The Belt and Road Initiative – facts and opportunities

6/4/2018 12:19:24 PM

China’s Belt and Road Initiative (BRI) aims to recreate the old Silk Road trading routes across Eurasia and Africa. The ambitious plan, also dubbed as The Silk Road Economic Belt, involves multibillion-dollar investments in infrastructure in around 70 countries. Experts disagree: does the project aim to improve connectivity between China and Eurasian countries? Or is it, as some say “a way to find new markets for China’s industrial overcapacity”? Club China offers the basics about the project.

The plan, in short

The BRI and its “21st Century Maritime Silk Road” – the oceanic component of the BRI – builds trade routes from China that extend all the way to Europe. It addresses an infrastructure gap that hinders overland trade between the west and the east. Dealing with this gap may, as the Chinese explanation reads, have the potential to accelerate economic growth across the Asia Pacific area and Central and Eastern Europe.

The plan involves building roads, bridges, power generation plants, airports, sea ports and other fundamental infrastructure in around 60 countries in Asia and Europe as well as East Africa. Great efforts will be but into railways, as the Eurasian Railway Program plans to build 81,000 km of railway lines for moving freight and passengers overland between China and Europe. The total cost is immense - creating the corridors between east and west is estimated to require a US$4-8 trillion investment.

The new and improved infrastructure helps create north, central and south belts. The North belt would go through Central Asia, Russia to Europe. The Central belt goes through Central Asia, West Asia to the Persian Gulf and the Mediterranean. The South belt starts from China to Southeast Asia, South Asia, to the Indian Ocean through Pakistan.

The goal: trade

With improved infrastructure, China is aiming to improve trade with BRI countries. This effect is already seen in recent figures. From a recent Dezan Shira analysis of BRI: “In 2017, China’s trade volume with BRI countries grew by 17.8 percent year-on-year to reach US$1.18 trillion.”

In 2016 alone, China invested US$14.43 billion in 53 BRI countries, mostly in tourism, public services, infrastructure, real estate, technology, and entertainment industries. The plan involves quite a bit more than ‘paving the way’ for trade. From the same Dezan Shira report on BRI: “Much of the infrastructure aims to accelerate power generation and resource extraction. BRI countries hold more than 50 percent of the world’s potential oil supply and 70 percent of its gas supply. Already, more than 40 energy projects have begun and a further 20 projects agreed upon.”

Can Europe participate?

European countries have watched China’s initiative with mixed feelings. In April, 27 EU ambassadors to Beijing have compiled a report that criticizes China’s Silk Road project, denouncing it as designed to put Chinese companies at an advantage. According the ambassadors, the plan “runs counter the EU agenda for liberalizing trade and pushes the balance of power in favor of subsidized Chinese companies.”

On other occasions, Europe has reached out. During their latest visits to China in early 2018, French President Emmanuel Macron and UK Prime Minister Theresa May expressed their interest in the opportunities and in participating.

Dezan Shira’s experts see three opportunities. “With more railway and port development projects, logistics companies can build new supply chain hubs and routes.” Also, as a result of improved infrastructure, European companies will be able to benefit from lower costs and faster transportation times if they want to sell products to BRI countries. And thirdly: “As the end point of several major BRI trade routes, European businesses can directly receive significant investments from Chinese entities.” In Greece, for instance, the China Ocean Shipping Group purchased 67 percent equity of Piraeus Port Bureau.

Beware of the risk

The experts list several serious risks for businesses that want to participate in the BRI projects, specifically in some Eurasian countries. “Political instability and extremist and secessionist movements could result in economic losses and physical danger to employees.” And: “A large number of these countries are also risky investment destinations for purely economic reasons. At least 27 BRI countries are rated as junk or below investment grade by international rating firms.”

Whatever the future holds for the ambitious trade route plan, it will not be a smooth ride. In China, concerns were raised in the South China Morning Post that the plan may run out of money. A former Chinese banker was quoted, saying that many countries along the route are already heavily in debt and needed “sustainable finance” and private investment. The countries’ average liability and debt ratios had reached 35 and 126 per cent, respectively, far above the globally recognised warning lines of 20 and 100 per cent.

 Interested in BRI for your business? Check out the Silk Road Briefing dedicated website.

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