When President Xi outlined ambitious plans to transform China's economic base by 2050 at this year's National Congress in Beijing, his words had a particular significance for many of the businesses operating out of Hong Kong and Taiwan.

At this year's 19th National Congress of the Communist Party of China, the implementation of the Belt and Road Initiative (BRI) was designated as the country's number-one priority. In Taiwan, meanwhile, the New Southbound Policy, the territory's blueprint for its own economic development, has been accorded a similar status. Thankfully, a substantial number of the aims of the two programmes are closely aligned, with many seeing co-operation, rather than competition, as the way ahead, with Hong Kong potentially playing a key role in both of these developmental strategies.

During his own address to the Party Congress in October, China's President, Xi Jinping, outlined his vision for the country's economic development over the next 30 years. His words resonated particularly strongly in Hong Kong and Taiwan, with both territories potential beneficiaries of the mainland's expansive new era.

As part of his programme for transforming China into a moderately prosperous society in the short-term, as well as a contemporary superpower over the medium- to long-term, Xi outlined a two-stage development plan that would run from 2020 until about 2050. For the initial 2020-2035 phase, he emphasised the need for the country to build on its existing economic and technological strengths as it looked to become a global leader renowned for its innovative capabilities.

In terms of phase two, which he envisaged as running from 2035 to about 2050, he saw this as a period of national consolidation. In particular, he emphasised the importance of the country emerging as strong on the domestic front, while taking on a heightened international role.

In terms of concrete objectives, he renewed calls for the country to address five critical issues that threaten its economic development – the need to cut overcapacity, the problem of excess inventory, the requirement to deleverage, the issue of cost reduction and the obligation to eliminate any weak links in the overall production chain. In a similar vein, he highlighted the importance of improving the allocation of resources and maintaining quality, while striking the right balance between supply and demand.

Specifically addressing a number of industrial issues, Xi detailed the growing importance of the advanced manufacturing sector, as well as the need to fully integrate digital connectivity, big data, and artificial intelligence with the needs of the wider economy. Only through such cross-fertilisation, he maintained, could the full potential of a number of emerging sectors be fully realised, including green/low-carbon production and the sharing economy, while a number of existing resources – most notably supply chain management and staff recruitment/development – could also be successfully upgraded to meet the challenges of the digital era.

For many Taiwanese businesses focusing on the advanced manufacturing sector, Xi's words had a particular relevance. In recent years, as the mainland's production base has evolved in line with the aims of Made in China 2025 – the country's 10-year plan to embrace the opportunities offered by intelligent manufacturing – the nature of its commercial interaction with Taiwan has also undergone a fundamental change. While the relationship was once characterised by low-tech Taiwanese production being outsourced to the mainland, it has now shifted to being more of a horizontal alliance, with technological exchanges now commonplace on either side of the Strait – a development set to become more pronounced as Xi's economic masterplan comes to fruition.

As well as his vision for the future of the manufacturing industries, Xi also outlined ambitious plans for the financial sector, an area where Hong Kong has globally acknowledged expertise. In particular, Xi signalled his commitment to further reforms of the overall financial system, while also seeking to enhance the capabilities of the financial-services sector, increase the proportion of direct financing and promote the development of a multi-level capital market. At the same time, he also pledged support for improving the dual-pillar monetary and macro-prudential policy regulatory framework, as well as indicating a need for further reforms to the interest-rate market and improvements to the financial supervision system. Overall, though, he reminded delegates of the paramount importance of avoiding systemic financial risks.

Xi's emphasis on market supervision and risk control within the mainland financial sector has been seen as representing a real opportunity for Hong Kong. While many financial institutions in Shanghai or Beijing, for instance, will be obliged to take a slow and steady approach to market liberalisation, Hong Kong will be free to move at a more accelerated pace, seeing it perfectly positioned to act as an intermediary for any mainland businesses considering overseas expansion, while also confirming its own status as one of the world's leading financial centres.

Overall, this will chime well with another priority highlighted by Xi in his address to Congress – the need for mainland enterprises to both expand abroad and to play their part in transferring skills and technology back to the country's manufacturing base, the so-called "going out" and "bringing in" doctrines. These policies were given greater import in light of both the President's headline commitment to the BRI and the accelerated free-trade pilot-zone programme currently underway at 11 key locations across China.

Since the BRI programme was first mooted in 2013, Hong Kong has played a key role in making this grand vision of international infrastructure development and trade facilitation a practical reality. In particular, its globally renowned professional services base – especially with regard to finance, legal compliance and risk analysis – has been at the forefront of many of the complex negotiations that have paved the way for the BRI's most ambitious construction projects. With the BRI remaining the centrepiece of China's long-term economic development programme, Hong Kong is guaranteed a seat at the top table when it comes to delivering the initiative's wide-reaching objectives.

As for Taiwan, its New Southbound Policy has clear synergy with the BRI. While the mainland's infrastructure-development programme rolls out across a wide number of territories, many of them are also being targeted by Taiwan. The mainland initiative, though, is focused on financing/managing major infrastructure projects, while also negotiating streamlined bilateral trade terms. By contrast, Taiwan is looking to encourage its manufacturers to directly invest in such countries, with the aim of nurturing the production capabilities of many of these underdeveloped nations.

In light of all of this, it can be seen that Taiwan and Hong Kong – although clearly not intended to be the primary beneficiaries of the mainland's largesse – can expect an array of collateral windfalls as the mainland looks to realise many of its mid-21st century ambitions.

