Staggering sums: the China belt and road initiative

On the first day of 2017, a 34-carriage goods train packed with low-value consumer items ranging from clothes and shoes to suitcases left the Chinese port city of Yiwu. Seventeen days and nearly 8,000 miles later it rolled into London, inaugurating a weekly service that will see Chinese goods carried to the UK capital by rail, a means of transport faster than container ship and half the cost of air freight.

The new service joins existing ones operated by China Railway to Germany and Spain, with London the 15th European city to be added to Chinese overseas train routes. The Yiwu-London goods transportation is yet another manifestation of China’s fast-growing ‘one belt one road’ (OBOR) trade initiative that is still less than four years old.

OBOR, which more recently has been abbreviated to the ‘belt and road initiative’ (BRI), was originally announced by China’s president, Xi Jinping, in 2013. Its ambitious remit can be summarised as creating an infrastructure network, financial and policy conditions to facilitate regional trade and cooperation.

Earlier this week, HSBC hosted a breakfast briefing in central London that provided insights into the BRI. As James Cameron, co-head of its infrastructure and real estate group within Asia-Pacific global banking noted, China has never issued a formal definition confirming which countries come within the BRI initiative. However, it’s generally accepted that at least 65 countries are involved and the focus is on building trade links between them. Cumulatively, these countries account for 29% of global gross domestic product (GDP) and 63% of the world’s population.

The initiative envisages two main corridors – the ‘belt’ referring to the historic overland Silk Road trading routes that connected China, via central Asia, to Europe and the Middle East, while the ‘road’ is actually the maritime route to the south and linking China to South East Asia, India and Africa. For both belt and road, the aim is to improve physical connectivity through infrastructure investment and to focus on expanding trade ties.

A glittering prize

The expected economic prize is staggering. In 2015, China’s annual trade with countries along belt and road routes was estimated to have reached US$1 trillion and within a decade that figure is projected to be upwards of US$2.5 trillion.

“BRI is still a nascent policy but we’re already seeing it have a material impact, with investment directed towards greenfield infrastructure and platform companies,” says Cameron. It has also led to the development of new financial entities such as the Asian Infrastructure Investment Bank (AIIB), with committed capital of US$100bn.

The AIIB, which celebrated its first anniversary earlier this year, was created with 57 founding shareholders although these did not include the US. The Obama administration regarded the new bank as an undesirable rival to the World Bank and was particularly critical of the UK, which was among the first to sign up as an AIIB member in March 2015. While the world’s third-largest economic power, Japan, is also yet to apply for membership, the AIIB is expected to attract a further 25 signatories this year, including Canada, Ethiopia, Ireland and Sudan.

The state-owned Silk Road Fund, established in late 2014, will also fund BRI infrastructure projects but is more focused on equity investment. It has already provided capital for the first hydropower project in the new economic corridor between Xinjiang and the Pakistani coast, on which construction got underway last year.

Other funding sources include the New Development Bank (NDB) – formerly known as the BRICS Development Bank as Brazil, China, India, Russia and South Africa were the founding investors – which was established in July 2014 with initial capital of US$50bn set to be doubled to US$100bn. The NDB announced earlier this month that it expects to lend US$2.5bn to US$3bn this year and has approved seven projects. However, its remit is narrower than the AIIB’s and focuses mostly on three areas: power generation, power transmission and transport infrastructure in Europe.

Add to this source China’s major banks such as the Export-Import Bank of China (ExIm), China Development Bank (CDB) and the Industrial and Commercial Bank of China (ICBC), plus several insurers, which are all stepping up their investment in infrastructure.

Cameron adds that there is also a significant need for infrastructure investment from overseas, particularly as BRI will present a range of differing situations, client requirements and product requirements.

The initiative offers two main trade opportunities for HSBC’s international clients, says Vinay Mendonca, the bank’s managing director and global head of business management – global trade and receivables finance. First is overseas direct investment in BRI infrastructure projects, from large multinationals to SMEs. HSBC seeks to support clients at both ends of the trade, offering an understanding of turnkey projects and pricing them accordingly; also asking questions such as whether clients want a hub facility.

Secondly, the markets are continuing to move from being export-led to demand-led, thus creating a demand for services in China, India and other major emerging markets, each of which has its own set of regulations in areas such as exchange controls.

Another role for the bank is in carrying out of ecosystem mapping of contractors and suppliers, while a procurement method for infrastructure sets out what the specific requirements are. There are instances where a Chinese company seeks to acquire a company abroad, such as the deal in late 2014 that saw China Communications Construction Company (CCCC) purchase Australia’s construction, tunnelling and rail group John Holland for A$1bn.

“A more open approach is now being adopted to partnerships, replacing what used to be a closed ecosystem for Chinese companies. They are now much more open to the possibility of forming joint ventures with local companies,” says Cameron. “Attempts have been made to integrate Chinese and international financing, while Chinese companies have bought local firms in order to gain both a local platform and local knowledge.” One example was the venture formed by US engineer AES with China Investment Corporation (CIC) and Korea’s Posco Energy to construct a power plant in Vietnam.

Further afield

Cameron adds that following the election of Donald Trump as US president and the apparent demise of the Trans-Pacific Partnership (TPP), more local partnerships and trade links have been established – in line with the aim of BRI to connect south and southwest China and there has been much investment in Pakistan and Bangladesh projects.

As regards the regular rail consignments now bringing Chinese goods to Europe, it can currently appear something of a one-way trade with the trains heading back with rather smaller cargoes, concedes Mendonca. However, he believes that China is likely to step up its purchases of higher-end goods and services in return and providers of either in Europe that are “quick movers” will be able to discern the trends and take up opportunities. “The digitisation of e-commerce in China is happening incredibly quickly,” he notes. Germany is particularly well-placed as Europe’s main producer of high-value engineered products.

Asked how the BRI has been received in Europe, Cameron refers to the European Commission’s (EC) so-called Juncker plan, approved in mid-2015 in response to the region’s investment deficit since the global financial crisis and the launch of the European Fund for Strategic Investments (EFSI). “There has been a great deal of dialogue over how China could play a part and Chinese companies are interested in platform projects in Europe. There has also been much positive development and momentum regarding Chinese companies forming partnerships.”

While the White House’s new occupant has employed some aggressive rhetoric against China, the US dollar is still the key currency used in funding BRI projects. China’s central government is attempting to promote the renminbi (RMB) and there have been moves to develop local currency markets; efforts that will be helped by the steady internationalisation of the RMB.

“As China trades develops and the trade with the 65 BRI countries rises from US$1trn to US$2.5bn over 10 years an increasing percentage of this business will be RMB-denominated,” says Cameron.

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