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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HKTDC Research | 19 Aug 2016

“Going Out” to Capture Belt and Road Opportunities (Expert Opinion 6): Setting a New Stage for the Technology Industry

Hong Kong’s burgeoning technology industry is ideally placed to take advantage of the dovetailing of China’s Belt and Road Initiative with its “going out” strategy that promotes technology co-operation and development. Hong Kong has a number of technology clusters formed by local and foreign-funded companies. Alongside factors such as an established global communications hub and market network, free flow of capital and the technology industry’s familiarity with international standards, Hong Kong’s strength in technology commercialisation means it can effectively promote co-operation between mainland enterprises and foreign partners.

China a Huge Market for Technology Services

 

 

There are a wealth of technology-industry players in Hong Kong, he said. For instance, some HKSTP tenant companies offer world-class services, including fixed and wireless communications, remote Wi-Fi networks, fibre optics and sensors, all applicable to highways, railways, power transmission, energy pipelines and other transportation systems. Hong Kong also had a depth of expertise when it comes to related applications, such as data transmission, system control and remote monitoring capable of meeting the mainland’s technology needs that have arisen from the building of modern transportation networks.

Hong Kong a Technology Services Platform for Enterprises “Going out”

Young took it further, saying that Hong Kong can function as a platform in servicing mainland technology enterprises “going out”. “Thanks to a range of good research capabilities, mainland enterprises have developed a large number of technologies and products well received by the market, including information and communications technology applications and solutions, as well as mobile-device applications,” said Young. He did, however, emphasise that many mainland businesses needed help when it came to developing technology that complied with international standards. “Some advanced technology sectors on the mainland are still in their infancy, making it difficult for them to directly introduce foreign technology into local applications."

Young pointed out that Hong Kong companies are familiar with international technology trends and technical standards, and have extensive international marketing networks, which can help effectively open up overseas markets by commercialisation of technology achievements in the mainland. At the same time, Hong Kong specialises in making good use of foreign general technology for localised applications in Hong Kong and the mainland.  Citing an example, he said: "In spite of the absence of smart home standard solutions in the Chinese mainland, foreign technology and user experience may not be suitable for direct application given the mainland’s relatively crowded environment. Hong Kong industry players are not only familiar with the technology and standards, but also understand the actual application and the needs for smart home in relatively densely populated areas. They can effectively introduce appropriate foreign technology to the mainland peers, while at the same time carrying out local adaptations."

 

 

Anny Wong, HKSTP’s Senior Manager of Mainland Collaboration, noted that Hong Kong was an international financial centre with extensive financing channels, which could provide a wide range of financing arrangements for the international business and technology co-operation projects being implemented by mainland enterprises under China’s “going out” strategy.

The HKSTP holds regular demonstration projects and technology exchange activities, and arranges partnership agreements with venture capital funds from Hong Kong, Europe and the United States aimed at identifying potential business and technology projects.

It also brings together technology companies and start-ups from Hong Kong, the mainland and overseas. Given Hong Kong’s advantages in professional services and intellectual property rights protection, the HKSTP has also helped to attract many investors from advanced countries as well as the mainland who are seeking to develop the Chinese and overseas markets.

The science and technology park is now home to more than 580 technology companies and about 238 technology start-ups (as at end-March 2016), about 10% of which are from the mainland. These companies are mainly engaged in technology sectors including biotechnology, electronics, green technology, information technology and telecommunications, and many are moving towards even more advanced applications in sectors such as robotic end-of-arm tooling, smart cities and health/elderly care in order to further capture opportunities arising from the mainland and overseas markets.

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HKTDC Research | 19 Aug 2016

Burgeoning Logistics Investment in Gdansk Paves Way for BRI Success

Opening of new warehouse facilities underlines Poland's pivotal role in roll-out of Belt and Road Initiative.

The opening of new warehousing facilities in Poland is being hailed as helping pave the way for China's ambitious Belt and Road Initiative (BRI). The new facility has been opened in Gdansk, Poland's fourth largest city and its principal port. It has been established to service the needs of the Suzhou-based Chunxing Group, as the aluminium components manufacturing company expands its interests across Europe.

