21 January 2018

The New Trade Routes Reshaping The Global Economic Landscape

Key themes emerged from HSBC’s China Connections event in Shanghai in October, when businesses from around the world gathered to explore growth opportunities in China.

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Unveiled by President Xi Jinping in 2013, it has featured prominently in news headlines and in the public statements and appearances of China's senior leaders since then. But for many companies, particularly outside Asia, the questions remain: Just what is China's Belt and Road Initiative (BRI), and what are its business implications?

The main goals of BRI, while certainly ambitious, are relatively straightforward. In essence, the initiative aims to revive and extend the historic trading routes that once linked Europe, Asia and Africa by enhancing infrastructure and addressing policy bottlenecks to promote the smooth flow of goods and services throughout all three regions. By better connecting some of the world's fastest-expanding economies, the project is set to provide a significant boost to global growth.

The largest physical infrastructure buildout in modern history

Perhaps slightly harder to grasp is BRI's scope, which is nothing short of staggering. It spans no fewer than 65 countries, among which trade is expected to surge to $2.5 trillion annually in a decade, according to HSBC estimates. BRI currently comprises around 900 infrastructure projects, from highways in Central Asia to ports in Africa, totaling some $890 billion in investment.1 China has already established the world's longest rail link, from China's southern city of Yiwu to Madrid, a distance of some 10,000 kilometers.

It is no surprise, then, that acclaimed economic analyst and forecaster Pippa Malmgren, who describes it as "the largest physical infrastructure buildout in modern history," has identified the initiative as one of the key signals shedding light on the future of the global economy.

The project's scale and complexity may explain why, while knowledge of BRI among global businesses is growing—56 percent of businesses polled in HSBC's most recent Renminbi Internationalisation Survey said they were aware of BRI, a significant increase from 41 percent in 2016—many companies still seem unsure about how to approach it. A mere 20 percent of firms surveyed claimed to be working on a strategy to capitalize on BRI.

This is unfortunate, because the initiative is set to produce opportunities for businesses of all stripes, from construction to professional services, as it progresses through various phases. 

Like any ambitious, large-scale project, BRI has been met with a certain degree of skepticism. One of the main questions, says Malmgren, is whether the project will reinforce China's leading global presence without bankrupting the country in the process.

But there are several compelling arguments for why BRI is likely to succeed. One is the degree of political momentum behind the project. At the 19th National Congress of the Communist Party of China in October, BRI was officially enshrined in the country's constitution.2

According to James Cameron, Co-Head of Infrastructure and Real Estate Group, Asia Pacific, at HSBC, China's policy banks have already pledged over $2 trillion in BRI-related financing. Businesses are also firmly on board; the $126 billion in project commitments from Chinese companies along BRI routes accounted for around half their overseas investments last year.  

Mutual benefits

Perhaps more importantly, while initially BRI was sometimes perceived as a means to fuel external demand for Chinese goods and services, recipient countries and their businesses are increasingly conscious of the benefits that BRI's new infrastructure and growth will present, and are supportive of its goals. 

Asia's chronic infrastructure gap, which the Asian Development Bank has estimated at $1.7 trillion annually3, means that, with BRI, China is essentially "pushing on an open door," Cameron notes.

Significantly, BRI will go well beyond physical infrastructure. Under the overarching mandate of increasing trade and investment between China and destination countries, it will also aim at improving "information-based" links in such areas as credit and financing, as well as trade policy coordination.  

According to Cameron, this means that needs will emerge within the ecosystem of BRI projects that will call for a vast range of skills and services, from financing to urban development and planning, logistics and supply chain management.

Careful planning and building of BRI infrastructure has the potential to create a "broad positive feedback loop" that will encourage new commercial, residential and logistics clusters, contributing to economic development region-wide. 

"If you get infrastructure right, it does have a genuine multiplier effect," Cameron explains. "That positive feedback loop is something we expect to see in regional economic growth as a result of BRI driving infrastructure spending."

As many BRI investments will be in emerging markets, they may encounter various regulatory, political or capacity barriers. Occasionally, as Malmgren has pointed out, BRI projects may even inflame political or territorial tensions. This makes it vital that businesses exploring BRI-related opportunities plan carefully and develop partnerships, ideally with firms with strong networks of local contacts and extensive regional experience. 

Developing these relationships or formulating a BRI strategy will not always be easy, but as the initiative transforms global trade patterns it will be increasingly important for businesses to consider and factor BRI into their planning, especially in terms of the new markets and supply chain networks it will open up.

At a time when many aspects of globalization appear to be on the retreat, BRI is an impressive demonstration of China's commitment to forging lasting connections with the rest of the world, as well as a timely reminder that, in the words of Natalie Blyth, Head of Global Trade and Receivables Finance, HSBC, the "globe is not static."

 

Related articles:

China’s New Green Imperative

China Emerges As A Global Innovation Hub

China’s journey from factory to forerunner

 

1https://www.lowyinstitute.org/publications/understanding-belt-and-road-initiative

2https://www.reuters.com/article/us-china-congress-silkroad/pressure-on-as-xis-belt-and-road-enshrined-in-chinese-party-charter-idUSKBN1CT1IW

3https://www.adb.org/news/asia-infrastructure-needs-exceed-17-trillion-year-double-previous-estimates

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