HKTDC Research | 29 Jul 2016

China's “Going Out” Initiative: Service Demand of Western China to Tap Belt and Road Opportunities

Thanks to the active overseas investment of Chinese enterprises in recent years and the Chinese government’s advancement of the Belt and Road Initiative, China was the world’s third-largest source of foreign investment for the fourth consecutive year in 2015. In fact, many mainland enterprises are stepping up their efforts in “going out” to look for brands, technologies and other resources to boost their competitiveness, while bringing in the advantages of foreign partners as a way to further develop Chinese and overseas markets.

 

Moreover, the majority of enterprises surveyed said they would consider “going out” further to tap business opportunities in countries along the Belt and Road routes, particularly in ASEAN countries and other Southeast Asian markets. As well as aiming to sell more industrial/light consumer products to Belt and Road markets, they also wish to carry out sourcing and investment activities such as setting up factories.

 

 

The largest proportion of the surveyed enterprises (50%) said that, in the course of “going out”, they would be most interested in going to Hong Kong to seek professional supporting services and business partners. This is in line with the results of similar surveys carried out by HKTDC Research in the past three years, namely in the Pearl River Delta (PRD) in 2013, the Yangtze River Delta (YRD) in 2014 and the Bohai Rim in 2015. Therefore, whether in the coastal regions or in western China, it is apparent that Hong Kong is the preferred services platform for mainland enterprises intent on “going out”.

New Pattern of Opening Up Under the 13th Five-Year Plan

China is not only a leading destination for foreign direct investment (FDI), but it also ranks among the world’s top sources of FDI. Indeed, China has in recent years significantly relaxed its administrative measures on outbound investment in order to facilitate the “going out” of enterprises to invest overseas. Furthermore, the Belt and Road Initiative strengthens mutually beneficial co-operation with countries along its economic corridors.

Adopted in March 2016, China’s 13th Five-Year Plan[1] stresses the need to establish a new pattern of all-round opening up in the next five years (2016-2020). It encourages enterprises to “go out” to establish sales networks in foreign markets and to bring in the advantages of foreign partners to enhance competitiveness. Meanwhile, bilateral and multilateral co-operation mechanisms will be improved to encourage co-operation and investment in countries along the Belt and Road routes, infrastructure connectivity and trade facilitation advanced, and co-operation in energy and industry chains strengthened. It can therefore be expected that China’s outbound investment activities will see further expansion.

(For further details, please see Opportunities Arising from China’s 13th Five-Year Plan: An Overview.)

The World’s Third-Largest FDI Source

According to the latest United Nations Conference on Trade and Development (UNCTAD) figures[2], for four straight years since 2012 China has been the world’s third-largest source of FDI. China’s total outward FDI flows have increased from US$123.1 billion in 2014 to about US$127.6 billion in 2015, trailing only the United States (US$300 billion) and Japan (US$128.7 billion).

Although China has entered into a “new normal” of slower economic growth in the past few years, it has gradually become a main investor in certain developed countries. In particular, investment through cross-border mergers and acquisitions has been increasing, and has moved away from the previous pattern of focusing on energy and natural resources to a diversified pattern covering wholesale and retail, transportation and shipping/warehousing, and real property development. Furthermore, many Chinese enterprises have engaged with their foreign partners in co-operation projects involving technology, or are carrying out various types of commercial co-operation activities with foreign brands, as a way to further develop Chinese and overseas markets.

 

 

Meanwhile, China’s direct investment in Belt and Road countries is continually increasing, rising substantially from about US$400 million in 2004 to US$13.66 billion in 2014, an average annual increase of about 43%. Ministry of Commerce figures show that in 2015 Chinese enterprises made non-financial sector direct investment totalling US$14.8 billion (+18.2%) to 49 Belt and Road countries, accounting for 12.6% of China’s total non-financial sector direct investment that year. The investment flows were mainly directed towards Singapore, Kazakhstan, Laos, Indonesia and Russia.

It is worth noting that a considerable number of Chinese enterprises choose Hong Kong as their main channel for carrying out outbound investment – not only because Hong Kong is an international financial centre in the region with such advantages as free flow of capital. Abundant global communications and market network resources, as well as the availability of a complete range of professional services, are also key factors attracting mainland enterprises to use the Hong Kong platform in “going out”.

According to Ministry of Commerce figures, in 2014 the Chinese mainland routed US$70.9 billion in outward FDI through Hong Kong, accounting for 57.6% of the mainland’s total FDI outflows that year. Based on cumulative investment stock as at the end of 2014, the mainland has made US$509.9 billion in outward FDI through Hong Kong, accounting for 57.8% of the mainland’s outward FDI stock.[3]

 

 

Hong Kong: a Preferred Platform

Many cities and economic regions along China’s coast have been open to the outside world for many years. As China’s economy and investment outflows expand, coastal regions, provinces and cities, such as the PRD, YRD and Bohai Rim, have become main sources of outbound investment. On the other hand, with the western region including Sichuan province and Chongqing municipal benefiting from the Western Development strategy and other preferential policies, and with the efforts of provinces and cities concerned in attracting outside businesses and capital, the economy in the western region has been developing rapidly. Western China has always been an important gateway, a trading and logistics hub and an industry exchange ground connecting to Central Asia, South Asia and West Asia, and now enterprises in the region are also developing related investment and trading opportunities under the country’s “going out” and Belt and Road initiatives.

In May 2016, HKTDC Research conducted a questionnaire survey at the SmartHK fair held in Chengdu, the capital city of Sichuan province. As well as seeking to understand what challenges enterprises in western China are facing in their operations, the survey also aimed to find out about their intentions concerning transformation and upgrading, in “going out” to tap Belt and Road business opportunities, and their demand for professional services.

The survey followed similar studies carried out by HKTDC Research in the past three years in the PRD (2013), the YRD (2014) and Bohai Rim (2015) regions.[4] In the current survey, 237 effective questionnaires were completed by mainland enterprises (comprising trading companies, manufacturers and service suppliers) mainly from Sichuan, Chongqing and elsewhere in the western region.[5] The opinions of these 237 mainland enterprises on “going out” to tap Belt and Road business opportunities are outlined below.[6]

 

 

• Challenges in Business Operations

  Of the enterprises surveyed, 96% said they had come across different types of challenges in their operations in the past year. The three main problems they faced were (1) difficulties in financing; (2) rising labour, land and/or other production costs; and (3) a weak mainland market and inadequate orders. These accounted for 39%, 38% and 36%, respectively, of the enterprises surveyed.

  In addition, 26% of the enterprises indicated they were worried about their lack of capability in product design and technological R&D; 22% pointed out that, in the face of keen competition in the international markets, they lacked competitive brands to help develop international markets and business; and 20% said they were affected by weak international markets and inadequate orders. By comparison, relatively few enterprises (only 9% of those surveyed) said the volatile renminbi exchange rate, including depreciation of the currencies in their target markets, was a hindrance.

• Adjusting Operating Strategy

  Confronted with market competition and other challenges, 95% of the enterprises surveyed said they had already adjusted their business and operating strategies and made relevant investment, or would consider doing so in the next one to three years. As to the direction of adjustments in business and operating strategies, most enterprises indicated they would do more to develop overseas markets, accounting for 44% of all enterprises surveyed (including 29% saying they would do more to develop overseas mature markets and 25% saying they would do more to develop overseas emerging markets). In addition, 43% said they would develop/strengthen their own-brand business, while 41% said they would like to do more to develop the Chinese mainland market.

  Compared with the results of previous surveys, enterprises in western China appeared to be as keen as their PRD counterparts in wanting to develop both overseas markets and the Chinese mainland market. In comparison, enterprises in the YRD and Bohai Rim regions were more concerned with bringing in foreign advantages to develop the mainland market, showing that the development strategies of enterprises in different regions were not all the same.