Robert Kang, Special Correspondent, Taipei

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By Chris Devonshire-Ellis, the Founding Partner and Chairman of Dezan Shira & Associates

With both China and Russia gearing up for overseas rail and Arctic shipping potential to Europe, positive moves to accept and accommodate improved rail links are being taken in the Baltics. Russia has recently signaled its desire to extend and redevelop passenger rail services from St. Petersburg to Berlin in a route that sees cross-border travel through Latvia, Lithuania, the Western Russian enclave of Kaliningrad, and through Poland.

Estonia, to the north-east, has also been discussing improvements with Russia concerning both road and rail connectivity, with the Deputy Minister of Transport of the Russian Federation Sergey Aristov stating in April that Estonia and Russia have reached an agreement regarding the re-establishing of their cooperation in transportation. Aristov was reported as saying the discussions were “very positive.” Estonia was represented by Ahti Kuningas, deputy secretary general for transport at the Ministry of Economic Affairs and Communications, Priit Rohumaa, chairman of the supervisory board of Estonian Railways, and the Estonian Ambassador to Russia Arti Hilpus. According to Ambassador Hilpas, discussions revolved around the potential for high speed links and Russian/Estonian highway collaborations.

These developments are partially geared to accentuate the increasing amount of Chinese freight trains arriving in Europe via Kazakhstan and Russia, and to allow both Chinese and Russia trade access too and obtain supplies from the Baltics. At present, much of the rail traffic enters the EU into Poland via Belarus, further south, leaving the Baltics and Nordic nations out of the loop. Chinese-European freight is seeing a 100 percent increase this year, compared to 2016, with 1,000 freight trains expected to make the journey during 2017. Such growth rates are only expected to continue. Coming Europe’s way are Chinese electronics, going the other – are valuable and perishable European consumables.

Getting the Baltics configured into this trade, both from the mutual access perspective as well as services provision, is also inspiring some serious infrastructure developments. Both Estonia and Finland are discussing the possibility of connecting to each other via a 90 km, Helsinki-Tallinn undersea tunnel. A one-way journey would take just 30 minutes, as opposed to an effective 3 hour (including airport time) trip to take the 60 minute Turboprop, and the 2 hours by ferry.

Helsinki and Tallinn jointly represent an economic area populated by 1.5 million people, and there is active inter-city movement of people for work and leisure as well as freight traffic. Last year, Tallinn processed 10 million port visitors, with Helsinki reporting 11.5 million marine passengers passing through. Traffic between the two port cities in particular saw major growth last year and tens of thousands embark on work-related trips between the two cities weekly. The EU-funded studies, which are being undertaken by a consortium of interested businesses, are expected to produce initial feasibility results later in the year. These are to include cost-benefit analyses and impact assessments for both the rail and marine options, how the undersea tunnel can be technically implemented, and price tag determinants for construction, maintenance, and rail traffic. It will also sketch out the project’s main features, including location of routes, stations, and rolling stock depots.

These are part of Rail Baltica, a greenfield rail transport infrastructure project intended to integrate the Baltic States in the European rail network. The project includes five European Union countries – Poland, Lithuania, Latvia, Estonia, and Finland. It will connect Helsinki, Tallinn, Pärnu, Riga, Panevežys, Kaunas, Vilnius, and Warsaw, and is expected to be completed by 2026.

Russia is not part of this grouping, as it is not an EU nation. Nonetheless, bilateral discussions between Russian Railways and the same group of nations have been and continue to take place. An example is the Kouvola Rail Forum taking place in Finland this September. The program specifically deals with the Eurasian Land Bridge, China rail, and Finnish-Russian rail connectivity, which has been upgraded in recent years to almost wholly electrified routes.

The Taiwanese electronics business MIPRO recently won a €22.3m contract awarded by the Finnish Transport Agency (Liikennevirasto) for the renewal of signalling systems at Niirala, Kotolahti-Mussalo, and Vainkkala marshalling yards in eastern Finland, which connect directly with Russia and the Russian Railway and highway network, although these require some development on both sides. However, both Finland and Russia recognize this, and are taking steps to integrate technological systems such as the introduction of RFID remote identifier systems. These in particular, offer potential benefits along the entire supply chain – from customers and operators to handlers and border authorities, benefiting China, Russia, and EU customers and smoothing over the entire supply chain.

Finland has also been discussing the potential for a US$3.4 billion “Arctic Corridor” that would connect Northern Europe with Russia, China, and Arctic Ocean deep-water ports. The idea is being pitched by a group of Finnish academics and business leaders, and would connect the city of Rovaniemi in northern Finland with the Norwegian port of Kirkenes on the Barents Sea. Ships could move goods from China as well as oil and gas from Arctic fields in Russia westward along the Northern Sea Route to Kirkenes. Cargo would be offloaded to the railway and sent southward through rail connections to Scandinavia, Helsinki, the Baltic states, and the rest of Europe. The Chinese routes for this are explained in the article “China’s Maritime Arctic Silk Road On Ice”.

“The Arctic Corridor project sees OBOR as very important as it provides an alternative to connect Asia with the Arctic and Europe.” said Timo Lohi, a spokesman for the Arctic Corridor project. Lohi also notes that Kirkenes in Norway is the closest Western port to Asia. Kirkenes Port is also ice-free, allowing the use of larger vessels and saving on ice-breaking costs.

These developments, tucked away into North-Eastern Europe, seem a long way from China when viewed on traditional flat maps. However, this is the top of the world, and distances are actually shorter than they appear. A direct flight from Helsinki to Beijing for example takes just 6 hours.

