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Belt and Road Top 10 of 2018: What Happened?

Through 2017, China’s Belt and Road Initiative (BRI) became increasingly noticed across the world. The two big events were the inaugural Belt and Road Forum held in Beijing in May 2017, followed by BRI being enshrined into the constitution of the Chinese Communist Party in October 2017. The former, through China’s large financial pledges to BRI countries, highlighted the scale of BRI; while the latter showed that BRI is here to stay. Hence, coming into 2018, expectations around BRI had risen and it became subject to more policy makers, companies and people paying more attention to its development. What follows are the top ten things that happened to the Belt and Road Initiative in 2018:

1. More countries join BRI; but views on BRI become increasingly polarized

With 2017 raising the expectations of developing countries looking to secure BRI investment funds from China, it’s no surprise we have seen more countries formally sign up to the initiative through signing Memoranda of Understanding. China has signed 123 cooperation documents on BRI development with 105 countries, and 26 similar documents with 29 international organizations. The largest economy to sign up to BRI was Italy, it has created a new Belt and Road Task Force led by Michele Geraci, a former Italian Professor who worked in China. In doing so, Italy became the first G7 member to sign up. However, our conversations with foreign policy makers show that it remains unclear as to what precise tangible benefits comes with signing such an MoU; and indeed many countries signing up opportunistically.

At the same time, views on the Belt and Road have become increasingly polarized. This is most evident through the United States, with Defense Secretary Mattis saying that, in a globalized world, there are many belts and many roads. US Secretary of State Pompeo issued a warning to Panama and other nations in the region about the potential dangers of accepting Chinese investment. “When China comes calling, it’s not always to the good of your citizens,” Pompeo said. It is these drivers that have led the US to spearhead its Free and Open Indo-Pacific Strategy along with Japan and Australia; the Strategy is seen as a direct response to China’s Belt and Road but has less financial muscle. It’s not just the US however, 27 of 28 EU Ambassadors to China also signed a letter condemning the BRI. This growing polarization is not just seen between countries, but also within them. For example, while Australia has resisted joining BRI, Victoria State recently decided to independently sign such an MoU without central government approval.

2. More focus on debt and international standards

A number of countries have actively resisted China’s calls for them to sign BRI MoUs, including Japan, Germany and the UK. Instead they have focused their efforts on trying to work with China to improve the debt sustainability of BRI, and ensure that it meets international standards. The UK has appointed Sir Douglas Flint, former Chairman of HSBC, as its BRI envoy to ensure that projects become more bankable and open to financiers from around the world. These efforts are ongoing, China has largely been reticent to engage but is now starting to acknowledge that it may have to if it wants to lessen criticism around BRI.

Much of that criticism has focused around the debt incurred by countries as they take on BRI loans from China. 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.

3. Belt and Road’s legal architecture gets a boost

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, as a result, “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.”

4. US- China Trade War is benefiting BRI

After a honeymoon through 2017, 2018 has seen a marked deterioration in China-US relations, epitomized most by the ongoing trade war. The trade war is causing much anxiety amongst Chinese firms who would normally sell into the United States.

However, Chinese companies still recognize the importance of the US market, and are looking for new ways to circumvent the tariff and sell into the US. Crucially, the US tariffs apply to goods made in China. That is to say, if a Chinese company produces the goods in a different country, then exports into the US, it will not need to pay the tariff. The Chinese company would still repatriate the profits back to China however. Hence, as we argue in this piece, Chinese companies have been incentivized to relocate their production abroad as a direct` result of the trade war. This in turn bolsters the Belt and Road Initiative.

5. Historic China-Africa Summit held in Beijing

In September, China held the Forum on China-Africa Cooperation (FOCAC), which concluded with the “FOCAC Beijing Action Plan (2019-2021)” and “Beijing Declaration” being adopted. The flagship announcement was a $60 billion pledge made by President Xi Jinping to promote African infrastructure and development. The $60 billion consists of: $20 billion in credit lines, $15 billion in grants, interest-free loans and concessional loans, $10 billion fund for development financing, $5 billion to finance imports from Africa.

However, following the announcement, many Chinese netizens were frustrated by the country’s investment spending abroad, given that China itself still sees itself as a developing country. Balancing the views of the people, who are facing an economic slowdown at home, with the expansion of the Belt and Road abroad, will continue to be a tough act for the Chinese leadership going forward.

6. New BRI corridors developed and existing ones accelerated

One of the flagship pieces of BRI infrastructure is the China-Europe train that travels from Eastern China, through Central Asia, and arrives ultimately in Western Europe. The train is twice as fast versus by sea, and six times cheaper than air transport, and that has resulted in a surge in the number of trains through 2018. China-Europe freight trains made 5,611 trips in the first 11 months of 2018, surging 72 percent compared with the same period last year.

The Air Silk Road has also seen a boost, now there are 5,100 weekly flights from China to BRI countries according to new data from the Civil Aviation Administration of China. Connectivity is also being improved through better visa policies; and indeed Central Asian countries have proposed a “Silk Road Visa” which would be similar to Schengen Area visas in the European Union. 

The Polar Silk Road was also proposed in early 2018 by China and the first Chinese cargo ships have already navigated the area. Climate change is leaving Arctic waters navigable for longer periods, opening a new shipping route from East Asia to Europe along Russia's northern coast. Dubbed the ‘Polar Silk Road’ (PSR) in China and 'Northern Sea Route' (NSR) in Russia, it could eventually become an alternative to the main Strait of Malacca and Suez Canal route, altering global supply chains and geopolitics.