• Intention of Tapping Belt and Road Opportunities

  In the current survey, enterprises were also asked about their opinion on Belt and Road opportunities. Among all the enterprises surveyed, 81% said they would consider tapping opportunities in countries along Belt and Road routes in the next one to three years. Among these enterprises, most (65%) said they would like to sell more industrial products and light consumer goods to Belt and Road markets. A smaller proportion of the enterprises (34%) would like to go to Belt and Road countries to carry out sourcing activities, including the sourcing of consumer goods/food products to sell in the mainland market or the sourcing of raw materials for production on the mainland. Some enterprises (26%) would like to invest and set up factories in Belt and Road countries. In addition, 17% would like to set up transit warehouses in overseas locations including Belt and Road countries to enhance international logistics efficiency.

  On the other hand, more than half of the enterprises (53%) said they would be most interested in going to Southeast Asia, such as ASEAN countries, to tap Belt and Road opportunities. Other locations of interest included South Asia (27%), Central and West Asia (20%), Central and Eastern Europe (19%) and the Middle East and Africa (18%).

• Keen Demand for Hong Kong and Overseas Services

  Facing all types of business and operating challenges and aiming to advance transformation and upgrading, the enterprises surveyed were keen for various types of professional services. In line with the results of HKTDC’s surveys conducted previously in the PRD, YRD and Bohai Rim regions, the three main types of services most sought by western China enterprises were: (1) brand design and promotion strategy; (2) marketing strategy for the development of new business and new markets (including the development of Belt and Road markets); and (3) product development and design. These accounted for 46%, 45% and 44%, respectively, of the enterprises surveyed. This shows that, irrespective of the direction of transformation and upgrading of mainland enterprises or the focus of their operating strategies, the professional services needs of enterprises from different regions are more or less the same.

  Other services western China enterprises need to seek from the outside included: marketing activities tailored to overseas markets, including Belt and Road markets (37%); financial services such as banking, financing and project valuation (36%); services in energy conservation, emission reduction and environmental protection technology (33%); and supply chain management and support services, such as materials and product inventory and logistics management (31%). Of those enterprises surveyed requiring these services, more than 60% indicated they would use the services provided by Hong Kong or overseas suppliers, with the exception of energy conservation and environmental protection technology.

• “Going out” To Seek Business Partners

  Meanwhile, 81% of the enterprises surveyed expressed an interest in seeking, or had already “gone out” to seek, business partners overseas. The majority of the enterprises (about 50%) said they were interested in co-operating with foreign brands to increase sales. This is similar to the results from the surveys previously conducted in the PRD, YRD and Bohai Rim regions. (Coincidentally, enterprises from different regions considered brand co-operation as their top reason for seeking foreign partners.)

  In addition, 22% of the western China enterprises surveyed said they would like to acquire minority equity stakes in foreign companies to expand their overseas/mainland sales networks, 20% would like to enter into technological co-operation with overseas institutions, while 15% would like to redouble their efforts in purchasing high-tech equipment, raw materials and key parts and components from overseas.

• Hong Kong as the Preferred Services Platform for the Mainland’s “Going Out”

  About half (50%) of the enterprises surveyed indicated they would like to go to Hong Kong to seek the professional services mentioned above and/or to look for foreign business partners. Although this proportion is slightly lower than in the previous three surveys, Hong Kong remains the “going out” platform preferred by most western China enterprises, and attracts the preference of a much higher proportion of enterprises surveyed than other locations such as the US, Germany, Taiwan, Japan and Singapore, which account for 26%, 20%, 19%, 17% and 14%, respectively, of the enterprises surveyed. It is therefore apparent that, irrespective of the location of a mainland enterprise or whether it is from the PRD, YRD, Bohai Rim or China’s western region, Hong Kong is the preferred services platform for “going out” from the mainland.

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[1]  The 13th Five-Year Plan refers to the Outline of the 13th Five-Year Plan for National Economic and Social Development of the People’s Republic of China adopted at the fourth session of the 12th National People’s Congress in March 2016.

[2]  World Investment Report 2016, UNCTAD.

[3]  Source: 2014 Statistical Bulletin of China’s Outward Foreign Direct Investment.

[4]  For the research topics and results of the surveys conducted respectively in the PRD, YRD and Bohai Rim, please see Guangdong: Hong Kong Service Opportunities Amid China’s “Going Out” Strategy published in December 2013; China’s “Going Out” Initiative: Jiangsu/YRD Demand for Professional Services published in September 2014; and China’s “Going Out” Initiatives: Professional Services Demand in Bohai published in September 2015.

[5]  The HKTDC held a SmartHK Expo fair at Chengdu Century City New International Exhibition & Convention Centre on 12-13 May 2016. During the CEO Forum and four thematic seminar sessions related to “going out” to tap Belt and Road opportunities, HKTDC Research conducted a questionnaire survey on the attendees. Of the 469 questionnaires collected afterwards, 237 were deemed to be effective ones filled out by mainland enterprises (including trading companies, manufacturers and service suppliers).

[6]  The options in the current survey are slightly different from those in the three previous surveys, so only some of the results can be compared.

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2 Aug 2016

‘One Belt and One Road’: Connecting China and the world

By Tian Jinchen (Director of the Western Development Department of China’s National Development and Reform Commission)

China is leading the effort to create the world’s largest economic platform. More than 2,000 years ago, China’s imperial envoy Zhang Qian helped to establish the Silk Road, a network of trade routes that linked China to Central Asia and the Arab world. The name came from one of China’s most important exports—silk. And the road itself influenced the development of the entire region for hundreds of years.

In 2013, China’s president, Xi Jinping, proposed establishing a modern equivalent, creating a network of railways, roads, pipelines, and utility grids that would link China and Central Asia, West Asia, and parts of South Asia. This initiative, One Belt and One Road (OBOR), comprises more than physical connections. It aims to create the world’s largest platform for economic cooperation, including policy coordination, trade and financing collaboration, and social and cultural cooperation. Through open discussion, OBOR can create benefits for everyone.

The State Council authorized an OBOR action plan in 2015 with two main components: the Silk Road Economic Belt and the 21st Century Maritime Silk Road (exhibit included in original). The Silk Road Economic Belt is envisioned as three routes connecting China to Europe (via Central Asia), the Persian Gulf, the Mediterranean (through West Asia), and the Indian Ocean (via South Asia). The 21st Century Maritime Silk Road is planned to create connections among regional waterways. More than 60 countries, with a combined GDP of $21 trillion, have expressed interest in participating in the OBOR action plan.

The effort has already made some practical achievements. China has signed bilateral cooperation agreements related to the project with Hungary, Mongolia, Russia, Tajikistan, and Turkey. A number of projects are under way, including a train connection between eastern China and Iran that may be expanded to Europe. There are also new rail links with Laos and Thailand and high-speed-rail projects in Indonesia. China’s Ningbo Shipping Exchange is collaborating with the Baltic Exchange on a container index of rates between China and the Middle East, the Mediterranean, and Europe. More than 200 enterprises have signed cooperation agreements for projects along OBOR’s routes. In 2014, China established the $40 billion Silk Road Fund to finance these initiatives, and it has made investments in several key projects. These projects are just the start as OBOR enters a new stage of more detailed and comprehensive development. This work will see the development of six major economic corridors, including the New Eurasian Land Bridge, China–Mongolia–Russia, China–Central Asia–Western Asia, Indo-China Peninsula, China–Pakistan, and Bangladesh–China–India–Myanmar. These corridors will be the sites of energy and industrial clusters and will be created through the use of rail, roads, waterways, air, pipelines, and information highways. By both connecting and enhancing the productivity of countries along the new Silk Road, China hopes the benefits of cooperation can be shared and that the circle of friendship will be strengthened and expanded.

China seeks to take the interests of all parties into account so as to generate mutual benefits, including environmental management and closer cultural exchanges. We wish to give full play to the comparative advantages of each country and promote all-around practical cooperation.