It should be remembered that Finland is a major gateway into Russia and also offers mutual access to China for electronics, as well as high quality Finnish goods to China. The same applies to the Baltic nations of Estonia, Latvia, and Lithuania, with Estonia especially having tied itself to developing China trade services as well as being a viable rail and sea port. While much of this depends upon the acceptance of Russia, and Russian Rail operators in the Baltics, a politically tricky subject at present, should military and security concerns be put to rest, the Baltics region can become a major player in future Chinese and Russian regional trade. Regional manufacturers should be looking at adjusting quality consumer products to Chinese tastes, and especially the sustainable, yet exotic (such as Nordic meats and fish) in addition to high quality clothing and other consumables. The services industries and development funds in particular, in everything related to transportation, warehousing, logistics, and related IT within the region should be keeping an eye on these possibilities. The EU’s next major capital city as concerns OBOR and influence may well be Helsinki.

This article was first published on Silk Road Briefing. Please click to read the full report.

The massive Colombo Port City development is set to be one of the Belt and Road Initiative's key South Asian hubs.

Colombo Port City: A Chinese logistics foothold and Sri Lanka's passport to enhanced global status.

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With Pakistan and China's long-term economic objectives seen as coinciding, Beijing has agreed to funnel substantial BRI funding into ensuring its neighbour's largest ever infrastructure development project is successfully implemented.

The China-Pakistan border: A gateway to beneficial co-operation or a conduit for China's global ambitions?

Summer 2018 is set to see construction work begin on the New Gwadar International Airport, a key element of both the China-Pakistan Economic Corridor (CPEC) and the Belt and Road Initiative (BRI), China's hugely ambitious international infrastructure development and trade facilitation programme. The final go-ahead on the project was given on 21 November, with both sides agreeing to put aside a number of concerns that have dogged the development and to push on with its speedy delivery.

Representing an investment of around US$230 million, the airport is expected to play a key role in facilitating enhanced trade between China and Pakistan and several Southern Asian, Middle Eastern, African and European countries. Construction is expected to take up to 30 months, with the completed airport having the capacity to accommodate the largest passenger and cargo aircraft currently in use.

Once completed, the airport will also form an integral part of the $57 billion CPEC project, alongside a series of new Pakistan-sited power plants, ports, highways, railways and special economic zones, all of which are scheduled to be completed by 2030. Assuming the development is fully implemented, it will be Pakistan's largest single infrastructure project since it became fully independent in 1947.

Overall, the Corridor has been largely funded by state-backed grants from China, loans from Chinese financial institutions and support from the Asian Development Bank. In essence, the project has been designed to tackle a number of problems that have long-hampered Pakistan's economic development, most notably a series of energy, logistical and transportation bottlenecks. Once these particular hurdles have been overcome, it is hoped that the country's export-oriented/manufacturing sectors will benefit from a substantial surge in inward investment.

The New Gwadar Airport sits at the heart of the CPEC project and will benefit from direct access to the vast Gwadar Deep-water Port and a proposed economic-development zone in Balochistan province, strategically set on the coast of the Arabian Sea. Ultimately, the redeveloped port, the airport and the economic-development zone, together with the adjoining city of Gwadar, will form a new integrated logistics hub, which the Pakistani government hopes will become one of the region's most significant trading interchange points.

In order to help realise this, plans are also in place to construct a 19km expressway, including a 4.5km sea bridge, which will act as a direct and rapid land link to the port. The expressway, as with the port itself, is to be funded and developed by Chinese corporations. In return, China Overseas Port Holdings, the state-owned logistics and construction conglomerate, has been granted a concession to run the port for the next 40 years.

The overall significance of the Gwadar project for both Pakistan and China should not be underestimated. At present, Pakistan's two primary seaports, Karachi and Qasim, which handle around 95% of the country's marine-routed imports and exports, are already working at maximum capacity. Given the limitations imposed by their geographical locations, it has not been feasible to increase their throughput, putting something of a lid on Pakistan's ambitious economic expansion plans.

By contrast, Gwadar's strategic location on the west coast is seen as offering considerable growth potential, especially as it is the closest major Pakistani port to both the Strait of Hormuz and the Persian Gulf. It also has the advantage of being able to offer direct port access to many of the landlocked Central Asian states, while functioning as a strategic transhipment hub between China, Asia, Africa and the Middle East.

As has been the case with many of the other countries co-opted into the BRI programme, there have been local concerns as to the extent of China's role in deciding Pakistan's economic future, as well as alarm over the size of the financial burden imposed by the requirements of the vast CPEC project. The country's government, however, maintains that the long-term benefits of the programme more than justify the outlay, with the success of the initiative representing a real opportunity to reduce poverty across the country, currently home to the world's sixth-largest population.

Geoff de Freitas, Special Correspondent, Islamabad

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What does the ‘Belt and Road Initiative’ mean for Australia?

As is readily apparent from any of the maps depicting the ‘Belt and Road’, Australia isn’t on it. Nonetheless, as President Xi Jinping said in his address to the Australian Parliament in November 2014, “Oceania is a natural extension of the ancient maritime Silk Road, and China welcomes Australia's participation in the 21st century maritime Silk Road”.

The ‘Belt and Road Initiative’ is thus of considerable potential interest to Australia, from a number of perspectives, including opportunities for Australian businesses arising from infrastructure and other projects in countries which are formally on the ‘Belt’ or the ‘Road’, and Chinese involvement in infrastructure projects in Australia which may complement various aspects of the ‘Belt and Road’ initiative.

Australian firms have considerable expertise in areas such as the design, construction, financing, and management of infrastructure projects and operations for which there are likely to be profitable opportunities arising from ‘Belt and Road’ projects in Asia and Europe. Education and training in the skills required for these areas may be another area of opportunities for Australian institutions and businesses.

