Treasury Practice

Belt and Road: opportunity or threat?

Published: Jul 2018
Traffic light trails on windy mountain roads leading towards the sea and sunset

As ambitious projects go, China’s Belt and Road Initiative (BRI) takes some beating. With all the grand plans to establish the infrastructure capable of connecting great swathes of Asia and Europe, it needs businesses to get involved. What does it take for a treasurer to ensure their organisation’s engagement with BRI is successful?

BRI is not just an infrastructure project in which land, sea and air ports become links in a vast chain connecting Asia and Europe; it is intended to be “a collaborative ecosystem”. When Deloitte released its report entitled ‘Embracing the BRI ecosystem in 2018’, it was at pains to point out that although the focus to date has been on energy, infrastructure and communications, the next five years or so will see BRI cast its gaze wider, covering sectors as diverse as trade, manufacturing, e-commerce, tourism and culture.

As a multi-decade strategy to boost the flows of trade, capital and services between China and the rest of the world, BRI is a “physical, financial and policy connect”, says Vina Cheung, Global Head of RMBI, HSBC. “It is not just about Chinese firms, but about local companies in countries along the route and multinationals that are capable of being part of the project.”

BRI represents a huge opportunity for Chinese and non-Chinese companies globally. With the current phase all about developing infrastructure, businesses engaged in the transportation construction, energy, water management and telecoms fields are likely to see most activity. But this list also includes opportunities for businesses that supply the main project firms, including the heavy plant manufacturers and materials suppliers, and professional service providers such as engineering firms, electrical specialists, and architectural practices. The need for legal specialists at this stage is also important for contract work. “Any business involved in these sectors globally should proactively seek out opportunities,” says Cheung.

The effect of these projects will ultimately be to ease the flow of trade. This stage will act as a catalyst for more commercial development along the routes, especially for goods and services. The reason is simple: improved efficiency should lower the cost of doing business – one of the underlying BRI objective, notes Cheung. With the growth of BRI trade estimated by HSBC to surpass US$2.5trn in the next decade, the opportunity here, she adds, is “significant”.

Despite the dominance of state-owned enterprise (SOE) over the major BRI infrastructure projects to date, Deloitte authors Sitao Xu and Lydia Chenargues also anticipate increasing opportunities for privately owned enterprise and the world’s MNCs. Similarly, they see country-level involvement shift from the current preponderance of emerging nations to a greater number of mature economies.

Risk and reward

However, for businesses of all types, the nature of BRI as both a long term and costly investment puts risk to the fore. Of the 70 countries Chinese state media says have joined the BRI (meaning about 125 have not), the sovereign debt of 27 is defined as ‘junk’ by the three main ratings agencies. Fourteen have been given no rating at all.

The majority of Chinese investment to date has focused on its geopolitical priorities such as Pakistan, Afghanistan, Kazakhstan and Uzbekistan. These are amongst countries that will need to demonstrate significant financial reform in order to see major capital inflow from MNCs.

The extent of China’s investment so far raises concerns about its own BRI debt levels. Indeed, global ratings agency Fitch said in January 2017 that the “lack of commercial imperatives” behind BRI projects means that it is “highly uncertain whether future project returns will be sufficient to fully cover repayments to Chinese creditors”.

MNCs understand that although there may be an opportunity for massively increased trade flows, BRI could equally generate vast almost unserviceable debts for a long time to come; success is not guaranteed. Whilst not downplaying the risk, Deloitte’s Xu and Chenargues argue that the risks are less severe than many assume. In fact, their belief is that “concern is overrated”, adding that “China has long insisted that BRI is a commercial venture, not an aid programme”.

With China’s strong bi-lateral connection with many of the higher risk countries, and its conviction of the need to ultimately develop along commercial lines, the Deloitte authors suggest that SOE-led BRI projects are effectively underwritten by China’s policy banks. This should help ease concerns of external investors, they feel, and bringing in quality. Interest is rising.


With Beijing having committed a further US$124bn at its May 2017 BRI Forum, President Xi Jinping also announced the commencement of ‘BRI 2.0’. In this, the focus on infrastructure shifts to investments in international finance, mining, manufacturing, tourism and culture. The forum attracted delegates from around the world, including Vladimir Putin amongst state leaders and officials from almost 40 countries; parts of Africa, South America and western Europe all potentially benefiting.

Naturally, large companies are paying very close attention and banks are eyeing up the prospects too, with Citi winning a deal from Bank of China to manage a complex US$3bn bond issue in April 2017. The money is for funding the opening of Bank of China branches across Asia, Eastern Europe and East Africa.

