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Fasten your seatbelts: China is creating a new global trade axis

China’s Belt and Road Initiative

By Ian Lavis on behalf of Praxity

Wouldn’t it be great if you could sidestep the global economic downturn and invest in an exciting new project with real potential to drive business growth? Well the opportunity is here. It’s called the Belt and Road Initiative, and companies are clamouring to be part of it.

If the hype is to be believed, China’s Belt and Road Initiative (BRI) will develop infrastructure and trade in local communities and across vast regions and continents.

This giant project, otherwise known as One Belt One Road (OBOR), aims to increase trade between East and West along key routes through Asia, Africa and Europe. It promises to transform the infrastructure and economies of more than 60 countries as well as presenting exciting new business opportunities in construction, transport, IT, finance and many other sectors.

The numbers* are staggering:

  • $US 1.1 trillion of investment committed already
  • 900 projects planned or underway, benefiting 80 countries
  • projects in Asia alone will require $US 1.7 trillion a year to 2030
  • countries located within the BRI account for 29% of global GDP
  • China’s government expects trade with BRI countries to exceed US$2.5 trillion a year within the next decade

*Source: HSBC

Is this really the start of a third global trade axis in a modern version of the ancient Silk Route that existed for centuries to transport silk and other lucrative goods, or is it simply an economic superpower building and controlling strategically-placed infrastructure in developing countries?

Either way, there is no doubt there are opportunities to be had locally, regionally and globally for forward-thinking companies in China, throughout the BRI and beyond.

That’s if China’s hugely ambitious plans for infrastructure and international cooperation can be realised. This is far more than a mammoth building project to create roads, railways, shipping routes and ports. It’s about promoting collaboration between governments, organisations, businesses and people. A joint report by the Shanghai Stock Exchange and ACCA called The Belt initiative: Reshaping the Global Value Chain, lists five key aspects of the BRI as follows:

  • policy coordination;
  • connecting infrastructure;
  • unimpeded trade;
  • financial integration, and
  • people to people bonds.

For it to succeed, the BRI requires a huge amount of work to develop intergovernmental and financial cooperation, and systems for monetary stability, investment and financing, and credit construction across Asia. It means constructing massive infrastructure to connect sub-regions in Asia as well as the continents of Asia, Africa and Europe. Also, removing barriers to investment and trade and discussing the possibility of free trade, and promoting the exchange of talent.

Despite the challenges involved and the risk to investors of a long payback period, the project is already having a big impact. Engineering projects are booming, according to ACCA, with 6,877 new contracts for projects in 61 countries, while China’s outbound investment is up 18.3% year on year.

In an article published by Standard Charter, Patrick Lee, Managing Director and Head of Global Banking for Standard Charter in Singapore, says, the spillover effect of the project is “simply too large to ignore”. He urges all businesses, regardless of size and types of expertise, to proactively seek BRI opportunities or “risk being left behind”. In a region facing an ageing population and increased youth migration which is likely to lead to changing consumption patterns, he says collaboration and differentiation will be key enablers.

One sector where companies are investing in BRI is the information and communications technology (ICT) sector. Earlier this year, China Daily reported on a new collaboration between the Kenyan government and the Chinese ICT company Huawei to build the infrastructure necessary for government cloud services. Also, to migrate government data and applications to the government cloud and create a platform for government departments to share data and communicate more effectively.

In a similar example of collaboration, according to Asia-Pacific magazine The Diplomat, the Chinese government has pledged to invest in a project in Bangladesh to create a public network linking government agencies and the MoTN project to extend telecommunications affordability and density.

While these projects represent the tip of the iceberg, there remain major obstacles if a third global trade axis is really going to become a reality.

In article published in The Diplomat in November 2017, Wenyuan Wu, US-based independent researcher who holds a Ph.D. in International Studies from the University of Miami, says the problem with projects engineered in a top-down fashion is that it “ignores institutional weaknesses in underdeveloped partner countries”.  He adds: “For all their investments, Chinese companies will eventually find these export markets are not developing in the ways they hope”.

While there is uncertainty over the long-term success of the BRI, companies within the ‘belt’ and beyond it might be wise to consider positioning themselves to take advantage of the fast-emerging business and investment opportunities.​​