Opportunities for Australian firms to participate in ‘Belt and Road’ related projects in China itself should in some cases be enhanced by the market-opening provisions of the China-Australia Free Trade Agreement. However, both within China and especially in other ‘Belt and Road’ countries where Australian firms do not have any significant established presence, opportunities for Australian firms are more likely to be enhanced by more formal collaboration with Chinese firms.

The other important dimension of the ‘Belt and Road Initiative’ from an Australian perspective is the extent to which it may incorporate infrastructure projects within Australia. Australia needs to invest a lot in infrastructure, both to make up for past under-investment, especially in urban transport, or mis-directed investment, especially in energy; to capitalize on emerging new technologies; and to facilitate new opportunities for international trade, including with China.

As a capital-intensive economy with a relatively small population spread across a very large geographical area, Australia has been partially reliant on foreign capital to meet its investment requirements ever since the commencement of European settlement. What has changed over time is the origin of that capital – from Britain and other European countries until the 1960s, then from the United States and Japan, and more recently from other Asian countries, including China, and the Middle East. According to the Australian Bureau of Statistics, Chinese investment into Australia totalled A$87.3bn at the end of 2016, of which almost $42bn was direct investment (as opposed to portfolio investment in shares and bonds)17. Data compiled by KPMG and the University of Sydney puts the cumulative value of Chinese direct investment between 2007 and 2016 into Australia at US$89bn18 – equivalent to almost A$120bn at current exchange rates. An increasing proportion of this investment – 28% in 2016 – has been in infrastructure (in particular, seaports).

Infrastructure investment raises particular political sensitivities in Australia because, although Australia has always been a predominantly capitalist economy, the provision of transport and energy infrastructure has historically been undertaken by government departments or state owned enterprises (as is also the case in China). The movement towards greater involvement of private enterprises and investors, whether Australian or foreign, in the provision and operation of infrastructure assets, has not been without numerous difficulties: many Australians feel, rightly or wrongly, that the result of ‘privatization’ has been higher prices and inferior standards of service, the opposite of what had been promised19. Many Australians resent the fact that investors from countries which don’t permit foreigners to purchase land, businesses or other assets are nonetheless allowed to do so in Australia20. The fact that these differences in foreign investment policy may reflect different political systems, or a polar opposite balance between domestic saving and investment, does not usually persuade Australians who hold these views to a different opinion.

These and other sensitivities have to be borne in mind when evaluating Australia’s response to the ‘Belt and Road Initiative’ – just as Australia has had to be mindful of, for example, Chinese sensitivities when pursuing greater access to Chinese markets during negotiations over the China-Australia Free Trade Agreement.

In particular, Australia’s response should not be influenced by fear – either of China’s purposes in promoting the ‘Belt and Road’ Initiative, or ‘fear of missing out’ (FOMO) on business opportunities in China, and Chinese investment in Australia.
 
There would seem to be little reason for concern if Australia were to sign a ‘memorandum of understanding’ similar to the one agreed between China and New Zealand earlier this year.

That Memorandum provides for both sides to “respect each other’s interests and major concerns to deepen mutual trust”, to “maintain and enhance existing bilateral co-operation and multilateral mechanisms”, and to “promote practical co-operation in areas of mutual concern”.

It provides that China and New Zealand will “carry out senior-level dialogue and promote communication” on macro policies and development strategies”, including as to “how they will best support the Belt and Road Initiative in line with [their] comparative advantages”; it includes a numerical target for the value of two-way trade by 2020 and a commitment to “conduct mutually beneficial co-operation” in a number of fields, including infrastructure, agricultural technologies and clean energy; it provides for “cultural exchanges”, including specifically in film and television”; and it commits both countries to “enhanced cooperation” in various multilateral fora including APEC, the AIIB and the Pacific Islands Forum”. The agreement is effective for five years, and will be renewable automatically every five years thereafter, subject to three months’ notice of termination by either country.

A similar understanding between Australia and China would likely be beneficial for both countries. From the standpoint of Australian businesses, it would serve to indicate that their participation in ‘Belt and Road’ projects has the formal endorsement of the Australian Government, and it would be a signal to Chinese businesses that participation by Australian partners in such projects is welcomed by the Chinese Government. That is likely to be helpful in pursuing business and investment opportunities.

However, more specific commitments – in particular, the designation of any specific projects in Australia as part of the ‘Belt and Road’ – would need to demonstrate ‘win-win’ characteristics that would be readily evident to both sides. They should be negotiated on a case-by-case basis, with sufficient time for the claimed benefits to be properly evaluated and any costs to be assessed.

In that context, it would probably assist in enhancing mutual understanding if Australia were to make clearer the criteria by which decisions regarding foreign investment are made – both in advance, and in explaining the reasons for particular decisions. As an Australian citizen, I am not satisfied by a mere declaration that a particular foreign investment proposal is ‘contrary to the national interest’, without at least some attempt being made to explain why – and I would imagine that foreign investors would feel much the same.

The ‘Belt and Road’ Initiative has the potential to be a major influence on the economic, political, social and cultural evolution of not just Asia, but a large part of the world, over at least the next three decades. Australia should want to be part of it – but for that to be sustainable it needs to be on terms that recognize and advance Australia’s own interests, and which resonate with the Australian people.

Please click to read the full report.

By Saul Eslake, Independent Economist, and Vice-Chancellor’s Fellow, University of Tasmania

Massive Belt and Road-related Chinese investment looks set to transform Sri Lanka's shipping and industrial sectors.

