Belt and Road Five Years On

Logo BRA.jpg

On Friday September 7 2018, the Belt and Road Initiative (BRI) turned five years old. Via video link, President Xi gave congratulatory remarks to a conference in Kazakhstan set up to commemorate the occasion.

Since its inception, the BRI has “gained extensive attention from the international community” Xi said. He added, “the countries participating in the initiative have continued to enhance policy coordination, accelerated the implementation of major economic and trade projects, endeavored to form an infrastructure network, steadily promoted cooperation in industry and finance, and strengthened people-to-people exchanges.”

Taking stock 5 years on

 As global interest in the BRI continues to rise, the Belt and Road Advisory was established to help organizations make more informed decisions and improve their engagement with the BRI. While no single article can fully reflect the different facets of BRI; what follows is our brief take on some of the central aspects to BRI five years on.

1)    Infrastructure

 We attended the Asian Infrastructure Investment Bank’s Annual Conference in Korea in June 2017. It was evident that many developing economies in attendance were vying for infrastructure funds and premising their growth strategies on the backbone of infrastructure.  The notion of infrastructure-led growth is not new, yet today is more influential than ever before, and China’s BRI has been a key factor in driving this shift. Not only is the BRI providing unprecedented sums of financing, but it is also giving many developing countries access to cheap capital that historically was inaccessible to them. We visited Ethiopia in December 2017, it was incredible to see the extent of Chinese built (and often financed) infrastructure across the country.

However, in the last year, the BRI has come under criticism for loading countries with debt. Mahathir’s election in Malaysia followed by the cancellation of key BRI projects worth over $20 billion have been the most visible manifestation of these concerns. Pakistan, Sri Lanka and Nepal have all postponed projects too, with excessive debt and unfavorable project terms oft-cited reasons. Some commentators in the West have thus inferred that the BRI is nothing but a ‘debt trap’ for developing countries.

Yet, this conclusion is too simplistic. As Gordon Orr (Former Head of McKinsey China) outlined in an interview with us, “Even a country that has as much capital as China cannot fund unlimited losses on building infrastructure. China wants an economic return on these projects. While some projects will invariably fail, there is an expectation that the average project will yield a return capable of paying off the debt incurred.”

That said, BRI infrastructure build-up does come with its challenges. Professor He Yafei, former Vice Minister of China’s Ministry of Foreign Affairs, told us that Chinese firms must improve their ability to bridge cultural gaps while working in new markets. Professor He added, “it is very important to have the support of the common people, without it BRI will not be as successful as it could be.” More broadly, infrastructure-led growth models only work under certain conditions. Infrastructure must be seen as an enabling condition that facilitates growth over the medium term through improving logistics, fostering industrial development and encouraging tourism. Failing to develop industry hand-in-hand with infrastructure may result in inadequate demand for that same infrastructure.

2)    Industry

With China’s wages rising, there is an opportunity for developing countries to leverage new infrastructure to attract manufacturing production that is relocating from China. In our podcast with Harriet Kariuki, a Kenyan seeking to improve business ties between China and Africa, she argued that the Belt and Road Initiative presents an opportunity for Africa to catalyze its industrialization.

In the case of Ethiopia, manufacturing wages are around $50 a month, compared to around $300 in Vietnam and $500 in China. Multinational firms are already taking notice of this opportunity; with Philip Van Heusen (PVH), Huajian shoes, H&M, Tesco, Gap, Belk, and Walmart already starting manufacturing operations in Ethiopia.

However, countries need to be careful on premising their industrialization strategies on capturing industry transfer from China. After speaking with factory owners during our trip to Yiwu, a manufacturing powerhouse in China’s Zhejiang Province, it became apparent to us that there is a reluctance to offshore production. That’s because automation is making manufacturing less dependent on low cost labor, and China’s logistics system remains best-in-class.

3)    Technology: China’s Digital Silk Road

Chinese tech companies enjoy significant political support. Government sponsored tech-zones and innovation hubs are being established across China as part of the government’s agenda to develop key technologies including: 5G, artificial intelligence, industrial internet, big data, and cloud computing technologies. For instance, efforts to build China’s “big data valley” are being made in Guiyang, the capital of Guizhou province. This economic and political momentum enjoyed by China’s IT sector is contributing to the development of a digital silk road. As these technologies mature in the domestic market, Chinese tech firms are increasingly looking outwards.

China sees a parallel opportunity in building digital infrastructure along with physical infrastructure in developing markets; and by doing so facilitating more efficient transactions and improved entrepreneurship. In our podcast with Professor Chen Dongmin, Dean of the School of Innovation and Entrepreneurship at Peking University, he argues that, “blockchain technology will quickly take off in countries along the Belt and Road unlocking such possibilities as a fast cross-border payment system. Similarly, great opportunities lie within logistics supervision, as there would not be a single body to supervise the process, but the supervision would become decentralized."

4)    Legal framework

Up to now, some of China’s biggest investments abroad have been governed by common law. This may not change overnight, but there have been more concerted efforts made from the Chinese side to define the legal system around BRI on China’s terms. This was the rationale behind the Supreme People’s Court announcement in June 2018 of the inauguration of two China International Commercial Courts – one in Xi’an to handle Silk Road Economic Belt commercial disputes and the second in Shenzhen for Maritime Silk Road disputes.

In our interview with Professor Don Lewis, China legal expert, he argues that “the world of international arbitration and international dispute settlement generally are likely to be shaken to their very foundations…There will be a major shift to China and Asia and away from the U.S. and Europe. This paradigm shift will impact commercial arbitration – and investment arbitration or investor-State dispute settlement even more so.”