This article was originally published by McKinsey & Company’s Global Infrastructure Initiative, www.globalinfrastructureinitiative.com.

©McKinsey & Company 2016 All rights reserved. Reprinted by permission.

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4 Aug 2016

Navigating the New Silk Road - Executive Summary from the inaugural Belt and Road Summit

This Executive Summary is jointly produced by the Hong Kong Trade Development Council and McKinsey & Company.

In 2013, China’s President Xi Jinping outlined sweeping proposals aimed at reviving ancient trading routes between Asia, Europe and beyond, through the creation of an overland “Silk Road economic belt” and a “21st century maritime Silk Road.” President Xi’s “Belt and Road Initiative,” perhaps the most ambitious development programme put forward by China, would encompass some 65 countries in Asia, Europe and Africa, which collectively include 4.4 billion people and claim a gross domestic product of US$21 trillion.

As a key driver of this plan, the Chinese government has agreed to underwrite the development of infrastructure in Belt and Road countries through multilateral institutions and policy banks as well as China’s state-owned firms. In 2014, China established three new financial entities, two with international support: the Asian Infrastructure Investment Bank (AIIB), which includes 57 founding members and has a registered capital of US$100 billion; the New Development Bank, also known as the BRICS bank, and which includes Brazil, Russia, India, China and South Africa, with an initial capital of US$50 billion; and the Silk Road Fund, financed primarily from China’s foreign reserves, with an initial capital of US$40 billion. Furthermore, China’s two policy banks, the China Development Bank and the China Export-Import Bank, are expected to provide substantial funding for Belt and Road-related projects, as are large state-owned lenders such as the Bank of China.

In spite of these resources however, the vast scope of the Belt and Road Initiative leaves ample opportunity for participation by other governments and the private sector. To explore these opportunities, the first ever “Belt and Road Summit” was held in Hong Kong on 18 May 2016, organised by the Government of the Hong Kong Special Administrative Region and supported by China’s Ministry of Foreign Affairs, the National Development and Reform Commission, the Ministry of Commerce and the People’s Bank of China, in association with the Hong Kong Trade Development Council. The honourable presence of Mr Zhang Dejiang, Chairman of the Standing Committee of the National People’s Congress of China, together with the support of the four Chinese ministries, is the first official endorsement of Hong Kong’s position and roles in the Belt and Road Initiative.

This definitive event brought together more than 2,400 government officials, business leaders and experts from around and beyond the Belt and Road economies for a day of discussion, debate and business-matching. It demonstrated Hong Kong’s ability to host a truly international business forum to facilitate the Initiative.

Why Hong Kong? We believe that Hong Kong is the ideal springboard to begin your exploration of Belt and Road business opportunities. As Asia’s financial and logistics hub, Hong Kong has a history in international trade, a stable legal system
and free flow of capital, information and people – all of which make our city the ideal place to commercialise opportunities from the Initiative.

To help you navigate the Belt and Road, we are pleased to bring you this report, which highlights some of the Summit’s proceedings and identifies major themes and areas for further consideration. Beyond the event, you can also visit our resource portal www.beltandroad.hk for further information on the Belt and Road, insights from business leaders and policymakers and a database of relevant advisors who can help.

In ancient times, the Silk Road connected people, created new opportunities and advanced development of nations through trade, commerce and cultural exchange. Likewise, we hope the Belt and Road Initiative will do all these and more. Beginning with the Belt and Road Summit, we invite you to join us on this momentous journey together for many decades to come.

Vincent H S Lo, GBS, JP
Chairman
Hong Kong Trade Development Council

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5 Aug 2016

China's One Belt One Road Opportunities for Australian Industry

By Australia-China One Belt One Road Initiative (ACOBORI)

This report presents a practical outline of China’s new Belt and Road Initiative (otherwise known as One Belt One Road) and the complementary role government and business can play in its implementation. The messages contained within this report are intended to provide representatives of Australia’s industries and professional services with a better understanding of current Belt and Road projects. As well as provoke a level of enquiry and consideration about the breadth and depth of capability that Australia could contribute to the implementation of the Belt and Road Initiative.

The Belt and Road Initiative aspires to increase regional cooperation and economic development with countries along the identified Silk Road routes. Beyond this geographical area, China views the Initiative as an inclusive framework, where participation will not be limited to a particular country or region, but rather offer a global model for international engagement.

Therefore, if appropriately curated and understood by both Australia and China, there will be avenues for Australian businesses to take part and benefit from the implementation of the Initiative – specifically:

1. Australian businesses could use the framework of the Initiative to attract Chinese partners in major Australian based projects (which may also involve commonwealth and state government interaction/regulatory compliance);

2. Australian businesses could use the framework of the Initiative to partner with Chinese enterprises in projects beyond Australia – both in China and in Belt and Road countries.

To participate however Australian industries and professions need to further capitalise on a strong trading relationship with China. This requires not only to reinforce the strengths of traditional trading sectors, but also to use the scope of the Initiative to identify other industry sectors where Australian businesses can bring comparative or competitive advantage…

With the link to download this report, you can use www.australiachinaobor.org.au. The current copy you have is a partial report, people can follow the link to our website to request full copy or even hard copy of this report to be posted to them.

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HKTDC Research | 5 Aug 2016

"Going Out" to Capture "Belt and Road" Opportunities (Expert Opinion 4): Cross-Border Financing Serving Outbound Investment

As an important business platform of the Asia-Pacific region, Hong Kong boasts many advantages, including a sound legal system, free movement of funds and information, and all kinds of legal/accounting and other professional services. Conrad Tsang, Chairman of the PRC Committee of the Hong Kong Venture Capital and Private Equity Association (HKVCA), pointed out that mainland companies may absorb external capital through Hong Kong for their overseas projects and other operations when investing in countries along the Belt and Road. Leveraging Hong Kong's strengths as regional headquarters, they may also make use of the territory's efficient business environment to coordinate investments in the mainland, Asia and other Belt and Road markets and boost the efficiency of "going out" as a whole.

Financing Overseas Investment Projects

In an interview with the HKTDC Research, Conrad Tsang said: "Unlike startups that need the support of seed or angel funds, mainland companies planning to 'go out' and invest abroad have grown to a considerable scale and have good assets and cash flow. This notwithstanding, most of them still need financing for their overseas projects and need to seek sufficient funds to support the development of these projects.

Hong Kong is an international financial centre, with a low tax rate, convenient business environment and other advantages. Geographically it lies next to the rapidly developing Asian region as well as mainland China, which has already become a major world economy.

As such, it is attracting international venture capital and private equity firms eyeing opportunities in the Asia-Pacific markets to shift their regional headquarters to the territory. They make use of Hong Kong's information resources and networks to find investment opportunities in the mainland, Asia and even countries along the Belt and Road and engage in fund raising and other financing activities. They also make use of Hong Kong's professional services to handle accounting, contract, legal and other matters, manage their business presence in the mainland and other regions, and secure and conclude investment deals locally.

Injecting International Elements in Going Out Enterprises

 

 

“Through Hong Kong's business platform and its advantage in the movement of capital, mainland companies can effectively overcome investment and financing hurdles in their overseas ventures. In fact, Hong Kong's venture capital and private equity investors can not only help in equity funding but can also inject international elements into mainland companies. Through their international corporate structure in Hong Kong, they can carry out cost-effective equity and debt financing for outbound investment projects and support the development and operation of these projects.

“Investors from all over the world converge in Hong Kong and venture capital and private equity firms with footholds in Hong Kong have become important clusters of investors in the Asia-Pacific region. They can effectively assist ‘going out’ mainland companies investing in projects along the Belt and Road.”