The Port of Hambantota: A development seen as key to the joint prosperity of China and Sri Lanka.

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With Hanoi's light-railway network scheduled to become operational in 2018, the broader Belt and Road picture is coming into focus with many of the initial phases of its development programme now approaching completion.

Hanoi's light-railway system: An integral part of the BRI's long road to completion.

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In the wake of the 23 June 2016 Brexit referendum, the worldwide business community has been left to wonder just how the UK-EU divorce will impact on the global economy. In the meantime, the debate as to whether quitting the EU – sometime around the end of March 2019 – will make Britain great again has become ever more divisive, with many warning that the UK economy may well collapse once it loses access to the Single Market, essentially the EU free trade zone.

To better understand how UK companies perceive the Brexit impact, and assess their Brexit readiness as well as their plans to explore future non-EU business opportunities, HKTDC Research conducted a questionnaire survey with representatives of 77 UK companies at the Think Asia, Think Hong Kong event held in London on 21 September 2017.

The results showed that, in general, most respondents had yet to experience any real fallout from the Brexit decision. In line with this, the majority indicated that they had either adopted a “wait and see” approach (i.e. having no Brexit plan in place) or intended to focus/invest more in non-EU markets in the future, with Developing Asia high on their agenda. This is in line with the finding that 75% of respondents were interested in capitalising on the opportunities emerging from the Belt and Road Initiative (BRI). Of those companies looking to explore new markets, securing the appropriate professional service support and researching their target overseas markets were their key strategies for their post-Brexit business development.

Eyeing the Developing Asian markets and the Belt and Road opportunities, nearly half of all respondents indicated they would seek professional services support from Hong Kong, mainland China or Singapore as an initial step. Significantly, 37% maintained they were considering establishing a regional office or regional headquarters in Hong Kong as a way of accessing and servicing their chosen overseas markets.

More than 80% of the interviewees acknowledged that Hong Kong’s professional services sector – including companies providing financial, legal or marketing support – could make a significant contribution to accessing the emerging business opportunities in many of the countries along the BRI routes. As such, they were open to learning more about the pivotal role played by Hong Kong within the BRI.

Brexit: Uncertain Impact

In general, most UK-based companies have yet to experience any negative impact from Brexit, with a significant number anticipating that will remain the case in the long-term. In total, 42% of respondents had either experienced no impact or expected no impact from the looming EU exit, although 15% indicated that they expected their share of the EU market to diminish, while 9% anticipated a labour shortage once it was more difficult to employ EU citizens in the UK.

These findings are very much in line with many of the documented events relating to the UK business community. Already many businesses in the financial services sector, including banks and insurance companies, have been advised by industry regulators to prepare for a break with the EU that involves no new trading deal having been agreed. Similarly many of the country’s retail chains and cross-border e-commerce players, which had traditionally relied heavily on the EU market or on EU immigrant workers, are now actively preparing for the challenges facing post-Brexit Britain.

Among the other associated issues identified were increased difficulties in securing finance (7%), the challenge of expanding market share within the UK (6%) and the likelihood of R&D funding dwindling following the loss of access to EU structural funds and the Investment Plan for Europe (4%).

Non-EU Market Investment

By contrast with the 30% of respondents who adopted a “wait and see” approach (no strategy), 35% of respondents maintained they now had plans in place to focus or invest more in non-EU markets. This is largely in line with the UK government’s pledge to improve trade links with the rest of the world, while encouraging UK companies to target markets further afield as the country adjusts to its post-Brexit trading status. In total, only 13% planned to increase their efforts to build their EU market share and 11% would focus on the local market.

When it came to identifying the most popular overseas markets for future development, Asia was the most endorsed region overall (49%), with Developing Asia (e.g. China, India and the ASEAN bloc) ranking first (38%) and Developed Asia (e.g. Japan and South Korea) placed fourth (11%). Western Europe (14%) and Middle East and Africa (11%) were also ranked highly as potential new markets for UK businesses.

Overseas Services Markets

Reflecting the intention of the surveyed companies to expand their existing business links to new markets, as well as the fact that the UK is by far the largest service exporter within the EU, 35% of respondents saw “providing professional services” as their likely focus in their target overseas markets. This was followed by the consumer market (14%) and the industrial products/services/technology market (12%).

Hong Kong is a Reliable Partner

In order to make substantial inroads into new overseas markets, many UK companies acknowledge that they need professional service support (e.g. financial, legal and marketing services) from overseas service providers. In line with their target overseas markets, when asked to choose their preferred business hub for accessing these markets, nearly a quarter of all respondents opted for Hong Kong as the best place to secure the professional services support they require. In second place was the UK (17%), followed by China (15%) and Singapore (10%).

In order to help service or access their target overseas markets, 78% of all respondents acknowledged the need to establish a new regional office (RO) or a regional headquarters (RHQs). As such, 37% of respondents acknowledged the need to set up RO or RHQs in Hong Kong, followed by Singapore (10%), Shanghai (6%) and New York (6%).

Belt and Road Opportunities

Overall, many of the respondents had a very positive view of the BRI and had high hopes of benefitting from a number of the associated business opportunities. By contrast, just 13% of respondents expressed no interest in the BRI, while 12% were wholly unaware of the initiative.

Hong Kong: The Super-Connector

Overall, Hong Kong was seen as a unique and essential partner by many of the UK companies looking to access new overseas markets in the post-Brexit world. This was largely on account of its vibrant capital market, complete with a wide range of financing channels, and its comprehensive professional and financial advisory services sector, which is plugged into a number of extensive global networks.