 5)    Environment

Since the inauguration of the BRI in 2013, the discussion surrounding greening the initiative has moved from the shadows into the spotlight. For China’s internationalizing construction companies, it is now more important to, ex-ante, examine the sustainability of infrastructure projects and their impact on the local environment. This shift has resulted from the Chinese government adopting a more proactive stance on environmental standards; knowing that projects can fail if those standards are not upheld.

The acceleration has been particularly pronounced over the last three years. President Xi pledged US$2 billion in 2015 in order to promote the UN Sustainable Development Goals and to improve the sustainability of infrastructure development. More recently, Xi called for a ‘Green BRI Investment Strategy’ during the inaugural Belt and Road Forum that was held in Beijing in May 2017. Specific climate measures for such a strategy proposed during the forum include the creation of a data service platform on ecological and environmental protection, as well as the formation of an international coalition for green BRI development.

Policy pledges are one thing, realities on the ground are another. For BRI projects, we find that coherent environmental frameworks are still lacking. Part of the challenge stems from enforcing regulations; at home Chinese construction firms are closely watched. Abroad, they can get away with more. Given the competitive nature of the construction industry, contracts can become a ‘race to the bottom’ that ultimately foregoes environmental (and social) standards in order to secure a deal.

6)    The commercial opportunity

There are opportunities for foreign firms to participate in BRI. Already some of the world’s best known legal, insurance, engineering and consulting firms have a long pipeline of BRI related projects. Chinese firms and banks are still in the early stages of their internationalization and lack knowledge in a number of areas. If foreign firms have expertise in specific BRI markets, then there will be opportunities to work with Chinese firms there.

That said, Chinese firms still dominate the BRI, with one estimate putting Chinese participation at 89%. Moreover, it can seem a daunting task to access these BRI opportunities for foreign firms. Many BRI projects lack transparency and there isn’t a way to gain a holistic picture of all BRI projects going on at one point in time.

In our podcast with Chris Devonshire-Ellis, CEO of Dezan Shira & Associates, he argues that “the bigger opportunity for foreign firms is to actually understand the infrastructure build up and the opportunities this new infrastructure is going to create… One example is the Chinese built the Southern Expressway in Sri Lanka. This is a road which leads from Colombo airport and heads southwards. That reduced the journey time from 5-6 hours to 2.5 hours. That’s had a huge impact on the tourism industry, and you’ve seen some of the big hotel chains enter as a result – for instance, the Shangri La."

Many entrepreneurs around the world are trying to understand what the BRI means for them. Interviewees in our flagship Voices of the Belt and Road podcast are a microcosm of this growing community of individuals seeking to understand and benefit from the BRI. Take William Suen for example; during our podcast he outlined how he is trying to position Hainan to benefit from increased maritime trade brought about through the BRI. Or Rhys Walley, CEO of the Manchester China Forum, who is seeking to bring about more Chinese investment into the UK’s Northern Powerhouse. Dr Xu Wenhong spoke of the opportunities that exist for China’s deindustrializing North East to position itself as a commercial hub between China and Russia.

7)    Geopolitics

In our interview with Professor Martin Jacques, bestselling author of “When China Rules the World”, he argues that the BRI is “bound to have a huge impact on governance across the Eurasian land mass. BRI will lead to many new forms of governance, both bilateral and multilateral, at both a national and regional level.”

Therein lies the potential threat that has pushed the US into adopting a stance against the BRI, and fueled 27 of 28 EU Ambassadors to sign a letter condemning the initiative. With the ongoing trade war, the US is seeking to contain China and change its institutional structure; but as we argue in this piece, US tariffs may paradoxically end up accelerating the BRI through encouraging Chinese firms to relocate production abroad in order to avoid the tariffs.

In aggregate, the BRI is bringing some countries closer to China, and some are being pushed further apart. The recent Africa-China Summit in Beijing, during which the BRI featured prominently, is a key example of the former. India falls in the latter camp, and remains concerned that China is using the BRI to contain it. Other countries fall in between the two camps, we argue that Japan is yet to make up its mind and has shown both positive and negative signs towards the BRI.

Making sense of BRI at 5

How should we make sense of the BRI over its first five years? Some say it is a vision. They invoke the romantic sentiment of the Ancient Silk Road that stretched from China to the Middle East and say that the BRI offers a comparable vision that fosters globalization and catalyzes economic growth in a world facing a growing number of uncertainties. Others see the BRI as a strategy; a geopolitical strategy that facilitates China's rise to the international stage. They argue that the economic forces behind the initiative are intentionally designed to reshape the world order in China's favor.

Neither of the above interpretations are strictly correct. But what can be said, is that the BRI is a process. In its first five years, the BRI has progressed through an evolutionary process, and we have seen its metamorphosis from an initiative solely focused on infrastructure to one which now also incorporates industry, technology, cultural, legal and environmental components. At the same time, the BRI has been increasing its geographical scope by shifting its focus from the historic Silk Road region to the entire globe. Chinese policy makers have also been setting increasingly ambitious goals for BRI; from economic development to constructing a community of “shared destiny for all mankind”.

Five years ago, very few individuals would have thought the BRI would become as all-encompassing as it is today. Following the enshrinement of the BRI in the Chinese Communist Party Constitution in 2017 and the removal of presidential term limits in 2018, what is clear is that the BRI is here to stay. It has now become China’s flagship initiative through which it views its interactions with the world. 

Logo BRA.jpg