7. Belt and Road becomes more open to third country involvement

In 2018, China has showed signs of engaging new partners in BRI projects. The first sign came with a proposal to build a joint Japanese-Chinese BRI project in Thailand. Japanese Prime Minister Shinzo Abe’s stance on China’s BRI has evolved from reticence to acknowledging the potential synergies, and in May 2018, the Japan Bank for International Cooperation proposed that a joint Japan-China consortium build a high-speed railway system in Thailand. If the project goes through, it would be the first time contractors from both countries work together on an infrastructure project in a third country. Both governments plan to establish a public-private council to discuss common infrastructure projects. China has also proposed to work with India on projects in Africa – in a so-called “India-China-Plus One strategy”. The details are still being worked out.

Even more recently, Saudi Arabia has been invited to participate through joint financing in the China-Pakistan Economic Corridor (CPEC). The arrangement is worth around $10 billion, with three road and energy infrastructure projects already pencilled in for Saudi Arabian financial contribution. Saudi Arabia will also contribute their expertise and help to turn the flagship CPEC port project of Gwadar into an oil city.

The fact that China has started to pilot third country involvement in its BRI projects is a welcome development. China has often come under criticism for not being inclusive in welcoming other countries’ financiers or contractors. Opening up projects like this also mirrors the desires of the developing countries receiving BRI funding who want greater diversification of partners and prevent over-reliance on China. For example, Myanmar’s Commerce Minister said that international companies should be invited to take part in Belt and Road-related projects and that the tender process should be more transparent. Given China’s competitive construction industry, the likelihood is that Chinese firms would still win projects put out to open tender, however the important aspect is that international firms would be allowed to compete. More broadly, the developing world’s infrastructure demands far exceed the financing capabilities of the Chinese state and its enterprises. For the BRI to have far-reaching impact, it needs to also catalyze new sources of capital into developing country infrastructure.  Through both open tender processes and a willingness to jointly finance projects, China would quell perceptions that the BRI lacks transparency and inclusivity.  

8. Hainan becomes a Free Trade Port, key part of the Maritime Silk Road

In April 2018, Hainan Island was announced as China’s first Free Trade Port, and has become China’s largest free trade zone. President Xi Jinping himself has given his personal endorsement to Hainan, which is set to become an integral part of the Maritime Silk Road. The announcement in April was following by the publication of a Hainan Development Plan in October which has paved the way to Hainan to serve as a pioneer in China’s future opening up and reform. Every Chinese Ministry now has been asked to set up its own Hainan strategy, and we can expect the island to become a key hub for BRI trade and tourism going forward. We are bullish about the Hainan opportunity, you can read our analysis here.

9. China International Import Exposition seeks to show China is open for imports

The inaugural China International Import Exposition (CIIE) was held in November 2018. The aim was to show the world, which has long criticized China for being a closed market to foreign imports, that China was open for imports. President Xi Jinping has himself said that it is not just another trade fair, and made a point to show Belt and Road countries that they could benefit through selling their produce into China.

Huge deals were signed at CIIE. In the e-commerce space, giant Alibaba sealed deals worth over $200 billion over the next five years, while competitor JD hit $100 billion. China’s State Owned Enterprises were also in the market for big deals, Sinopec reportedly signed $45 billion of deals alone while China’s offshore oil and gas company CNOOC Ltd signed 20 deals with foreign businesses, including Siemens, Caterpillar and Schlumberger. Foreign multinationals to sign big deals included Volkswagen, Rolls Royce and Standard Chartered. Volkswagen signed $9 billion worth of deals, Rolls Royce signed a $1.45bn deal with China Eastern for aircraft engines and their maintenance while Standard Chartered signed a $1.6bn deal with China Poly over next 2 years for metals and mining products.

Beyond the big multinational conglomerates, thousands of Chinese companies also engaged in smaller transactions with foreign companies of all sizes. According to MOFCOM, 20% of deals signed were on farming and agricultural equipment and produce; this is no surprise given the trade war now making it harder to source certain agricultural products from the US. For Belt and Road countries, many of which have largely agrarian economies, the Chinese market presents a huge opportunity for their food exports. Kenya is a perfect example; it is the 7th largest global producer of avocados and at CIIE a deal was struck to permit Kenyan avocados to enter the Chinese market. As our former podcast guest Harriet Kariuki commented, this would “greatly benefit [Kenyan] smallholder farmers”.

10. More foreign firms trying to benefit from BRI

The Chinese government says over 80 State Owned Enterprises have undertaken 3,116 investment projects in Belt and Road countries to date. The scale of BRI has led more and more foreign firms thinking about how they can benefit from the BRI. For example, Western banks have also been betting big on BRI this year. Following HSBC, Citigroup announced it had appointed a veteran investment banker its head of Belt and Road Initiative-related banking and origination businesses.

But it’s not just big multinationals. 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.

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."

Separately, we have published a series of articles looking at how foreign firms can develop their Belt and Road strategies. They advise you on a) how to get involved in BRI, b) how to secure BRI funding and c) how to leverage your Chinese partners.




https://beltandroad.ventures/beltandroadblog/belt-and-road-top-10-in-2018-what-happened

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