HKVCA currently has over 340 corporate members, including 190 private equity firms, and manages a total of US$1 trillion in assets. These firms are engaged in venture, growth, buyout and other funds in the Asia-Pacific region.[1] A total of US$67 billion in private equity funds were raised in Asia last year, about 18% of which were gathered in Hong Kong. There were 354 private equity entities with headquarters in Hong Kong as of the end of 2015.[2]

[For examples of how Hong Kong investors can help mainland companies in "going out", please see: “Going Out” to Capture “Belt and Road” Opportunities (Expert Opinion 5): A Co-investment Example of Going Global]

 

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[1]  Source: HKVCA.

[2]  Source: Asian Venture Capital Journal/data quoted by the Hong Kong SAR government.

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9 Aug 2016

Infrastructure Financing Trends

By International Finance Corporation, World Bank Group

What are the Current Trends in Emerging Market Infrastructure Spending?

Emerging markets need twice the infrastructure investment they now receive. East Asia has the greatest needs, while Africa’s requirements are large in comparison to its economic size; power generation accounts for more than half of needed investment. There is great potential for increasing participation by institutional investors in developing-country infrastructure: Insurance companies, asset managers, pension funds and sovereign wealth funds are increasingly aware of the manifold benefits that infrastructure investments offer.

Emerging markets can absorb an estimated $2 trillion per year in infrastructure spending, about half of which currently goes unmet. And the gap will only grow, as infrastructure investment needs in emerging economies are expected to double annually over the next decade.

Government budgets are the biggest source of funds, accounting for about three of every four infrastructure dollars, while the private sector provides the rest. Yet in the aftermath of the financial crisis, governments have seen their fiscal deficits grow and their budgets shrink, increasing the need for private funding. However, most private funding flows to upper middle-income countries.

Going forward, East Asia including China will require the majority of infrastructure investment; Sub-Saharan Africa’s needs are substantial relative to the size of the region’s economies. In terms of sectors [1], electricity will require over half of all infrastructure spending. That includes power generation, capacity, and transmission and distribution networks. And preparation costs, including design and arranging financial support, are not insignificant—they can constitute up to 10 percent of overall project costs.

Debt represents about three-quarters of total private financing for infrastructure, with loans about 1.5 times the size of bonds. Before 2008, international loans had been the main infrastructure funding source. Since then international lending has slowed and local loans and bonds have filled the gap. International instruments rebounded in 2013, though primarily due to a few large transactions in limited sectors in Mexico, China, and Brazil.

Private Participation
Private participation in emerging-market infrastructure hit a high in 2012. The Latin America/Caribbean region was the largest recipient, while South Asia and East and Central Asia have tended to be high volume destinations as well. At a country level there is a concentration in the BRICs—Brazil, Russia, India, and China—plus Turkey and Mexico. Between 2000 and 2013 some 38 percent of private flows went to Brazil and India. Still, despite the increase in private investment in infrastructure since 2008, most of the gains flowed to upper-middle income countries, while flows to lower-middle and low income countries fell by 37 percent and 68 percent, respectively, between 2007 and 2013. At a sector level, private investment is concentrated in the energy and information technology sectors.

Insitutional Investors
Insurance companies, asset managers, pension funds, and sovereign wealth funds are all attracted to infrastructure because it offers diversification potential and inflation and interest rate protection—and it contributes to public goals. As a result, and despite the current small allocation to infrastructure by these market participants, private infrastructure investments are increasingly attracting interest from institutional investors. In addition, more investors are entering the space via debt, co-investments and secondaries, and less through direct investment.

Please click here for the full report.

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[1] Infrastructure sectors covered: energy, water and sanitation, transport, and telecom. Estimates were conducted using various sources, including PPIAF, Dealogic, and Project Finance Review. Source for spending data: Bhattacharya and Romani, “Meeting the Infrastructure Challenge, 2013.

 

 

 

 

 

12 Aug 2016

Six Challenges for US-Japan Cooperation in Asia

By Hitoshi Tanaka, Senior Fellow, Japan Center for International Exchange

A new year has come, but it seems clear that in 2016, the regional order in East Asia will continue to be characterized by a sense of instability. China’s behavior continues to create unease, most prominently through its unilateral construction of artificial landfill islands in the South China Sea, but also through the progress it is making on its regional economic initiatives, the Asian Infrastructure Investment Bank (AIIB) and the One Belt, One Road infrastructure connectivity plan. Meanwhile, the shadow of Crimea hangs over Russian dealings with Asia, and North Korea has yet again tested a nuclear device.

A key question as 2016 progresses will be a familiar one: How best to focus US-Japan cooperation to address both the challenges and opportunities that accompany the rise of China? The time is ripe for intensive alliance consultations regarding future cooperation with China given the relative improvement of Sino-Japan relations over the last year. At the same time, there are six thorny issues that carry the potential to undermine US-Japan cooperation and thus need to be dealt with. Close, careful US-Japan consultation and cooperation is required to ensure that these issues do not create a wedge in the alliance.

1. The Future of US Global Leadership
The world is watching the US presidential election closely for signs of the foreign policy path the next US president will take. A significant amount of the rhetoric from the primaries is concerning—most notably the xenophobic remarks of Donald Trump, which have captured the media spotlight. While it is still a long road to the White House, the kind of debate we have seen so far—which has taken a hostile tone toward certain nations and groups (such as banning Muslims from entering the United States) and has failed to recognize the vital need for international cooperation—is damaging to the long-term credibility of US global leadership. Continued US leadership is critical to maintain and strengthen liberal and free-market values as well as the stability and prosperity of East Asia. The United States, East Asia, and the world need a US president with the stomach for strong global leadership based on deep cooperation and consultation with US allies and partners, rather than one who advocates unilateralist or isolationist thinking.

2. Regional Trade Deals and Economic Governance
The Trans-Pacific Partnership (TPP) deal reached in October 2015 has rightly been hailed as a major achievement in setting common rules for regional economic governance. Now the agreement must be ratified by the 12 signatory states, including the US Congress. In light of China’s efforts to launch the AIIB, roll out the One Belt, One Road initiative, and reach a Regional Comprehensive Economic Partnership with the ASEAN+6 nations, the TPP is critical to the future credibility of US regional leadership. The TPP is not simply a vehicle to facilitate increased trade, but rather a means to shape 21st-century rules for economic governance and to promote and entrench liberal free-market principles in Asia Pacific.

Indonesia’s decision in September 2015 to choose China over Japan to build a high-speed train line between Jakarta and Bandung is illustrative of what is at stake. The US$5.5 billion Chinese proposal was attractive given that it required neither financing nor a loan guarantee from the Indonesian government; in other words, China is taking on almost all of the financial risk of the project, which most ODA providers are not able to do. Three-quarters of the funding will come from China and the remaining 25 percent from Indonesian companies. Indonesian President Joko Widodo, who campaigned on improving welfare for ordinary Indonesians, was thus able to avoid using the national budget for a project in one of the country’s most prosperous areas. But many questions remain regarding the transparency of the proposal and the ability of China to meet international standards, including on labor and environmental regulations. There is already local criticism of the project for its plans to use Chinese workers at a time when Indonesia’s unemployment rate is rising and there are concerns over China’s safety record in light of the crash of a high-speed train in Wenzhou in 2011.

It is thus critical that the United States, Japan, and the broader international community engage with Chinese-led economic initiatives, including the AIIB and One Belt, One Road project, to help steer China toward a greater embrace of international best practices. In this context, it is important to note that the TPP has an open-accession clause to create a clear and transparent process through which other countries—including China, Indonesia, and South Korea—can join in the future. The United States and Japan should actively promote the expansion of TPP membership, especially to these countries.

3. Demilitarizing the South China Sea
The construction of artificial landfill islands by China in the South China Sea in areas such as the Fiery Cross, Mischief, and Subi Reefs, which are also claimed by ASEAN nations, has set back efforts to peacefully negotiate a diplomatic resolution to these territorial disputes. Moreover, the potential for the future construction of a chain of airports, ports, and other facilities on the artificial islands, as well as high-profile attempts by the People’s Liberation Army (PLA) Navy to enforce no-fly zones, risks further militarizing the South China Sea. Such a scenario would be a serious security concern for the region and should be avoided.

