China’s Belt and Road Initiative (BRI),
formerly referred to as One Belt, One Road (OBOR) represents an
economic development funding plan worth, at its most ambitious target,
US$4 trillion in foreign direct investment (FDI) along two regional
trade routes. Representing the consolidation of strategic objectives
for Beijing, the BRI remains beset by uncertainty over the scope and
timeframe of China’s commitment and hesitancy from key regional
partners. Questions linger over commercial viability from industry and
regulatory compliance and credit risk relating to project financing.
Scope and outcomes
First proposed by Xi Jinping in 2013 and initially getting off to a
slow start, the BRI saw nearly US$500 billion worth of related
projects and M&A deals announced in 2016 alone. The initiative
focussed on physical asset development across two trade routes. The
“Belt” refers to the westward overland route linking China to Central
Asia, Russia and Western Europe along the ancient Silk Road trade
route. The “Road” relates to the maritime channel navigating from
South East Asia through India and the Persian Gulf to Southern Europe.
The BRI aims to engage over 65 countries and reach a total population
of 4.4 billion, representing over a 30 percent share of the global
economy across three continents. The plan dwarfs the size and scope of
past initiatives such as America’s Marshall Plan to rebuild Europe
after the Second World War. Existing projects greenlit include new
rail lines from Europe to China, ports in Pakistan and Sri Lanka and
high speed rail links with Laos and Thailand.
BRI will employ a combination of intragovernmental free trade
agreements, state-owned bank sponsored underwriting and direct FDI.
The initiative will support the internationalisation of China’s
competitive advantages in the industrial, manufacturing and
infrastructure sectors. Infrastructure development will comprise
railways, roads, highways, ports and pipelines, supporting industrial
and manufacturing capacity investment in industries including energy,
chemicals, aerospace, telecoms and textiles. Involvement by firms from
every Chinese province will be backstopped by support from China’s
Export and Import Bank, Ministry of Commerce and sovereign wealth
fund. While most of BRI is expected to be funded in US dollars, the
project will provide opportunities to promote the internationalisation
of RMB, building upon the IMF’s 2016 inclusion of the RMB in the
Special Drawing Rights (SDR) basket of currencies.
China’s outward foreign direct investment through the BRI is the
culmination of multiple geopolitical, diplomatic and economic
objectives. Large scale public-private partnership will enable the
reorientation of China’s foreign exchange and capital reserves from
low interest US government bonds to higher yielding infrastructure
projects. Investment partnerships with businesses across every
province in China will facilitate the take up of industrial production
overcapacity as the economy transitions from investment driven
manufacturing to a consumption led, service and higher value goods
based economy. A non-discriminatory investment focus that eschews
traditional alliance structures will aim to facilitate intra-regional
cooperation and dependence between nations. China will also be looking
to build the profile of the Asia Infrastructure Investment Bank (AIIB)
as a competitor to the World Bank and Asian Development Bank through
co-sponsorship of BRI projects.
Challenges and the financial sector
Concerns linger relating to China’s commitment and the hesitancy of
regional partner involvement. Whereas overall outbound FDI reported a
40 percent jump in 2016 prompting regulators to clamp down on capital
outflow, FDI directed at BRI markets has slowed, with decline
accelerating into early 2017. Non-financial FDI to key BRI countries
similarly accounted for less than 10 percent of total outbound FDI in
the previous year. Loans from the China Development Bank (CDB) to BRI
markets similarly peaked in 2014 at 41 percent, falling to 33 percent
by the end of 2016. Measures towards solidifying regional partnerships
remain fraught. India has expressed concerns over regional sovereignty
and territorial integrity relating to development in Pakistan-Occupied
Kashmir. Sri Lanka and Myanmar leaders have meanwhile sought to
renegotiate projects approved by predecessor leadership. |
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Financial institutions have similarly
expressed trepidation relating to regulatory challenges and commercial
viability and the complexity of operating in frontier markets. Global
banks including HSBC, Standard Chartered and Citi remain attracted by
opportunities for financing, bond issuance, advisory and partnership
with Chinese leadership. Uncertainty remains relating to tax,
financial planning and particularly compliance as it relates to
infrastructure projects such as rail and oil pipelines that may flow
through sanctioned regions. The bulk of finance business is further
expected to flow to Chinese state owned commercial banks supported by
domestic agencies and governmental ministries. Financiers have
additionally expressed reluctance to originate and hold long dated and
complex exposure without some form of credit enhancement and
insurance, given regulatory constraints on concentration and
counterparty risk. Impending Basel IV standards will further raise
risk weighting on foreign secured loans imposing a contingent
liability of loan repricing.
Regional trade and the role of business
Measures to ease financing concerns from China through to the Middle
East, Africa and South East Asia resulting from BRI investment should
be welcomed. East & Partners Global Supply Chain report indicates
China tops the measure of most challenging region to fund inside a
corporate supply chain, nominated by over 40 percent of top 100
revenue ranked corporates across eight global markets. Africa and
South East Asia are comparatively ranked third and fourth after Latin
America, nominated by around 20 and 10 percent of businesses
respectively. This however, serves primarily to emphasise the
predominance of China as a key export market and the capacity for
infrastructure investment to support greater globalisation of trade
throughout the Silk Road and BRI maritime route. According to recent
East research on enterprises in the Asia region, China is nominated as
a key export market by over 75 percent of institutional businesses as
compared to India (42.3 percent), the Middle East (6.6 percent) and
the wider African continent at 2.3 percent.
Chinese leadership is further seeking to leverage the technical
expertise of industrial multinationals who have expressed greater
interest than Western governments. GE is looking to build upon
existing contracts with Chinese construction and engineering firms
through orders for natural gas turbines and power equipment in the BRI
region worth US$7 billion over the next 18 months. Manufacturing
conglomerate Honeywell is similarly orienting to build upon existing
business in supplying natural gas processing equipment in Central
Asia. Western governments in contrast, have broadly treated the
initiative with scepticism both with the expectation of favouritism
for Chinese firms, and reluctance in granting China economic and
political leverage in the wider region. However, to the extent that
infrastructure development and the establishment of thriving capital
markets helps to facilitate new export destinations and supply chain
networks for businesses from the Institutional segment through to SME,
investment in the region should be welcomed.
An initiative to be embraced
Realisation of the full scope of the BRI will depend on China’s
capacity to solidify regional engagement through memoranda of
understanding and striking milestone contracts with a diverse
partnership of public and private stakeholders. Western governments
and financial intermediaries would be well served by gaining a greater
clarity of the industries and enterprises with the interest and
capacity to engage on the BRI and the economic, geopolitical and
regulatory impediments to be overcome.
To the extent that China can export its investment driven model of
productivity, gross domestic product and income growth to the wider
Central Asian, Middle East and Africa region, the Belt and Road
Initiative should be an undertaking that is encouraged globally.
To speak to East & Partners about additional trade finance research,
or about exploring opportunities within China’s Belt and Road
Initiative,
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