The four major state-owned commercial banks have lent a combined US$150 billion – just over half of all BRI lending. Perhaps surprisingly, relatively little funding has come from either the Asia Infrastructure Investment Bank (AIIB) (US$2 billion) – the Chinese established multi-national development bank – or the Silk Road Fund (US$4 billion) – a state-owned investment fund established to support the BRI.

Funding Sources for BRI Investment

At the recent BRI summit, President Xi announced a further US$113 billion of funding, which is likely to be delivered via the Silk Road Fund, the China Development Bank and the Export-Import Bank of China. However, the Chinese government needs other countries to provide funding via the AIIB; it cannot afford the vast sums reported (as high as US$8 trillion in coming years) on its own.

Conclusions – What Does the BRI Mean for Australia?

Based on current data, the BRI has had only a modest impact in boosting China’s trade and investment links – compared with the considerable ambition of China’s government. There remain long term challenges, balancing competing political and economic objectives that may run counter to each other.

Australia is not currently considered one of the BRI countries; however as a signatory to the Asian Infrastructure Investment Bank, it has a direct link into the initiative. Some have called for greater involvement in the project, including suggestions that BRI could fund infrastructure and development projects in Northern Australia. That said, the history of previous attempts to develop this region have been patchy at best.

Others have suggested that the input demands for infrastructure construction could underpin longer term demand for Australia’s resource exports. We would urge caution in such an assessment – as China’s vast overcapacity in sectors such as steel production are too large to be absorbed by near neighbours, while the longer term outlook for China’s domestic demand is likely to be relatively weak. We would argue that the BRI is unlikely to provide another mining boom for Australia.

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By He Yafei, former Vice Minister, Ministry of Foreign Affairs of China

This is really the best of times and worst of times. With the rise of a large number of developing and emerging countries and relative decline of “advanced countries”, the global convergence of power is accelerating and the balance of power continues to tip in favor of the developing countries. This big picture provides a useful prism through which a clearer view of the world today and tomorrow, including the future of globalization, global governance and the global liberal order, becomes clear in our minds.

Liberal order in crisis

Without any doubt, a crisis has been raging across the “liberal democratic world” for some time with “black swan events” appearing in the U.S. and in many European nations. These have wreaked havoc with the political eco-system in the Western world, weakening the centrist and progressive forces that used to underpin the U.S.-led postwar world liberal order.

The challenges to liberal order as well as liberal democracy come from both within and outside, mostly from within, which raises many questions as to whether the U.S.-led and U.S.-defined liberal order can survive.

Among challenges from within, first and foremost is the loss of credibility of economic neo-liberalism as the governing ideology for global economic order since the 2008 financial crisis, which has made many countries turn to the East, in particular to China, for new ideas and concepts.

Next naturally are the “Trump Phenomenon” and its copycat versions in European countries, though the result of French election has given people some relief as Europe stares into the abyss of EU disintegration.

President Trump has been in office for a bit more than four months, during which his pronouncements and actions, together with his midnight tweets, are perceived both at home and abroad as risking an end to the role by the U.S. as guarantor of this liberal world order. His view of American decline and his instinctive contempt for the norms and values of liberal democracy, long held as sacrosanct by Western nations, is too blunt to miss or to ignore. Hence comes the question: Will the US continue to provide global commons in this new era of globalization or will it backpedal and go into an isolationist Mode Vivendi as has been the American tradition? That is why Francis Fukuyama repeatedly asks that “irksome” question of “do we still live in the liberal international order” as he gives talks and writes about the fast dismantling of that order based on liberal democracy.

China offers an alternative?

The Belt & Road Initiative is both a national developmental strategy and an innovative initiative by China to global governance offering huge opportunities for greater cooperation among countries concerned on the basis of equality and mutual benefit. The widely acclaimed success of the recent B&R Forum of International Cooperation in Beijing testifies to its popularity worldwide. The number of countries (and regional and international organizations) that have signed MOUs on B&R with China had increased to 68 by the closing of the forum.

Nevertheless, B&R has been viewed with deep suspicion – some in the West portrayed the initiative as China’s attempt to grow its sphere of political and economic influence, with a hidden agenda to overthrow the current international system of liberal democracy.

Here we have to distinguish between two things that are not really related. The liberal democracy and liberal order as defined in the Western narrative are indeed under siege and in crisis, because politically and economically they has been used or abused to impose a Western model of governance onto other nations regardless of their domestic conditions, including the “Washington Consensus” and “Responsibility to Protect”. It has also been followed rigidly in Western countries themselves for capital-holders to extract as much profit as possible from the society —overlooking the negative impact it has on some segments of the populations, especially those who have only unskilled labor to offer. The French economist Thomas Piketty in his famous book entitled “The 21st Century Capital” described this ugly phenomenon in great detail.

The widening gap and exacerbating conflict between the rich and the poor have been blamed on globalization per se. The fact that governments in those countries failed to address this glaring problem has been conveniently forgotten.

Here lies another reason why China’s proactive B&R proposal is so popular.

There are at least two things that make B&R an attractive proposition. One is that this idea of new international cooperation is deeply rooted in the success of China’s economic growth and its domestic governance, including the enormous efforts in poverty reduction and elimination. China was successful in lifting over 700 million people out of poverty in the last four decades.

The other is the fact that China’s success has been achieved by taking its own path of development with strong institutional guarantees from government led by the Chinese Communist Party. In other words, China has not followed the governance model of neo-liberalism offered and sometimes imposed by Western nations. Other developing countries and emerging markets, as well as many advanced industrial nations, have come to the conclusion that China offers an alternative model, though by no means to be simply copied, to economic growth and good global governance. B&R is a solid example.

President Xi solemnly promised at the B&R Forum that the new Silk Road will be “the road of peace, prosperity and innovation with inclusiveness and civilization integration”. B&R is also offered as a way to deal with the serious global challenges of peace deficit, governance deficit and development deficit.

It is quite clear that B&R has nothing whatsoever to do with the decline or non-decline of the liberal order or liberal democracy as claimed by some scholars and experts in the West. If there is anything about B&R that can contribute to the future of global governance and world order, it is the inherent opportunities of that proposal to further democratize international relations and make globalization an equal process for sharing benefits among all nations and therefore more sustainable.

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By Carey YANG Qiuyu, The Belt and Road Research Center, Qianhai Institute for Innovative Research (QIIR)

Before the Belt and Road Initiative, China has close trade relationship with Southeast Asian countries, especially ASEAN countries. With the completion of the ASEAN Economic Community in the end of 2015, the world's seventh largest economy with 640 million people will bring an unlimited potential market. The gradually maturing development of the ASEAN Economic Community has provided a great platform for the construction of 21st Century Maritime Silk Road. The Belt and Road initiative also prioritizes the ASEAN countries during the development. That is to say, trade markets of ASEAN will all go into a rapid development phase for some time in the future.

Although the ASEAN economies have made unremitting efforts to improve the economy and trade of their members, their economic and trade conditions polarize seriously. Additionally, the volume of trade between member countries' and China is extremely unbalanced…..

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