One potentially complicating factor is the recent election in Taiwan, where the Democratic Progressive Party (DPP) won a comprehensive victory, with Tsai Ing-wen winning the presidency and the party gaining the majority in the Legislative Yuan. The DPP is known for its pro-independence stance vis-à-vis Beijing and has in the past suggested negotiations between Taiwan and ASEAN nations over the South China Sea. Tsai has also questioned the “1992 consensus” that there is only “One China” with Beijing and Taipei simply maintaining differing interpretations. For the time being, Tsai seems to have settled for a loosely defined continuation of the status quo. But if the DPP government were to push Taiwan toward a more assertive foreign policy stance and articulate a South China Sea policy different from that of the mainland, it could further complicate the issue.

Further military build-up in the South China Sea will undoubtedly feed regional tensions and increase the risk of accidental conflict. Until a diplomatic resolution can be peacefully negotiated between China and the ASEAN countries, it is vital that all parties be alert to China’s incremental changes. At the same time, in addition to continued US freedom of navigation operations—to ensure free passage, uphold international law, and prevent any further unilateral changes to the status quo—the United States and Japan must coordinate and cooperate to persuade China that freedom of navigation in what is a vital sea route for international commerce and the energy security of East Asia, is a shared interest not just for the United States, Japan, and ASEAN countries but also for China itself.

4. North Korea
Four years since he inherited power from his father, Kim Jong-un appears to be drawing from a diverse toolbox to consolidate his grip on power. First, Kim is continuing the country’s nuclear weapons development program. On January 6, 2016, North Korea tested a nuclear device for the fourth time—the second under Kim Jong-un’s leadership. Such tests and rocket launches are a signal to domestic audiences, especially the Korean People’s Army (KPA), that Kim is capable of continuing the country’s technological progress and bolstering military might against hostile external forces. Second, Kim has also purged a number of high-level officials from his father’s cliques (most infamously his own uncle, Jang Song-thaek), replacing them with his own younger loyalists. Notably, these purges have tended to target military men rather than economic planners. Third, Kim has also shown interest in cementing his legitimacy through economic development. Experiments with reforms have taken place quietly in the background, allowing farmers to retain a fraction of their produce to sell on the market rather than being forced to sell everything to state distributors. Kim is also gearing up for the 7th Congress of the Workers’ Party of Korea (WPK), the first time such a meeting has been held in 36 years. It has been speculated that Kim may use the party congress as a platform to launch more serious economic reform measures and to reassert the primacy of the WPK over the KPA.

The region was rocked by North Korea’s most recent nuclear test. This time, the international community must go beyond business-as-usual measures to deal with the North Korean nuclear program. In order to truly alter North Korea’s behavior, economic sanctions, including financial sanctions, will need to be strengthened. Beijing has a big role to play. Irrespective of its apparent change in attitude after the third North Korean nuclear test in 2013, China has continued to provide substantive assistance to North Korea. For any form of sanctions to be effective, though, the international community as a whole, including China and Russia, must fully back them. South Korea, Japan, and the United States must deepen cooperation and adopt a unified approach on sanctions policy as well as on joint contingency planning. From a coordinated trilateral base, the three nations also need to consult with China and Russia to form a united five-nation front to apply greater pressure on North Korea. An immediate restart of the denuclearization process under the Six-Party Talks may be difficult, but without the right measures to pressure and isolate North Korea, nothing will be achieved and North Korea will continue to develop its nuclear arsenal.

5. Russia Policy
Since Vladimir Putin and Shinzo Abe both returned to power in 2012, the two leaders have built a certain rapport and have shown a willingness to deal with the issue of the Northern Territories (referred to as the Southern Kuril Islands in Russia). Putin was even scheduled to visit Japan. But then Russia annexed Crimea in March 2014 and summit plans were put on hold.

Since then, Japan has stuck to its international obligations and imposed sanctions against Russia in concert with the other G7 nations to punish Russia for its violation of international law. However, if it appears that an acceptable agreement can be reached on the Northern Territories, an issue that has blocked the normalization of Japan-Russia relations since the end of World War II, Japan will have no choice but to seize the opportunity. At the same time, it is important that the United States and Japan maintain very close coordination and not allow Russia to utilize the Northern Territories issue to drive a wedge between them. They must also make clear to Russia that any Russo-Japanese cooperation to resolve the Northern Territories dispute will not translate into an acceptance of the annexation of Crimea or any other violation of international law.

Recently, Prime Minster Abe has reportedly expressed the possibly of making a trip to Russia in his capacity as this year’s chair of the G7. There is also talk of a possible trip by Putin to Tokyo by the end of 2016. While continuing to advocate for a peacefully negotiated resolution to the Crimea crisis, given the possibility that the isolation of Russia could push Putin toward China, it may be wise not to preclude some forms of strategic cooperation with Russia in areas of overlapping interest—including on North Korea and Syria.

6. Reducing Okinawa’s Burden
The battle between the Okinawa prefectural government and the Japanese central government regarding the relocation of the US Marine Corps Futenma Air Station continues to intensify. Each side has launched a series of tit-for-tat court battles centering on the legality of the construction of a new base in Henoko to replace Futenma. Backed by their determined governor, Takashi Onaga, local Okinawan protestors are demanding at a minimum that no new bases be built in the prefecture, with a view to reducing the concentration of bases in Okinawa in the future.

The situation has reached something of an impasse. While the United States might be happy to leave this to the Japanese government to deal with as a domestic issue, ultimately the United States will also have to suffer the consequences of Okinawa’s local opposition. Deep US-Japan consultations must continue, which should be conducted as part of regularized reviews of the US forward deployment structure and how it relates to US-Japan alliance goals. There are two important points to keep in mind here. First, while a continued US forward deployment presence in Okinawa is critical to the maintenance of the alliance’s deterrence posture, if the situation is not handled with due sensitivity for local Okinawan concerns, base protests will continue to be a thorn in the side of alliance relations over the long term. Second, the overall US forward deployment posture in East Asia should be evaluated in light of advances in new military technologies and the need to respond to regional security challenges in a dynamic way. A more evenly rotated distribution of US soldiers across the region—a trend that is underway thanks to increased cooperation with partners such as Australia, India, the Philippines, Singapore, and Vietnam—would not only help reduce the burden on Okinawa over the long term, but also be strategically desirable in responding to a range of new threats.

The choices we make now, during this time of regional flux, about how to deal with these six challenges will go a long way toward determining the future regional order. With deep and regularized consultations across all aspects of the alliance—including on security, economic, and diplomatic strategy—not only can the United States and Japan (in conjunction with other allies and partners) deepen the foundation of their cooperation, but they can also guard more effectively against unilateral changes to the status quo and work together with China to steer its rise in a mutually beneficial direction.

Hitoshi Tanaka is a senior fellow at JCIE and chairman of the Institute for International Strategy at the Japan Research Institute, Ltd. He previously served as Japan's deputy minister for foreign affairs.

Reprinted with the permission of the Japan Center for International Exchange.

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HKTDC Research | 12 Aug 2016

“Going Out” to Capture Belt and Road Opportunities (Expert Opinion 5): A Co-investment Example of Going Global

Chinese mainland enterprises are increasingly looking to make direct investment overseas in order to explore new markets or to obtain access to labour or other resources. Companies have undertaken such moves on their account as well as via mergers and acquisitions. According to one Hong Kong-based investment house, however, equity co-investment or other forms of joint-stock partnership could provide additional options for those mainland investors who are eager to expand their overseas businesses while managing the risk involved. Through cooperation with co-investors, mainland enterprises could not only enjoy the benefits of risk sharing among the investment partners, but also be furnished with additional synergy that could help them move beyond their business constraints, thereby reaching new business frontiers through capitalising on the strengths of their co-investment partners.

