In 2016, China was an economy in transition. Internally, growth was moderating, economic drivers were diversifying and its evolution from emerging to developed market was gathering momentum.
As policymakers transition China’s economy from export-oriented production and manufacturing to a more consumption-led model, there is a clear need to diversify and look at opportunities outside China to benefit from its position in global trade and international commerce.
Enter Belt and Road (B&R), an initiative which is influencing a new round of high-growth across emerging economies. In a return to its roots, China has identified historical trade corridors to facilitate its next phase of internationalisation.
Given the project’s scale, there has been much debate around the motivations, the scope and the opportunities under the B&R framework.
On the surface, B&R is an opportunity rooted in historical strategic road and maritime corridors linking China, Africa and the Middle East with the rest of the world.
Yet, it is also a major pivot in China’s cross-border commercial policy, whereby emerging markets are set to become the next beneficiaries of strategic initiatives. Indeed, in many respects it is these countries, not China itself, which will determine B&R’s success.
Principles of B&R
The initiative is a new paradigm for China and the more than 60 countries which line the rebooted Silk Road.
Deploying the country’s massive manufacturing base, technical expertise and capital, for regional infrastructure development will be essential if the initiative is to succeed. In addition to “hard” connectivity with Association of South East Asian Nations (Asean), Central Asian and Middle Eastern countries via an unblocked road and rail network between China and Europe, there is also an emphasis on “soft” connectivity, including the promotion of trade and financial integration, as well as policy and cultural exchange.
Aside from infrastructure investments in ports, high-speed railways, power generation and other utilities, B&R offers vast scope for private-sector investment opportunities for both China and partner nations in real estate; telecoms; e-commerce; financial services; tourism; education; creative industries; and green technologies.
The rationale for African countries participating in B&R is based on the continent’s rapid urbanisation trend.
More than half the African population is expected to live in towns and cities within less than 20 years, compared to 40 per cent now. This will in turn bring an increased need for infrastructure, and the financing to build it.
Encouragingly, the groundwork has already been laid. In recent years, Africa has benefited from infrastructure development from China, and now has the opportunity to leverage this further — notably in line with the rise of the sub-Saharan consumer class.
There is also an increasing emphasis on private capital — in 2015, six institutions including Standard Chartered provided $515 million in financing for an independent Zambian colliery to build a mine-mouth, coal-fired power plant and associated infrastructure. Last year, one of China’s largest construction companies signed deals in Africa worth a combined $5.5 billion, further signalling the growth of B&R activities.
Stronger ties have also emerged with Middle Eastern and Central Asian economies, which have seen pockets of development driven by China’s demand for overland resources trade and delivery.
Since the mid-1950s, the economic relationship between China and Arab countries has become cast with energy cooperation as the central tenet, infrastructure construction and investment support as its two ‘wings’, and nuclear energy, satellite technology and new energy as three areas of potential breakthroughs.
Like Africa, the Middle East is also experiencing urbanisation. In the heady days of oil at more than $100 a barrel, it could self-fund the required infrastructure. But it now needs alternative sources of capital. In this context, B & R has obvious appeal, particularly with a similarly growing emphasis on private sector participation.
Meanwhile, UAE and Qatar have committed to the development of the RMB by launching clearing hubs. Data from SWIFT’s RMB Tracker last September also show strong growth in the UAE’s adoption of RMB. Despite recent reductions in global RMB use, this is just the beginning of a long-term trend.
For countries along the B&R route, the opportunities available require strategic consideration. In its initial phase, B&R has spearheaded the negotiation of partnerships stretching from Singapore to the UAE, via Pakistan and other countries along the route.
Partnering for good
B&R initiatives will lead to tighter financial integration within the region through enhanced cross-border exchanges. The establishment of financial institutions such as the Asian Infrastructure Investment Bank and Silk Road Fund will provide a level of capital and support. But, corporations outside China will require high-level financial partnerships and advisory to fully reap the potential rewards of B&R.
When history judges its success, B&R will likely be viewed in its entirety. Understood as a China-initiated programme, but seen in broader terms as a cross-border economic project. China needs to ensure mutual benefits from the initiative. B&R is a commercially oriented project, not a foreign aid programme. To achieve true success, the initiative depends on the adoption and connectivity of multiple markets, government and private sector cooperation, and investment along the new Silk Road.
— Sunil Kaushal, Regional CEO, Africa & Middle East.