The Belt being the Land Route. The Road being the Sea Route.
The Belt and Road Initiative is known as one of the most ambitious and important foreign policy, proposed by the Chinese President, Xi Jinping. This development strategy was launched in 2013 as “Yidai Yilu” or “One Belt. One Road” in English. It aims to promote the New Silk Road Economic Belt and 21st Century Maritime Silk Road, offering a modern-day solution in international trade links to foster growth and development in the 21st century.
The Belt and Road Initiative provides a visionary blueprint of routes that cover more than 60 countries and regions from Asia to Europe via Southeast Asia, South Asia, Central Asia, West Asia and the Middle East. This currently accounts for some 30% of global GDP and more than 35% of the world’s merchandise trade.
China has championed the Belt and Road Initiative as a vehicle for connectivity, mutual development and cooperation.
In pursuing the Belt and Road Initiative, what we hope to create is a big family of harmonious co-existenceMr. Xi
For the region, the potential benefits are substantial; the World Bank has pointed out that the BRI could stimulate Asian and global economic growth and make it more sustainable. At the same time, for China, the BRI has the added attraction of supporting its domestic economy by boosting trade and creating new business opportunities for Chinese companies.
Having said that, questions raised for businesses are: How does the business world view the initiative? Where are the opportunities, what are the risks and challenges, and what are the expectations for the future?
Opportunity And Risk Along The Belt And Road Initiative
Research was conducted by The Economist Corporate Network and below are the findings:
Over 80% of respondents agree or strongly agree that the BRI represents an opportunity. Yet in contrast to this strong endorsement a more nuanced response emerges when respondents are asked if the BRI presents a risk, with 34% agreeing to some degree, 38% disagreeing and a further 28% neither agreeing nor disagreeing (see figure 5).
Where respondents see both risk and opportunity, they may simply be reflecting the fundamental economic decisions facing international businesses concerning where to allocate resources. For example, emerging markets with young, dynamic populations, rising incomes and attractive GDP growth prospects clearly offer opportunities for growth but the on-the-ground realities of the business environment mean that for some the risk is not worth the potential return.
Interestingly, while the geographic breakdown of our survey respondents was fairly evenly split between Asia (33%), Europe (32%) and North America (32%), Asia-based firms were more likely to agree that BRI represents a risk (53%) than those from elsewhere (26%).
Why is it that while both sets of respondents agree on the opportunities, Asian firms appear more bearish? It may be that distant head offices in Europe or North America have a less granular understanding about the challenges on the ground, or that some Asian respondents fear being excluded from the party.
This explanation might resonate with firms from Japan, for instance. At the same time, European and North American companies may be well advised to examine the risks and commercial viability of specific BRI opportunities for their own businesses.
What is behind the overwhelmingly optimistic assessment of the BRI? As shown in figure 6, three quarters of respondents are looking forward to an increase in demand for their products or services. This is particularly true of companies in the professional services, construction and financial sectors.
Over half expect to develop partnerships with Chinese companies or to implement significant new investments, while 45% anticipate greater appetite for M&A activity. Yet companies will need to invest in capacity and capabilities if these opportunities are to materialise, and it appears that the timeline for this has been pushed to the medium term for most respondents.
We asked what plans companies have in response to the BRI and when these plans will be actioned. In the immediate term (this year), respondents seem to be focusing on building up their human capital (40%) and establishing new representative offices (32%), with just under 30% looking for joint venture partners or potential acquisitions.
The majority, however, report a more measured timeline with plans stretching out over the next three years. As ever, companies will work at a pace that they are comfortable with and capable of meeting but there is a risk of falling behind as others dance to a quicker beat.
Given the nature of BRI projects—large-scale infrastructure development—the pace of engagement may be determined by sector with financing, consulting and other professional services in the vanguard, followed by construction and civil engineering, and finally those that operate on the newly developed infrastructure itself such as logistics providers.
Given the risk profile of many destination countries along the belt and road, a proper assessment of the challenges in destination countries will be necessary.
Financial institutions will need to be cognizant of the range of credit risks present in BRI countries.
Construction firms and other enterprises building their presence in countries along the BRI will need to prepare for potential threats to their operations in these new markets.
We asked our respondents about their concerns in six areas:
- Political risk
- Financial risk
- Operational risk
- Working with Chinese state-owned enterprises
Figure 8 shows that political risk, transparency and governance top the list of concerns, with well over three-quarters of all respondents claiming to be either “very” or “moderately concerned”. Governance and transparency concerns have dogged both the BRI and the establishment in 2016 of the AIIB which, although a separate (Chinese) initiative and promoted as a new international finance institution, is one of the main funding conduits for BRI projects.
Concerns have been raised, most vocally by the US, that through these initiatives, China will exert disproportionate influence over Asia’s development agenda. India has also raised concerns over sovereignty and territorial integrity, and opposes the China Pakistan Economic Corridor that passes through territory in Kashmir (held by Pakistan but claimed by India). The AIIB has gone to great lengths to address concerns over its governance structure over the past year.
Of more immediate importance to the business community, however, are concerns that China will show subtle or even overt favouritism towards Chinese companies, and SOEs in particular. This may be one reason for the interest in partnering with Chinese firms identified above.
Turning to political risk, the map above shows the risk profile for countries in Africa, Asia and Europe. Many countries in developing Asia and Africa face severe political, economic, social and security challenges.
Taken at face value, this reality is one of the ideological foundations of the BRI: China hopes to bring peace and prosperity to the region by making the investments in sorely needed infrastructure that private-sector players and local governments are unwilling or unable to do.
Yet, high-profile construction projects also necessitate the heavy involvement of the destination country’s government, and hence the risk profile. Indeed, China has faced setbacks borne from political challenges in some BRI countries. For example, in 2011 Myanmar suspended work on a vast Chinese-financed dam at Myitsone, as the then-leader of the opposition, Aung San Suu Kyi, had called for a reassessment of the project.
Conclusion on Research Findings For Businesses
To date, the Belt and Road Initiative has been promoted as a high-level vision of economic development and integration across the region, and the extensive political support for the initiative suggests that the Chinese government will aggressively push the project over the coming decades.
For many companies, there are significant risks, given the often-challenging operating environments in the more than 60 countries in the BRI and the possibility of low returns on several projects. However, Mr Xi’s government has clearly decided that the potential benefits of the scheme— geopolitical as well as economic—are worth bearing. This suggests the likelihood of a significant boost in the financing available for infrastructure development across the region.
The survey by The Economist Corporate Network shows that the business community overwhelmingly regards the BRI as an opportunity. Yet a lack of clarity from China, questions around transparency and concerns over operational risks in BRI countries suggests that most will move cautiously. Encouragingly, the Chinese authorities and associated actors have recognized the need to engage with the business community and address these concerns.
Ultimately, companies will need to evaluate the BRI as they do any other opportunity and decide whether the rewards outweigh the risks. This should also become easier to do as the project gains traction and related actors gain experience. China has shared the vision, business leaders must now decide if they are ready to get up and running on the Belt and Road.