Alternative Mode of Investment

Synchronising the Interests of Different Partners

Assessing the pro and cons, Downs said: “Ultimately, Chinese enterprises may not have the controlling stakes in such co-investment models, with success resting on the participants’ contributions and the effective cooperation among the partners. On the upside, the Chinese enterprises would be given the opportunity to participate in a bigger project and have access to markets beyond that of their original business, thus generating sustainable incomes from their overseas investment. This would be a viable option for those ‘going-out’ enterprises without enough experience, exposure and/or resources. Of course, they would have to determine whether to get a majority control in a smaller-scale project by sole investment or whether to take a smaller stake in a bigger project and go global with co-investment partners, and probably with lower risks.”

Downs noted that China is on course to solve its overcapacity problem, while looking along the Belt and Road to seek for further growth impetus. In this regard, private equity firms based in Hong Kong, such as Ironsides, would be able to help Chinese mainland enterprises to relocate their excess capacity via investment in Asia and other Belt and Road countries. This is down to the fact that investment firms in Hong Kong have the advantage of vast business connections both on the Chinese mainland and internationally. As a result, they have access to a variety of different companies, all of which are looking for growth opportunities.

 

 

With free flow of information and familiarity with Chinese and foreign business environment, Hong Kong investors have a considerable understanding of the business needs of a variety of mainland and overseas companies. They are thus in the ideal position to help combine the strengths and resources of Chinese and foreign partners, and to align their interests in order to jointly enter new markets, move up the value chain, and re-allocate resources, when required, to drive businesses forward.

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16 Aug 2016

China’s Vision for a New Asian Economic and Political Order

By the National Bureau of Asian Research NBR

An essay for the Strategic Asia Program by Kyle Churchman

The past year has been a pivotal one for China’s proposed strategic investments in Asia. At the top of Beijing’s regional diplomatic agenda was the One Belt, One Road (OBOR) initiative, a series of land- and sea-based trade routes intended to closely link China with regions to its west and south: Central Asia, South Asia, Southeast Asia, the Middle East, East Africa, and Europe. In addition, the Asian Infrastructure Investment Bank (AIIB)—a multilateral intergovernmental bank launched by China to finance infrastructure development in Asia, including OBOR-related projects—held its signing ceremony in June with the participation of 57 nations. Together, these two investment initiatives reflect Beijing’s proactive attempt to reshape the Asian economic and political order.

The One Belt, One Road Initiative
The Silk Road Economic Belt—OBOR’s land-based component—encompasses several economic corridors around China’s western rim, creating a grid of transportation routes rather than a single linear path. The belt project envisions the construction of new rail lines, highways, pipelines for oil and gas, telecommunications infrastructure, and fiber-optic cables. Two corridors will extend across the Eurasian landmass at different latitudes and terminate in Europe, while another will connect China’s southwestern provinces with mainland Southeast Asia. The proposed China-Pakistan and Bangladesh-China-India-Myanmar economic corridors will be closely integrated with the belt and provide port access to the Indian Ocean.

As conceptualized by Beijing, the 21st Century Maritime Silk Road starts in the major port cities of southern China and passes through the South China Sea before extending across the Indian Ocean to East Africa and northward through the recently expanded Suez Canal to Europe. Infrastructure investment along the route will involve the construction of new ports and upgrades to existing facilities. Beijing’s objective is to facilitate greater Chinese commercial (and perhaps naval) activity in the Indian Ocean region.

According to an important OBOR vision document released by the Chinese government in March 2015, the initiative is intended to facilitate regional trade and investment, promote more widespread use of the renminbi in cross-border trade, and foster greater exchanges between Chinese citizens and the peoples of OBOR countries. Through dialogue with participating countries, China also aims to remove technical barriers to trade, such as conflicting customs procedures.

While the Chinese government has couched the initiative in altruistic terms, OBOR is chiefly designed to benefit China’s economy. Most importantly, China seeks to spur economic development in its poorer western and southern regions, which lag far behind the prosperous coastal provinces. Large state-owned enterprises in the infrastructure, energy, and advanced manufacturing industries, which have suffered in recent years from a glut of domestic overinvestment and the slowdown in the Chinese economy, are being encouraged to “go out” and win contracts along the routes. Whether China might eventually push for a free trade zone that covers OBOR countries in response to the recently concluded Trans-Pacific Partnership agreement is an important question.

Geostrategic motivations also drive the OBOR initiative, with the overarching one being the desire to circumvent U.S. encirclement in the Western Pacific. U.S. political and military influence in the regions west of China is considerably weaker than around China’s eastern rim, giving Beijing incentive to “go west” as Washington rebalances to the Asia-Pacific. The construction of new pipelines linking China with hydrocarbon-rich Central Asian states and the transport of Middle Eastern oil through Pakistan instead of the South China Sea will improve Chinese energy security. Currently, more than 70% of China’s oil imports from the Middle East and Africa pass through the Strait of Malacca—a chokepoint between the Malay Peninsula and Sumatra that is vulnerable to a U.S. blockade. A further geostrategic motivation is focused on soft power: China hopes to win the goodwill of OBOR nations by providing billions of dollars in financing for infrastructure projects that will likely benefit their economies.

The Asian Infrastructure Investment Bank
The AIIB seeks to address the Asia-Pacific’s enormous infrastructure needs, including financing of some OBOR-related projects. Thanks to pledges by key European countries to join the bank as well as China’s $29.78 billion contribution, the AIIB’s capitalization stood at $100 billion at the time of the June 2015 signing ceremony. China’s 26.6% voting share gives it de facto veto power in the institution, as major decisions will require 75% support from member countries. China promises to make the bank “lean, clean, and green”—that is, an institution with a small yet efficient management team, zero tolerance for corruption, and respect for the environment.

Nonetheless, the United States and Japan, both primary sponsors of the existing Asian Development Bank (ADB), have refused to join the AIIB. Both countries have expressed concerns about the AIIB’s governance and lending practices, fearing it will erode the liberal economic influence of the ADB and the Bretton Woods institutions.

Outlook
As China advances its vision for the regional economy in the form of OBOR and the AIIB, it faces the key challenge of reassuring its Asian neighbors and the United States that its intentions are genuinely benign. Some observers have equated OBOR with the Cold War–era Marshall Plan, but Chinese foreign minister Wang Yi and other senior Chinese officials have vigorously claimed that the initiative is concerned with the promotion of economic cooperation rather than strategic dominance. China’s pivot westward could also alarm India and Russia. In attempting to break free from U.S. encirclement, Beijing may in fact stoke similar fears of encirclement in India, which considers the Indian Ocean its natural backyard. For Moscow, greater Chinese presence in Central Asia—both political and economic—could produce mixed blessings for Russia’s overall strategic position. On the one hand, Chinese engagement could ease strategic and economic pressure on Russia by sharing the burden of restricting U.S. influence and suppressing radical Islam in the region. On the other hand, it could reduce Russia’s soft power and influence within a region where it has traditionally exerted dominance.

Over the next year and beyond, OBOR and the AIIB will continue to take fuller shape in China’s national investment strategy. The AIIB is set to become operational in January 2016 and OBOR is expected to feature prominently in China’s thirteenth five-year plan (2016–20) that will be unveiled during the spring 2016 meeting of the National People’s Congress. China will also likely intensify discussions with OBOR countries about possible investment projects. The implications of OBOR and AIIB have yet to be seen. It will be important, however, to watch how China incorporates the terminal points of the network in Europe within its broader strategic vision. Further integration of European markets with the Asian trading network may be as important a goal for Beijing as the strengthening of partnerships with regional neighbors.

Kyle Churchman is a Resident Junior Fellow at the Center for the National Interest in Washington, D.C. He formerly was a Political and Security Affairs Intern with the National Bureau of Asian Research (NBR). The views expressed are those of the author.

