The plan gained ulterior international attention after President Xi Jinping pledged to establish a $40 billion infrastructure fund for the New Silk Roads during a meeting with leaders from Bangladesh, Cambodia, Laos, Mongolia, Myanmar, Pakistan, and Tajikistan ahead of the Beijing Asia-Pacific Economic Cooperation (APEC) conference in November 2014.
The official China Securities Journal later reported that Beijing would also establish a “Marine Silk Road Bank” with a minimum paid-in capital of 5 billion RMB ($816.23 million). On December 29, 2014, one month after President Xi’s announcement, the China Silk Road Fund Limited Liability Company was founded with a registered capital of 61.525 billion RMB ($10 billion).
From A Correspondent in Johannesburg, November 1, 2017
A newly released report on China, titled “Belt & Road: Opportunities & Risks, The Prospects and Perils of Building China’s New Silk Road”, places Tanzania among East African nations seen to benefit from China’s multi-billion dollar Belt and Road Initiative (BRI)–the attempt to revive and expand China’s ancient Silk Road.
BRI relates to projects worth some USD $350 billion to be spent over the next five years under China’s initiative, according to the new report produced by the organizations Baker McKenzie and Silk Road Associates.
The report says African countries to benefit from this initiative include Kenya, Tanzania, Ethiopia, Djibouti and Egypt, explaining that the Chinese initiative carries with it potential to provide major opportunities for investment in the countries.
Silk Road Associates has developed proprietary data analytics on China-linked infrastructure projects in BRI economies. This dataset includes over 500+ projects that involve Chinese parties, SOE and private firms. The US $350 billion figure is estimated by looking at the pattern of infrastructure-related projects by sector and country in the BRI region since 2013, and other factors such as expected government commitment and geopolitical trends; then, forecasting an expected increase in activity over the next five years by sector and country.
The report explains how BRI (also known as One Belt One Road (OBOR)) is primarily divided between the overland ‘Belt’, the classically defined Silk Road that stretches from China to Europe, and the new, maritime Silk Road, where the maritime Road is a densely populated consumer and industrial opportunity. Like the landlocked Belt, it also connects China and Europe, but differs in that the Road passes through Southeast Asia, South Asia, the Middle East and East Africa, a region that is home to 42% of the world’s population and 25% of its GDP, excluding China.
The report states that multi-nationals from all countries can expect to find significant opportunities in the maritime Road regions over the coming decades, irrespective of the success of BRI.
Kieran Whyte, Head of the Energy, Mining and Infrastructure Practice at Baker McKenzie in Johannesburg, says for investors in Africa, “A big attraction of the Belt and Road Initiative for both governments and project sponsors is that it assists the speed of project implementation. Project stakeholders advise that the whole process is a lot quicker than other options.”
The report outlines East Africa’s integral role in the BRI, owing to Djibouti’s ports, Ethiopia’s manufacturing, and the region’s existing plans to connect rail, road and energy networks.
It also details how key opportunities in Africa with regards to BRI will be transactions related to major projects in the power and infrastructure sector and related financing. China’s construction of power plants and transmission lines in East Africa is expected to be a game changer for local industry.
BRI infrastructure projects in East Africa include the recently opened railway in Kenya between the port city of Mombasa and the capital, Nairobi and the Karuma Hydroelectric Power Station, a 600 megawatts) hydroelectric power project under construction in Uganda. Port connectivity is also expected to improve significantly in the next five years.
Chinese government data indicate that 50 Chinese SOEs have already invested or participated in nearly 1700 projects in Belt and Road countries since the initiative was launched three years ago. This number is set to grow significantly in the next five years, particularly as private Chinese interests and international partners begin to invest in the wake of these SOEs.
Ben Simpfendorfer, Founder and CEO of Silk Road Associates, said: “A tangible shift in Chinese commercial activity in the BRI region over the past six months should now leave no doubt about China’s intention to see BRI become a defining force in the global economic landscape, for decades to come.”
While infrastructure development has been the primary driver of BRI activity to date, this new report identifies sectors including technology and telecommunications, manufacturing and eventually consumer goods and retail as all starting to play a larger role in BRI over the next five years and beyond.
The report notes that the telecommunications sector is expected to develop in Africa as China’s smartphone and household electronics brand owners begin to expand into the region.
The report encourages companies to begin exploring BRI opportunities on offer now, while international partners are being widely sought by Chinese investors.
Stanley Jia, Chief Representative of Baker McKenzie’s Beijing office, said: “While BRI was seen at its inception as predominantly the preserve of Chinese SOEs, funded by Chinese banks, and staffed by Chinese workers, the sheer scale and ambition of the initiative means there will be plentiful opportunities for those local and multinational companies that can work hand in hand with Chinese organisations for mutual benefit, particularly as the next wave of Chinese investment arrives.”