The establishment of the new facility marks something of a shift in policy by Chinese businesses active in the region. Previously, most of their commercial activity had focussed on mergers and acquisitions. This latest venture, though, represents a major investment in the region, bringing with it a number of new jobs.

It is envisaged that this new Gdansk facility will optimise warehouse and logistics services for Chunxing's European clients, allowing the company to service their needs with considerably abbreviated lead times. At present, the initial warehousing phase of the project is approaching completion. Over the next three to four years, this will be followed by the construction of a full-scale production plant in the city.

In terms of why Gdansk was chosen as the base for Chunxing's European expansion plans, this is seen as being down to a number of factors. Most obviously, the city's location, with its close proximity to Poland's principal port, was a key factor. The port offers a direct connection to China, while the region's road infrastructure also easily facilitates distribution activities across wider Europe.

Poland is also linked to China via the China Railway Express Network, which officially began operating under its new branding in June of this year. Currently, freight trains run directly from a number of Chinese cities to Warsaw, Poland's capital city, which is just 250 miles from Gdansk. An expressway linking the two cities is scheduled for completion by 2020.

Earlier in the year, in a sign of the growing economic-political connections between the two countries, Xi Jinping, China's President, headed a trade mission to Poland. During his official visit, Xi affirmed China's commitment to building closer ties with both Poland and Eastern Europe.

He said: "Central and Eastern Europe as a sub-region boasts the greatest potential for growth in all of Europe. We see Poland as being at the very heart of that. China is also ready to commit to Poland's re-industrialisation drive, particularly through greater cooperation with regards to production capacity."

Anna Dowgiallo, Warsaw Consultant

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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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HKTDC Research | 26 Aug 2016

“Going Out” to Capture Belt and Road Opportunities (Expert Opinion 7): Cold-chain Logistics Enhances Value of Imports

Chinese companies actively seek foreign investments through the country’s “going out” strategy in order to further penetrate overseas markets. They are also looking for new supply sources of quality raw materials such as agricultural produce and fresh foods for processing in the mainland or for local sales in the flourishing mainland market. To this end, mainland enterprises require advanced cold-chain logistics solutions and modern management to keep up with consumers’ increasing demand for quality fresh and frozen produce, according to key industry players in Hong Kong. As Hong Kong players have extensive international management experience, they can help mainland enterprises bring in all types of fresh and frozen products from overseas and countries along the Belt and Road route to meet the increasingly stringent requirements of mainland consumers.

Huge Demand for Imported Frozen Products

Stringent Requirements of Multinationals

Chan said DCH Logistics’ cold-chain service clientele included mainly Hong Kong and multinational corporations. In addition to helping its clients store and ship high-end frozen products, the company offers such value-added services as customs clearance, goods inspection and testing, repackaging and labelling, as well as goods consolidation and distribution. To cater to the requirements of different products, DCH Logistics is equipped with physical facilities including multi-temperature warehouses and delivery trucks, and uses advanced refrigeration-monitoring technologies. Moreover, it places great importance on employing modern cold-chain logistics management systems and professional operation processes to comply with the stringent requirements of multinationals in order to ensure food hygiene and safety.

Furthermore, Hong Kong companies were capable of complying with the stringent requirements of international corporations because of their experience in providing cold-chain logistics services to a large number of multinationals in Hong Kong, the mainland and overseas markets, said Chan. As the demand for better quality frozen products on the mainland became stronger and stronger, industry players from Hong Kong would have an edge in providing comprehensive supply-chain services for the importation of overseas fresh and frozen foods.

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26 Aug 2016

One Belt and One Road” and Hong Kong’s Legal Services

By CGCC Vision

Following the Chief Executive’s repeated mention of the development of “One Belt and One Road”, the related topics have been the subject of considerable public discussion. The new policy bears endless opportunities for all, and Hong Kong’s legal profession is, of course, no exception.