 

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23 Aug 2016

Xi Jinping’s long road to somewhere? China’s OBOR initiative and how Europe should respond

European Centre for International Political Economy ECIPE
By Guy de Jonquières, Senior Fellow at ECIPE

Executive Summary

The true nature and purpose of China’s One Belt One Road (OBOR) initiative are subject to much speculation. The one certainty is that OBOR commands powerful high-level Chinese support and is backed by a large investment of political capital. It is no less than the personal signature initiative of President Xi, who has made clear that he regards it as central to his political legitimacy and as the tangible embodiment of his “China Dream” of rejuvenating the nation and its ruling Communist Party – which in his mind are probably the same thing.

However, the initiative faces formidable challenges. It remains unclear how much new investment OBOR has generated, how far it makes economic or geo-political sense or, indeed, how far China can afford to support it, given its current economic and financial difficulties. There has been fierce competition to win government support for OBOR projects but its political nature risks leading to serious misallocation of resources.

OBOR should not be expected to provide a financial bonanza for Europe or to re-energise the region’s flagging economic performance and loss of self-confidence. Nor does the EU need Chinese investment or other resources to achieve those objectives: the solutions to its problems lie mostly in its own hands. However, it should not turn its back on OBOR. It should, rather, view the initiative as one in a series of small steps aimed at fostering deeper mutual understanding and engagement – and possibly even greater trust between the EU and China. Though that could cause strains in its relations with the US, realistically, the EU has little option. It also has little to lose by trying to build bridges and make common cause with China in areas of mutual benefit, even though they may not pay off politically and economically in the longer term. Setting its face against China would not insulate Europe from the aftershocks if China suffered serious economic setbacks or entered a period of political and social turbulence. Whatever happens, China’s economy is simply too big and too deeply integrated with the rest of the world, and the country’s global impact too great, to be ignored.

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The mention of China’s One Belt One Road initiative, also known as Belt and Road, brings to mind the Indian fable of the three blind men and the elephant. The men have never seen an elephant, so have no idea what one looks like. One grasps its trunk and insists it is a tree. Another puts his arms round its leg and declares it to be the column of a statue. And the third grabs its tail, which he says is obviously a snake. Perceptions of what OBOR is really about – and how far it is feasible – diverge equally widely.

Some observers argue that the initiative, launched with a flourish by President Xi in 2013, is primarily about economics; others that it is principally about geo-politics. For some it is driven, like most Chinese foreign policy, by priorities and pressures close to home; for others, it is a visionary strategy for expanding China’s sphere of international influence and establishing regional hegemony, while countering the US-led TransPacific Partnership. Some think it is really about promoting the development of backward inland provinces; others that it is about exporting China’s massive excess capacity in steel, cement and other industries.

Then again, some think it is aimed at preventing instability in neighbouring Islamic states spilling over into the western province of Xinjiang, with its large and restive Muslim population. Still others see it as an extension of China’s “Going Out” strategy”, intended to promote outward investment, that will also safeguard the country’s dependence on extended supply lines of imported energy and raw materials. And some observers view OBOR as little more than a slogan containing very little real substance to date.

Curiously, most or all of those different interpretations may well be true. OBOR, it seems, has achieved the rare feat of being all things to all men. At least for the moment. However, things that please everybody do not always amount to a lot. An outward appearance of coherence can fragment, as differing priorities and incompatible interests assert themselves. And that, too, may be true of OBOR.

The one certainty is that OBOR commands powerful high-level Chinese support and is backed by a large investment of political capital. It is no less than the personal signature initiative of President Xi, who has made clear that he regards it as central to his political legitimacy and as the tangible embodiment of his “China Dream” of rejuvenating the nation and its ruling Communist Party – which in his mind are probably the same thing. When Mr Xi issues orders, those further down the line of command jump to attention. And so great is his authority in China that the rest of world should pay attention, too.

Turning his dream into reality is not, however, proving easy. To generate momentum for OBOR, events, rallies and meetings have been staged across China, at both national and local level. That has doubtless raised the initiative’s profile and unleashed a wave of public enthusiasm and energy. But it has also complicated the task of co-ordination – always formidable in China - by involving a multiplicity of special interests, in addition to the plethora of different and often rival agencies and departments that habitually have a say in the country’s policy formulation processes. Some foreign diplomats say they have found it difficult to extract specifics about the initiative from Chinese officials and even to discover who, if anyone, is in overall control of it.

With so many fingers in the pie, there has inevitably been fierce competition to grab a bigger share of it and, above all of the government loans and subsidies required to fund it. It is far from clear how many viable new projects have emerged from this stampede. Indeed, there have been numerous reports of existing or shelved programmes being rebranded with the OBOR label in the hope of winning official favour or support. A lot of effort, it seems, may be going into pouring old wine into a new bottle.

One symptom is the claim earlier this year by Gao Hucheng, China’s commerce secretary, that since OBOR was launched, special economic zones along its route have created almost one million jobs in 35 countries and regions and generated more than $100bn in tax revenues. If so, that is a truly remarkable achievement.

However, it may also be the reverse: an attempt to create the illusion of progress where there has actually been very little, by, as one Beijing observer puts it, “building Potemkin villages along the OBOR”. It is not easy to identify really significant developments that unarguably owe their genesis to the initiative. That may be because it is difficult to determine exactly where it begins and ends. Or perhaps it is because bankable projects that offer worthwhile economic returns just aren’t that easy to come up with.

For instance, analysts who have studied the proposed route between the Russian border and the former capital of Xian, OBOR's Chinese hub, have concluded that it can never be economically viable because so few people live along it. Some other projects, beyond China’s borders, look even more dubious, indeed dangerous - so much so that even some of the Chinese state-owned enterprises charged with spearheading OBOR appear distinctly hesitant about getting involved. One senior executive of a leading energy group, fearing that participation in OBOR could expose it to heavy losses, refers to the plan disparagingly in private as “One Road, One Trap”.

One particularly questionable project is intended to transform Gwadar, a remote Pakistani promontory on the Indian Ocean, into a transportation hub for energy and raw materials and a humming port metropolis modelled on the thriving southern Chinese city of Shenzhen. Yet Gwadar is acutely short of fresh water and 400 miles from the nearest electricity grid or large city. It is also under threat from militant jihadists and separatists, requiring 2,000 Pakistani soldiers to guard a handful of Chinese workers. No wonder prospective Chinese investors are hardly rushing in.

Not all the links in the OBOR chain look as risky as Gwadar. Some independent economists believe the maritime section, confusingly named the Road, makes more commercial and economic sense than much of the land-based or Belt part.
 
Strategic Dilemmas

Nonetheless, strategic dilemmas lie at the heart of the grand plan. On the one hand, it is in- tended in part to stabilise troubled neighbours such as Pakistan and Afghanistan in the aftermath of US military withdrawal by promoting their economic and industrial development. However, similar western policies in far-flung and unstable places have repeatedly failed. If OBOR is no more successful, China could find itself drawn into political and military quagmires that it is ill-equipped to navigate, creating serious challenges to its vaunted – though inconsistently implemented - doctrine of non-intervention in other countries’ internal affairs.

If Beijing had a clearly articulated and overarching global geopolitical strategy, it might perhaps find such conundrums slightly less difficult to wrestle with. But, by the admission of its own senior policy makers, it does not. Indeed, Wang Jisi, a leading foreign policy expert who is often – though not entirely accurately - credited as OBOR’s intellectual architect, warned in 2010 that without one, OBOR could lead China into dangerous international territory. Like much of the country’s foreign policy, OBOR seems to be heavily influenced by a China-centric world view, driven chiefly by inward-looking impulses and intended first and foremost to meet pressing domestic priorities and needs.