BRI is also not without risk for those companies that are investing in and working on BRI projects. Those risks include foreign investment restrictions, antitrust regulations, tax, local employment and environmental laws, as well as political risks in some jurisdictions. Baker McKenzie is uniquely placed to support organisations with BRI ambitions, with an on the ground presence in more countries than any other law firm along the Belt, and the Road.
FINANCING
China’s President Xi Jinping
Earlier reports described in greater detail how Beijing plans to finance the BRI. In 2013, President Xi Jinping initiated the idea of building a land-based “Silk Road Economic Belt” and a “21st Century Maritime Silk Road” during his visits to Central Asia and Southeast Asia. The two routes, later referred to as the “One Belt One Road” strategy, are Beijing’s design to revitalize the pre-modern Eurasian trade route that linked the world to China.
In Beijing’s design, “One Belt One Road” will connect China with Southeast Asia, Middle East, Europe and North Africa on land and maritime “economic corridors” (see a detailed explanation of the routes in English here).
More importantly, the Chinese government plans to build these two transcontinental economic and development routes that form “infrastructure, institutions. and people-to-people exchanges” with “policy communication, infrastructure connectivity, trade link, capital flow, and understanding among peoples.”
Beijing will provide financing support for the two New Silk Roads: Since its inception, the “One Belt One Road” strategy has become China’s most important design for long-term international trade and development. It also became a buzzword in the public sector: 20 out of the 34 local governments at the provincial level incorporated “One Belt One Road” with their 2015 government work plans.
While it is unclear if this will remain a mere “slogan” or will turn into a concrete strategic action plan with multi-level engagement from the central and local governments, Beijing is certainly stepping up the efforts to materialize its design.
The plan in fact gained ulterior international attention after President Xi pledged to establish a $40 billion infrastructure fund for the New Silk Roads during a meeting with leaders from Bangladesh, Cambodia, Laos, Mongolia, Myanmar, Pakistan, and Tajikistan ahead of the Beijing Asia-Pacific Economic Cooperation (APEC) conference in November 2014.
The official China Securities Journal later reported that Beijing would also establish a “Marine Silk Road Bank” with a minimum paid-in capital of 5 billion RMB ($816.23 million). On December 29, 2014, one month after President Xi’s announcement, the China Silk Road Fund Limited Liability Company was founded with a registered capital of 61.525 billion RMB ($10 billion).
The company’s shareholders include the China Investment Corporation ($1.5 billion), the China Development Bank ($1.5 billion), the Export Import Bank of China ($500 million), and State Administration of Foreign Exchange ($6.5 billion). Its leadership is chaired by the Assistant Governor of the People’s Bank of China (PBOC), Ms. Jin Qi.
According to Mr. Zhou Xiaochuan, the Governor of PBOC, the New Silk Road Fund LLC is a profit-seeking company that focuses on financing long-term infrastructure projects and promoting open and mutually beneficial business relations in “One Belt One Road.” Notably, the New Silk Road Fund LLC is also welcoming funding from foreign investors.
Existing Chinese Policies to support “One Belt One Road”
Apart from the financing vehicles, Beijing is also paving the way towards the New Silk Roads with free trade agreements and RMB liberalization. In January, the Ministry of Commerce announced that it completed the free trade agreement (FTA) talks with South Korea and had signed a draft agreement with the East Asian country.
The MoC also announced that it will follow the model of the China-South Korea FTA to establish 65 more FTAs with countries along the two New Silk Roads on its agenda. The Chinese government hopes to boost mutual investment activities between these countries and China in order to support the overarching project.
In line with the process, Beijing is setting up new RMB offshore clearing centers across the globe, including centers in the United Kingdom, Germany, France, Luxembourg, and Canada. The Chinese government also signed currency swap agreements with Canada, Qatar, Russia, Switzerland, the United Kingdom, and Brazil, among others in recent years.
Following China’s efforts to liberalize RMB payment in the global market, the Chinese yuan became one of the top five most-used currencies in the world, surpassing the Canadian dollar and Australian dollar, according to the Society for Worldwide Interbank Financial Telecommunication (SWIFT).
If successful, faster transactions in RMB are likely to facilitate economic cooperation among the countries included in the “One Belt One Road” project.
Considering the opportunities and risks of the project
The grand strategy in building New Silk Roads is China’s attempt to export its excessive capacities in sectors such as steel, construction, transportation, and manufacturing. It is also consistent with China’s economic agenda to hedge its foreign-reserves investments, which now heavily rely on the US treatury bill.
The “One Belt One Road” strategy will also likely move the Chinese market in the same direction of booming Asian infrastructure sectors. In fact a 2014 PWC report estimated that the “Asia-Pacific market will represent nearly 60% of global infrastructure spending by 2025.” The project is likely to lead to a continuation of the same market trends in China.
Some analysts warn, however, that interested investors, as well as Chinese companies, should not overlook the complex political and security context along the two Silk Roads. It is imperative that all parties entering the program fully consider the political risks of doing international projects with Chinese partners given questionable precedents in both private and public sectors, particularly in terms of corruption.