Elsie Leung, Deputy Director of the HKSAR Basic Law Committee, believes that as a world power, China should pay close attention to its cultural standing, political and legal systems, and the quality of its people. The “One Belt and One Road” national policy advances the democratic rule of law, deepens the cultural system reform and improves people’s livelihood, which is fully in line with the rise of a world power.

The Uniqueness of “One Belt and One Road”
Leung noted that since the “One Belt and One Road” has no preset rules, it enables China to become proactive. Moreover, the concept has a win-win approach without any threshold and is open, inclusive, mutually beneficial and non-exclusive.

Thus, the areas of cooperation between China and other countries along the “One Belt and One Road” are much diversified, while the Silk Road Fund, AIIB, TPP, international financial institutions and development-oriented financial funds can provide the capital and skills for these countries as required.

Embodiment of One Country, Two Systems
Under the principle of “One Country, Two Systems”, Hong Kong is a part of China while having different systems. It has also become an international financial centre as well as a bridge between the Chinese and Western cultures. On this basis, Leung is convinced that China’s “One Belt and One Road” development initiative and “going global” strategy present major opportunities for Hong Kong’s legal profession.

Hong Kong’s Laws have Obvious Advantages
The country’s development will inevitably involve a large number of contracts. Leung believes that by relying on its existing legal status, Hong Kong can strive to make its laws as the applicable law for the contracts and for its courts and other institutions to become the place for contract dispute resolution, thereby contributing the wisdom and efforts of its lawyers.

She added that Hong Kong’s lawyers are not only adept at the details of both Chinese and Western laws, but also gaining deeper understanding of the legal systems and financing methods of Islamic countries. Furthermore, as Hong Kong’s lawyers are bilingual, they are able to accurately analyze the different requirements of the contracting parties, and share their analyzes with Chinese customers to help them make accurate judgements.

Leung also pointed out that because Hong Kong’s lawyers are in constant contact with a large number of businesspeople from around the world and understand their needs, they are high-quality intermediaries whose participation can prevent misunderstandings and effectively contribute to the negotiations between the contracting parties.

She also commended Hong Kong’s sound and fair international legal dispute resolution mechanism, complete procedural rules, and stringent by-the-book disposal of cases, which are fully in line with international practice. Therefore, Hong Kong is well-positioned to build a legal dispute resolution centre that is generally accepted by the international community. She suggested that Hong Kong should establish a legal dispute resolution centre specialised in serving the “One Belt and One Road” initiative.

Looking Ahead to Seek Opportunities
Looking into the future, Leung looks forward to the various sectors submitting recommendations to the HKSAR Government for inclusion in the Policy Address; she also requested the Central Government to include the recommendations in the “13th Five-Year” Plan for implementation. As in the case of the CEPA, it depends on our proactivity to seek opportunities.

 

This article was firstly published in the magazine CGCC Vision 2016 July issue. Please click to read full report.

 

 

 

 

 

 

HKTDC Research | 2 Sep 2016

“Going Out” to Capture Belt and Road Opportunities (Expert Opinion 8): Marketing Global Brands

As a cosmopolitan city in the Asia-Pacific, Hong Kong is the regional centre for the promotion of many global brands. Its industry players are familiar with the markets in the Chinese mainland, Southeast Asia and elsewhere in the Asia-Pacific region, many of which are countries along the economic corridors of the Belt and Road Initiative. They have extensive experience in the management of global brands through years of offering one-stop services to their multinational clients, including the development of marketing and branding strategies, management of projects, planning for exhibitions, and carrying out all types of creative design. On the other hand, mainland enterprises are actively going to Belt and Road countries and other overseas markets to expand their sales networks or to bring in foreign brands to further tap business opportunities in the mainland market. Against such a backdrop, Hong Kong is in a perfect position to meet the needs of mainland enterprises for services in marketing, branding and design. It is therefore a preferred service platform for mainland enterprises that are “going out” and “bringing in”.