Southeast Asia presents another challenge. For Beijing, OBOR is a way of strengthening and tightening regional relations. Yet it seems unlikely to dispel on its own the deep anxieties and ill-feeling generated across the region by China’s aggressive expansionism and land grabs in the South China Sea. Indeed, OBOR may backfire if other Asian countries come to view it less as a positive gesture of co-operation than as an attempt to promote and extend China’s supremacy in the region and to underpin other nations’ dependence on it.

Another big question is how far China can afford the substantial investments, including heavy associated spending to boost its overseas military presence, that OBOR calls for. Though no firm figures have been given for its overall cost, some estimates put it at at least $1 trillion. Most of that is expected to be financed by Chinese lenders, with the Asian Infrastructure Investment Bank and the $40bn Silk Road Fund chipping in relatively small proportions of the total. China’s policymakers expect that its investments will ultimately generate significant financial returns for the state and for corporate investors.

However, the initiative comes at a difficult and perilous moment for China’s economy. Former double-digit growth is giving way to what looks likely to be an extended slowdown, as the authorities struggle to staunch sizeable capital outflows and to contain a massive credit explosion that has raised debt to vertiginous levels. Meanwhile the far-reaching and painful structural reforms that policymakers acknowledge are essential in order to re-balance the economy and place it on a sustainable footing have ground almost to a halt.

Just as slower growth spells lower tax revenues, potential claims on fiscal resources are mounting, notably in the form of rapidly rising levels of bad debt. Some independent analysts estimate that Chinese banks’ non-performing loans are as much as 20 per cent of their total assets, far higher than the official figure of 1.67 per cent, and equivalent to around 60 per cent of Gross Domestic Product. Though all those assets might not have to be written off – some could probably be restructured or sold – the bill for cleaning up the mess could be large.

Indeed, much of the debate about China’s economy today centres on whether these problems are set to create a full-blown financial crisis, or whether it will manage somehow to muddle through, but at the cost of an extended and bumpy period of under-performance. Meanwhile, other costly burdens loom that will weigh on growth and the public finances: notably under- taking a huge environmental clean-up operation, dealing with acute water shortages and coping with a shrinking and fast-ageing population that will eliminate the “demographic dividend” that has helped power the economy’s rapid expansion since the early 1980s.

All this means that China is likely to have less scope in the future to deal with problems and promote initiatives simply by throwing money at them, as it has often done in the past. Whether OBOR will nonetheless prove to be the catalyst for a great national rejuvenation, as Mr Xi hopes, that will also help reinvigorate China’s stuttering economy – or whether it will turn out to be hubristic overstretch – remains uncertain.

Doomed TO Succeed?

In one sense, though, the initiative is doomed to succeed. Mr Xi has staked so much person- al and political capital on it that it has become a key test of his leadership: failure would inflict severe loss of face and prestige and would risk seriously diminishing his stature and authority. Whatever happens, the party’s propaganda machine will no doubt be working overtime to present it as a triumph at home, which is the one audience that China’s rulers really care about.

OBOR is at least going with the flow. Asia is the world’s economically most dynamic region - admittedly, in a world where growth remains generally weak – and it offers huge opportunities and promise for the future. To harness them, the region needs large amounts of investment – as much as $8 trillion over a decade in infrastructure alone, according to the Asian Development Bank. If it is to keep on growing, many of those investments will happen with or without OBOR. The still unanswered question is how many of them Mr Xi and OBOR can plausibly take credit for.

The ambitions of OBOR’s architects do not stop at Asia. They conceive of it as a truly global enterprise, extending to Europe and embracing Africa and Latin America as well. Indeed, the Chinese government has sought to sell the initiative to European policymakers, at both EU and national level, as a shot in the arm for the region’s economy that could revive its growth and restore its flagging dynamism by increasing levels of investment.

Though some in Europe have reacted enthusiastically, such arguments appear optimistic and their economic foundations questionable. Europe undoubtedly does need more investment. Fixed capital formation in the EU suffered a collapse after the global financial and Euro crises, from which it has yet fully to recover. However, it is far from clear that China offers the solution - even if it had unlimited funds to invest.

The last thing Europe needs, from China or anywhere else, is more capital: it already has more than it knows what to do with. High savings levels in many countries, encouraged by the austerity policies imposed, voluntarily or involuntarily, on Eurozone members, have put substantial financial resources at their disposal. However, a sizeable proportion is not utilised at home but is exported. Last year, net lending to the rest of the world exceeded net borrowing in 23 of the EU’s 28 members and the Euro area was a net international creditor to the tune of 2.9 per cent of aggregate GDP.

Nor is Europe short of the technology, knowledge, experience and engineering and management skills needed to undertake large-scale infrastructure projects and investment in a wide range of productive, wealth-creating activities. By most measures, it remains far ahead of China, which actually needs what Europe has to offer rather more than the other way round. Indeed, China’s rulers view OBOR and the “Going Out” strategy as ways to catch up by acquiring abroad knowhow and assets essential to economic and industrial development that the country lacks.

As a report by the European Investment Bank concluded in 2013, investment in Europe is being held back, not principally by financial constraints, but by weak demand, by over-capacity generated by the chronic misallocation of capital that triggered the Euro crisis and by a climate of acute political and economic uncertainty. Together, these have depressed prospective returns on investment and made owners and custodians of Europe’s abundant pool of capital acutely cautious about committing it.

Solutions to this nexus of problems may not be easily found. But the keys lie firmly in Europe’s hands, not in China’s. Hopes that Chinese money and drive will provide the missing “Ingredient X” that will somehow make up for Europe’s self-inflicted policy failures, power its economic revival and restore its flagging self-confidence and sense of purpose are not only exaggerated. They are largely misplaced.

That should temper expectations of how much OBOR can contribute. It does not, however, mean that Europe should turn its back on this or on other potentially constructive Chinese initiatives. It should, rather, remain ready to respond to them in a businesslike manner and to explore opportunities for co-operation that genuinely serve the interests of both sides, while remaining vigilant about possible pitfalls and attempts by Beijing to get its way by employing its well-practised divide-and-rule tactics among EU member states.

Europe should view OBOR, not as some giant leap forward – as it is often portrayed in China – but as one in a series of small steps aimed at fostering steadily closer engagement with China. That is the spirit of the approach so far favoured, at senior levels at least, by the European Commission.

Steps taken to date include establishing a “connectivity platform”, a Sino-EU working group charged with identifying specific opportunities for co-operation on OBOR, initially in the field of transport; a modest proposed Chinese contribution of €5bn-€10bn to the planned €315bn European Fund for Strategic Investments, the so-called Juncker fund; and EU support for Chinese membership of the European Bank for Reconstruction and Development, which is studying possible joint projects and knowhow exchanges with the AIIB, to which 14 EU member states have signed up.

None of these developments is ground-breaking and some may never bear fruit at all. However, in parallel with the continuing negotiations on a bilateral investment treaty and the possible launch at some point of talks on an EU-China free trade agreement, they offer both sides opportunities to understand each other better and, perhaps, even to establish some level of mutual trust.

Some may ask whether this is a realistic or worthwhile approach, at a time when Mr Xi is displaying what many see as dictatorial tendencies, when China’s foreign policy is increasingly coloured by nationalism and when its economy is looking decidedly shaky. Such questions particularly preoccupy Washington, whose dealings with Beijing are subject to growing tensions that are likely to rise further if Donald Trump becomes the next US president. Those tensions risk, in turn, imposing strains on transatlantic relations if US and European policies towards China diverge sharply.

Realistically, however, the EU has little choice but to try to work with China. It lacks the superpower status, the strategic stake and the political and military influence in Asia that lead many in the US to view China as a threat. It also has little to lose by trying to engage more deeply with China. Seeking to build bridges and make common cause in areas of mutual benefit may or may not pay off politically and economically in the longer term. But setting its face against China would not insulate Europe from the aftershocks if the country suffered serious economic setbacks or entered a period of political and social turbulence. Whatever happens, China’s economy is simply too big and too deeply integrated with the rest of the world, and the country’s global impact too great, to be ignored.

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