As a regional hub for legal services and dispute resolution, underpinned by an independent judiciary and a common law system that are familiar to many UK businesses, Hong Kong is ideally placed to provide vital professional services support to British companies making their first venture into Asia.

Acknowledging it as a "super-connector" linking mainland China to markets across the world, many respondents maintained they had huge confidence in the role Hong Kong could play in helping them capitalise on any emerging BRIbusiness opportunities. Overall, 84% of all interviewees agreed that Hong Kong’s professional services sector would be invaluable in terms of accessing BRI business opportunities, while 88% were keen to get a better understanding of Hong Kong’s pivotal role in the BRI.

Profile of Respondents

Among the 77 UK company representatives surveyed, 46% were employed in service-oriented companies, 15% in trading firms and 7% by manufacturers. In terms of location, 86% were based in England.

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By Yawei Liu, Director of The China Program at The Carter Center, Atlanta, Georgia

China’s “One Belt, One Road” initiative is perhaps the most ambitious development plan ever devised by any nation-state. Plans call for trillions of dollars to be invested in roads, railways, and ports to create land corridors across the vast reaches of Asia and sea lanes that link China to markets in Europe, the Middle East, Africa, and beyond. The “Belt and Road” project – as it is now called – is President Xi Jinping’s signature foreign policy instrument, and is the cornerstone of China’s ambition to transform itself from a mere player and benefactor of globalization to a reformer and leader of the international order.

But the questions and potential pitfalls to the Belt and Road initiative are easily as large as its ambitions.

The overriding question is this: does the Chinese government have the will, willingness, and wherewithal to overcome all difficulties and accomplish the mission? To succeed, China must negotiate with governments of scores of host countries and international institutions to design, build, and maintain projects. The Belt and Road initiative envisions mammoth Chinese government loans to Chinese companies and foreign governments to finance projects. Will projects become financially viable? Will loans be repaid, or will the initiative devolve into a massive boondoggle? Lack of transparency on the sources of project design and funding means these crucial questions cannot be answered fully. In fact, available evidence suggests there is reason for major concern.

The Origins of the Initiative

The “One Belt, One Road” initiative was first announced by President Xi in September and October in 2013 in Kazakhstan and Indonesia respectively. At the time, it was simply a concept and an idea. In March 2015, the Chinese government issued a paper that began to turn the concept into a plan.

On April 20, 2017, the spokesperson of the Chinese Ministry of Transportation said during a press conference that China has signed more than 130 bilateral and regional transport agreements with countries involved in the Belt and Road. He said that China had opened 356 international road routes for both passengers and goods, while maritime transportation services now cover all countries along the Belt and Road. Every week, some 4,200 direct flights connect China with 43 Belt and Road countries, and 39 China-Europe freight train routes operate.

Before the Beijing Belt and Road Forum for International Cooperation was held on May 14-15, 2017, the Chinese government issued another paper entitled “Building ‘One Belt, One Road’: Concept, Practice, and China’s Contribution.” The paper mentioned six corridors and six means of communication: a New Eurasian Land Bridge Economic Corridor, a China-Mongolia-Russia Economic Corridor, a China-Central Asia-West Asia Economic Corridor, a China-Indochina Peninsula Economic Corridor, a China-Pakistan Economic Corridor, and a Bangladesh-China-India-Myanmar Economic Corridor. The means of communication are rail, highways, seagoing transport, aviation, pipelines, and aerospace.

Xi himself touted the progress already made at the May forum, saying building had accelerated on a number of projects: a Jakarta-Bandung high-speed railway, a China-Laos railway, an Addis Ababa-Djibouti railway and a Hungary-Serbia railway. Ports at Gwadar and Piraeus had been upgraded, and other projects were “in the pipeline. Xi pledged to avoid “outdated geopolitical manoeuvering” and said China hoped for “win-win” relationships. “We have no intention to form a small group detrimental to stability. What we hope to create is a big family of harmonious co-existence.”

International think tanks and news organization have taken note. The Center for International and Strategic Studies published a research paper saying the Belt and Road project could span 65 countries, comprising roughly 70 percent of the world’s population. Economically, it could include Chinese investments approaching $4 trillion.

The New York Times reported that the initiative was designed to open new markets and export China’s state-led development model “in a quest to create deep economic connections and strong diplomatic relationships.” The Times highlighted some of the projects:

• Africa’s first transnational electric railway, which opened this year and runs 466 miles from Djibouti to Addis Ababa, the capital of Ethiopia. China financed most of the $4 billion price tag. Chinese companies designed the systems, supplied train cars and engineers who built the line over a six-year period.

• A 260-mile rail line from northern Laos to the capital, Vientiane. China is leading the $6 billion investment. Mountainous terrain means bridges and tunnels will account for more than 60 percent of the line, and construction is further complicated by the need to clear unexploded land mines left from American bombing of the country during the Vietnam War.

• The deep-water port at Gwadar, Pakistan. The facility, on the Arabian Sea, will be linked by new roads and rail to western China’s Xinjiang region, creating a shortcut for trade with Europe. The port is part of the $46 billion China says it is spending on infrastructure and power plants in the China-Pakistan Economic Corridor.

Geopolitical Risks Will Not Go Away

For all the hoopla about the Belt and Road initiative, there are signs that all is not well when it comes to international cooperation needed to make the initiative work. The Belt and Road “summit” in May was attended by only 29 heads of state. Germany, Great Britain, the United States, and Japan sent only government ministers or lower ranking officials to the meeting. India, one of the most important countries for the initiative, chose not to send any representative to the summit because its government believes that China harbors an ulterior motive in establishing the China-Pakistan Economic Corridor, a signature component of the Belt and Road program. “No country can accept a project that ignores its core concerns on sovereignty and territorial integrity,” said Gopal Baglay, spokesperson of India’s External Affairs Ministry.