Extensive Experience in Promoting Global Brands

Respecting Brands and Designing Work

“In developing a brand’s business it is necessary to pay attention to maintaining and enhancing the unique features and attributes of the brand in question,” stressed Tse. “If the focus is only on short-term sales and minimising costs, there is likely to be conflicts with the aims of developing the brand’s business and more harm than good will be done. Hong Kong’s market promotion professionals and designers well understand the importance of related requirements and always strive to provide high-quality services.

“What’s more, as international clients recognise that industry players in Hong Kong are respectful of designing work and industry ethics and that there is sound protection of intellectual property rights in the territory, Hong Kong has become an important base for promoting global brands.”

 

 

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[1] ISO 9000 and ISO 14000 are internationally recognised standards for quality management systems and environmental management systems, respectively.

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13 Sep 2016

One Belt, One Road (OBOR): China's regional integration initiative

By Gisela Grieger (European Parliamentary Research Service)

Summary

In 2013, China launched its 'One Belt, One Road' (OBOR) initiative. OBOR is China’s broadly sketched vision of how it plans to boost regional integration in its wider neighbourhood. The initiative is unprecedented in terms of China's financial engagement and the innovative network-based project design which is intended to contribute to a more inclusive global governance. It contrasts sharply with existing treaty-based integration concepts where the geographical scope, partner countries, strategy, principles and rules were clearly defined at the outset. China's new development vision has been seen as an alternative to regional trade agreements which do not include it; as a strategy for asserting its leadership role in Asia in response to the US pivot to Asia; as an economic outreach towards Asian countries for resolving territorial and maritime disputes by exporting China’s domestic development policies; as a means of tapping into new sources of growth to check the marked downturn in its economy; as a tool for tackling the socio-economic divide between its inland and coastal provinces; and finally, as a venue for addressing security challenges on its western periphery as well as energy security issues. The response to China's regional integration vision has been mixed. While the idea of enhancing connectivity has drawn considerable interest, given the huge infrastructure gaps across Asia, scepticism regarding China's potential hegemonic ambitions has prevailed notably among regional rivals India and Japan as well as the USA. Whether OBOR will be mutually beneficial for China and the EU will depend on the two sides agreeing on the 'rules of the game', including for joint projects in third countries. Potential synergies between OBOR and the EU connectivity initiatives are being explored under the EU-China Connectivity Platform.

In this briefing:
• Geopolitical and economic drivers of China's regional integration strategy
• The One Belt, One Road (OBOR) regional integration initiative
• OBOR's significance for China
• OBOR's significance for the EU
• Outlook
• Further reading

Please click to read full report.

 

 

 

 

 

 

20 Sep 2016

One Belt – One Road: China’s Re-Engineering of the Global Business Environment

By Jean-Pierre Lehmann, IMD – International Institute for Management Development, Lausanne

Perceptions about OBOR

The international community is still struggling to understand the gist and impact of OBOR since China has difficulty in explaining its intentions. Initially, OBOR was referred to as “China’s Marshall Plan” by some Western media and more recently it has been seen as a countermeasure to the US-led Trans Pacific Partnership (TPP) and pivot to Asia….

Opportunities

The first opportunity OBOR presents for China is that it will open new markets, which will help to resolve issues of domestic overcapacity. Moreover, the infrastructure thrust will reduce trade costs through central Asia and shift competitiveness inland. As the land corridors are set to run along the major Eurasian countries, through China-Mongolia-Russia, China-Central and West Asia, China-Indochina Peninsula, China-Pakistan, Bangladesh-China-India-Myanmar, it will also enable the integration of inland and coastal China, bringing growth and stability to the region. An example upheld as a symbol of success for OBOR, the Trans-Eurasia Chongqing-Xinjiang-Europe international railway route, which starts in Chongqing and ends 11,179 km later (following 16 days of travel) in Duisburg, Germany, is currently being used by companies like BMW and HP.

China needs more such infrastructure projects to sustain its economic growth and to support important domestic industries. In fact, Marc Laperrouza [a guest contributor to this article] senses a kind of desperation among Chinese businesses and government agencies to find new projects/acquisitions on technology and infrastructure. He feels that the country is currently obsessed with innovation. In fact, in southern China large-scale low-cost manufacturing is transforming into design houses in an effort to move up the value chain. China wants to move beyond its traditional role of exchanging infrastructure against natural resources, as in the case of its investments in Africa. By progressing with OBOR, it will take projects coupled with financing mechanisms to countries lacking in infrastructure, such as Indonesia or the Philippines. This will, in turn, allow China to offer its products and services to these countries in the longer term. Beyond hard infrastructure, Marc sees the potential for China to export standards for the very first time. China has been intensifying its efforts to set indigenous standards for homegrown ultrahigh voltage (UHV) transmission technology and aims to contribute to UHV standards internationally. Two factors are creating a window of opportunity for Chinese UHV technologies to gain acceptance as the de facto global standard: (1) It is the only country currently deploying UHV technology on a large scale and (2) No international UHV standard has yet prevailed.

While OBOR signals a new phase in China’s globalization process, what about soft infrastructure? Despite all its success, China lacks attractiveness and battles inferior quality perceptions. According to Marc, out of 7 million annual university graduates, there are 700,000 engineers but only a fraction of them are world-class. This situation could give rise to fundamental questions about quality and security for key strategic assets, for example as the UK’s next generation of nuclear power plants will be built in collaboration with China Guangdong Nuclear Power Group. Marc wonders if China’s infrastructure-driven hard power can translate into winning soft power. “Exporting the local advantage sounds good on paper but what about the ground reality of the specific OBOR countries? It was an African honeymoon for China until a few years ago but now the situation is growing tense.”

Ultimately, China wants better return on investment. While it is the biggest holder of US debt, it is also looking to invest elsewhere to not only enhance its returns but also to win friends in the process. Evidently, with OBOR the investment preference (e.g. M&A, EPC projects) will shift toward developing countries where priorities are power, transport infrastructure, telecommunication and water. The next open question is whether there is an actual business case for OBOR investments and whether it can bring sufficient returns….

© 2016 IMD- International Institute for Management Development

Please click here to view the full article on the IMD website.

 

 

 

 

 

 

27 Sep 2016

The EU–China Bilateral Investment Agreement: Between High Hopes and Real Challenges

By Insa Ewert, Visiting Fellow at the Egmont Institute from December 2015 to January 2016
 
The need for investments in Europe and China alike is driving the negotiations. From this outset it is likely that the different objectives in the negotiations can be consolidated. In addition, as OBOR on the Chinese side and the EFSI on the EU side are already under way, they can serve as tools to increase bilateral investments in the short-term and bridge the period of time until the BIA comes into effect. In contrast, even though negotiations on the BIA may be – by optimistic calculations – concluded within one year, the agreement would only come into effect after several years, depending on the possibly extended ratification process. The BIA therefore serves as a long-term tool to enhance investment between the EU and China, rather than promising short-term benefits.
 
Another factor to be kept in mind are the economic developments in China and worries about a significant slowdown of the Chinese economy. As undecided as economists are in predicting what might happen in China in the next year and to what extent the Chinese Communist Party has the tools to mitigate a possible hard landing, the long-term effects on European economies also remain to be seen. However, due to the overall slow-down of the Chinese economy, China’s interest in increasing its investments abroad, and its ambition to progress towards an FTA with the EU are all strong indications of China’s willingness to finalize the negotiations in the near future. 6 To conclude, successful negotiations have the potential to not only increase investment flows and contribute to economic growth, but also to strengthen the EU’s overall relationship with China. They can further serve to demonstrate the effective implementation of the EU’s trade and investment strategy internally and strengthen the EU’s economic relevance in global trade and investment regimes. However, policy-makers on both sides of the negotiations need to remain aware of the potential obstacles. In order to obtain the best outcome, the EU needs to follow a coordinated approach and ensure that the implementation of the agreement actually significantly improves the situation for European companies in China. As the example of the Shanghai Free Trade Zone has shown, all that glitters is not gold.
 
Please click to read full report.