Other countries, including the United States, also expressed concerns about Chinese motives. To them, “new international order,” “new security framework,” “new economic model,” “new civilization exchange,” and “new ecological order” are synonymous with China’s domination first in Asia and eventually in the whole world.

Western press reports reflected the skepticism. “Neighbors Japan and India have stayed away from the summit, suspicious that China’s development agenda masks a bid for strategic assets and geopolitical ambitions,” wrote Carrie Gracie of the BBC. CNN’s James Griffiths reflected similar sentiment in his reporting on the Beijing meeting. “Its boosters tout its massive economic promise and claim it could benefit the entire world and lift millions out of poverty. But no one can say for sure what exactly the plan encompasses, and detractors warn it could be an expensive boondoggle at best or a massive expansion of Chinese imperial power at worst.”

Russia appears to be increasingly wary of the Belt and Road initiative. President Vladimir Putin attended the summit, but proposed linking the program to the Eurasian Economic Union, Moscow’s own regional economic project. It is common knowledge that Moscow has reservations because Russia is loath to cede influence over Central Asian countries, a main focus of the Belt and Road initiative. A New York Times report quoted a senior associate of Carnegie Center in Moscow saying, “Russia’s elites’ high expectations regarding Belt and Road have gone through a severe reality check, and now oligarchs and officials are skeptical about practical results.”

The Belt and Road initiative faces serious geopolitical risks. Many countries involved in the initiative are situated in the most complicated geopolitical regions pressured by political, religious, and ethnic conflicts. Some are proxies of rival major powers. Pakistan and Afghanistan, key countries for Belt and Road, confront tribal political power that refuses to yield to central control, radicalism, terrorism, and secessionism.

Countries like these can easily derail any connectivity projects in place. The China-Pakistan Economic Corridor is a case in point. The corridor is home to an unprecedented estimated Chinese investment of $48-$57 billion dollars, and the expansion of Pakistan’s Gwadar port would provide China with a much-needed access to the Indian Ocean. But this corridor goes through the province of Baluchistan, where “separatist militants have waged a campaign against the central government for decades, demanding a greater share of the gas-rich region’s resources.” Since 2014, militants trying to disrupt construction on the “economic corridor” have killed 44 Pakistani workers.

Financing Can Be a Challenge

The initiative faces challenges attracting Chinese capital in both the state and private sectors. To be sure, the Chinese state is marshaling significant investment resources: a $40 billion Silk Road Fund was created in 2014; the Asian Infrastructure Investment Bank was launched in 2015 with $100 billion of initial capital that is expected to be spent chiefly in Belt and Road countries; three Chinese state-owned banks received $82 billion in state funds in 2015 for Belt and Road projects.

Yet only a small portion of available investment funds appears to be going toward Belt and Road projects. Capital leaving China is largely going to markets that are safer, richer, and better-developed than those under the Belt and Road framework, according to David Dollar, an economist at the Brookings Institution in Washington. Aside from Hong Kong, the top destinations for Chinese overseas direct investment at the end of 2016 were: the Cayman Islands, the Virgin Islands, the United States, Singapore, Australia, the Netherlands, the United Kingdom, Russia, Canada, and Indonesia. “Of these, only Russia and Indonesia are along the Belt and Road,” Dollar writes. China’s two policy banks, the China Development Bank and the China Export & Import Bank report Belt and Road-related lending totaled $101.8 billion at the end of 2016, or 15 percent of their total overseas lending. Data cited in the Wall Street Journal says Chinese companies have invested more in the United States since 2014 than the 60-plus countries touched by the initiative combined. In other words, Xi’s regional investment priorities have not translated into a shift in private investors’ decision-making.

Jonathan E. Hillman of the Center for International and Strategic Studies, writes that OBOR could include Chinese investments approaching $4 trillion. But Nicholas R. Lardy, a China specialist at the Peterson Institute for International Economics, told New York Times reporter Jane Perlez, “China’s outlays for the plan so far have been modest: only $50 billion has been spent, an ‘extremely small’ amount relative to China’s domestic investment program.” The funding gap is obvious, and the lack of market appeal to capital will certainly become a huge obstacle.

Lending Perilous for Borrowers

Countries involved in Belt and Road projects often take on crushing debt burdens.

Laos, a country with a total output of $12 billion annually, has borrowed $800 million from China’s EXIM Bank, in part to finance a rail line from the northern part of the nation to the capital, Vientiane. According to the New York Times, Laos still faces a huge debt burden. The International Monetary Fund warned this year that the country’s reserves stood at two months of prospective imports of goods and services. It also expressed concerns that public debt could rise to around 70 percent of the economy.

It is reported that Sri Lanka is already overburdened by debt resulting from accepting Chinese concessional loans. As a result of Sri Lanka being unable to keep up with its payments, the Sri Lankan government has converted some of this debt into equity, allowing Chinese firms to control 80 percent of the Hambantota port for a period of 99 years.

The Pakistan corridor is projected to result in $50 billion of debt that will take Pakistan 40 years to pay off. Just like in Sri Lanka, Pakistan’s debt contract could ultimately result in a transfer of local assets to Chinese ownership. Some Pakistani critics refer to the corridor as “the new East India Company.” Jane Golley of the Australian National University told a Financial Times reporter: “The lack of commercial imperatives behind OBOR projects means that it is highly uncertain whether future project returns will be sufficient to fully cover repayments to Chinese creditors.”

Many projects are in Central Asian countries. It is clear some of these countries are suffering from “from weak and unstable economies, poor public governance, political stability, and corruption.” Chinese lenders are not always blind to risks but many “are being pressed to lend to projects that they find less than desirable. An Economist article indicates that Chinese government sources expect “to lose 80 percent of the money they invest in Pakistan, 50 percent in Myanmar, and 30 percent in Central Asia.” This is not just speculation. China has recently lost $60 billion in Venezuela as it descended into chaos.

In addition to this, the Chinese foreign currency reserve is rapidly declining as many companies and individuals are moving their money out of China due to an unprecedented anticorruption campaign and political uncertainty. Thus, Beijing has erected new barriers designed to stem the exodus of capital outflow. In this context, there are two channels through which capital is fleeting from China: first, state-driven, politically motivated, and commercially dubious deals that have backfired on Beijing in the past; second, capital that is going to safer places in the name of the OBOR initiative.  One result of the state driven overseas investment will add to China’s fast-growing debt burden, “now standing at more than 250 percent of GDP.”

Not All Roads Will Make Economic Sense

Building major railway lines, one of the primary goals of the initiative, may not make economic sense, even though rail transport is faster and greener than shipping by sea. Turloch Mooney, senior editor of Global Ports writes, “The cost of shipping a 20 foot-equivalent unit by rail to Europe still averages around five times more than by ocean, and the capacity constraints of trains and rail infrastructure compared with ocean-going vessels mean that, while rail services have the potential to create a significant dent in air cargo volumes, they will most likely never account for more than one to two percent of ocean volumes.” To ship cargo from Suzhou to Warsaw, ocean freight takes 40 days and creates 2.1t of carbon emissions. Now, more and more Chinese companies are shipping goods to Europe via rail but for every five containers going to Europe, only one comes back filled with goods. The other four, unfortunately, come back via ships.

Tom Holland published an article on April 24, 2017 in the South China Morning Post declaring, “The idea of a ‘Belt and Road’ rail cargo route between Europe and China remains nothing more than a fanciful curiosity.” The online magazine Quartz elaborates:

“There is really no need to use trains to increase commerce between Europe and China. Sea cargo transportation is much cheaper, and companies already rely on it. More than 19,000 containers can be placed on a single cargo ship, and they only take 30 days from Europe to reach China. The railway is faster than a shipping container, but is also riskier because it goes through a few unstable countries and can be interrupted by extreme weather, terrorist attacks, and politics. China is trying to justify its domestic overproduction by creating the One Belt, One Road, and framing it as a business strategy that is also beneficial for other nations, but the actual benefit for some trading partners and the long-term global economy is still to be seen.

There Are More Important Things than Roads

In the name of investing overseas, state-owned Chinese companies have experienced spectacular failures, costing the Chinese government an astronomic amount of money. The unexpected decision by the Myanmar government to suspend the Myitsone Project may have cost the Chinese government $3 billion. The Chinese company involved in the deal firmly believed its agreement with the military-controlled government of Myanmar was ironclad.

The toppling of Gadhafi in Libya led to at least $6 billion in losses as Chinese companies all had to abandon their projects. One of the leading investors in Libya, the Sinohydro Group, said it had never imagined a strong leader like Gadhafi could be overthrown.

The China Railroad Group signed a high-speed train deal with the Venezuelan government worth $7.5 billion although it was clear that country did not have money, electric power, and density of population to sustain such a project. It launched a project even after the Venezuelan government defaulted on repaying a loan of $18 billion from China. The project is now worth nothing. The Belt and Road initiative is only about three years old and there have already been failures and losses of immense proportions. More will certainly come.

Failures are bound recur in the coming years and the Belt and Road initiative surely will be littered with projects that are costly and unsustainable white elephants. In fact, this is already happening. A Chinese scholar recently came back from Ethiopia and said the electric railroad built by the Chinese from Addis Ababa to Djibouti – hailed as one of the first landmark accomplishments – in fact made only one run with a diesel locomotive, and has been idle since completion. When asked why, the scholar said, “Well, there is no electricity to power the trains. The hydraulic power plant is yet to be built.”

Conclusion

Any of the factors discussed above could prevent the Belt and Road initiative from achieving its lofty goals and lead China into a financial abyss. It cannot be China’s exclusive endeavor and needs to enlist support from all countries in the world to make it a success. To do that, China needs to be transparent about its geopolitical considerations, decision-making processes, and financial arrangements.

Market forces and not just state investment must be employed. Social dynamics and political uncertainties in each country where a project is launched must be carefully scrutinized. The Chinese government cannot blindly force state enterprises to delve into projects and by the same token, state enterprises must not obediently do what they are asked without due diligence on projects.

Signs are emerging that silent resistance against reckless and mindless Belt and Road projects may be shaping up. China’s overall investment in such projects has dipped despite the central government’s recent demand for more and larger investments in related projects. China’s decision to be part of a globalized market and to follow rules and laws required by this market has enabled China to launch the Belt and Road initiative in the first place. To ignore global market rules is short-sighted and suicidal in the long term.

The initiative is not just about development and prosperity. It is also about China transforming itself from a mere player and benefactor of globalization to a reformer and leader of the international order. Beijing must be aware that before all roads lead to Beijing, it must study past development failures and avoid strategic arrogance and national selfishness; it has to learn that the new roads will go nowhere if they are paved with national glory and supremacy and not common destiny and co-prosperity. Without a broad view, few roads will lead to Beijing.

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