This is just the tip of the iceberg. A recent Asian Development Bank report suggested that, between 45 Asian countries, there should be an investment of US$26trn to 2030, to fix the apparent infrastructure shortfall. Two-thirds of that sum is for further transport and power development.

At this stage, with most of the construction deals going to Chinese firms, the biggest western beneficiaries will be financial and professional services, says Jonathan Bewes, Vice Chair, Corporate and Institutional Banking, Standard Chartered. The demand is for technical expertise and specialist products, and funding to match. Standard Chartered announced in December last year that it will commit US$20bn by 2020 to support BRI.

No wonder then that major MNCs such as Siemens, Honeywell, GE and ABB have already climbed on board the BRI train, along with around 50 Chinese SOEs that have so far played a part in the 1700 or so infrastructure-related ‘BRI 1.0’ projects.

GE, for example, drew only US$400m in equipment orders from BRI projects in 2014. By 2016, that figure stood at US$2.3bn, with a pipeline of US$7bn for its gas turbines set over the following 18 months.

If Chinese business will be the biggest beneficiary, BRI may well raise fears that it is nothing more than a one-way conveyor belt for Chinese goods to reach the rest of the world. The US has already called for the bidding on related contracts to be transparent. Notwithstanding non-Chinese discomfort, the country’s media outlet Xinhuanet reported in May 2018 that the value of China’s imports from BRI countries increased faster than its exports in 2017 (a 20% year-on-year rise versus 8.5%). This is the first time it has happened since BRI was announced in 2013. It’s not proof of equitable trade flows, but it may be seen by some as a step in the right direction, the current US/China trade war excepted.

International involvement

“We should build an open platform of cooperation and uphold and grow an open world economy,” said President Xi at the May 2017 BRI Forum. In its insistence that BRI is open for all – not least because it cannot itself foot the expected estimated final capital cost that ranges between US$4trn and US$8trn – Beijing is seemingly handing an opportunity for foreign business to join the journey.

Where, for example, there is a meeting between market need on the one side, and the provision of professional services (and the trade of branded consumer products) on the other, there will be occasion for non-Chinese firms to flourish for many years to come. If domestic firms cannot offer the skills and experience (or brand desirability) to match those of their overseas counterparts, then the trade is seemingly there for the taking.

However, there is a danger of corporates erecting too much of a rigid framework around something that may be more conceptual in nature, says Bewes. “There are plenty of opportunities in one country or another for businesses to take advantage of, but much of this could be seen as ‘business as usual’,” he argues. Standard Chartered, he adds, has in effect been working on ‘BRI’ projects for the past few decades – in 2017 alone, the bank closed 50 BRI deals, half of which were in Africa. “Each business will have to evaluate what opportunities fit with its own strategy and manage the risks accordingly.”

Conceptual or not, BRI is an occasion for businesses to look beyond their own traditional operating models. Some forward-looking international traders are already incorporating a flexible approach in terms of the goods they source and sell, notes Cheung. A garment manufacturer, for example, might shift its thinking in terms of a finished product being shipped out from a single location, towards the idea of the availability and use of different materials at different points along the route, creating a highly flexible supply chain.

The ‘flexible’ approach may go some way to mitigating the risks inherent in emerging market operations. But the risk when operating in some BRI countries can be higher than others, and businesses should thus be supported by those with on-the-ground knowledge, says Cheung. “Asia has a very dynamic and varied regulatory regime; with many countries along the belt and road still developing, the local laws, regulations and tax arrangements can be complex.”

Belt and Road initiative: directions of flow

Treasury approach

The real test in this environment is for companies to navigate through a full corporate lifecycle, from entering into a new market, to growing the business or maintaining the project, to enhancing capabilities through integration with a regional hub or headquarters. With treasurers playing an increasingly important role in company growth, thinking through these different stages is vital, says Cheung.

In general, the difficulty for businesses working in third-party countries (certainly beyond G20 nations) can be substantial, adds Bewes. “Partnering with banks that have on-the-ground presence in those territories, where they are part of the local infrastructure, will offer a huge advantage in terms of help and advice navigating the local cultural, regulatory and legal challenges.” The major western banks such as HSBC, Standard Chartered and Citi, boast long operational histories along the BRI routes.

For treasurers, at the start there is a need to define the optimal business form for entering any new market with a BRI project. For the project to function in a sustainable way, this would include a consideration of the best legal structure (many US firms, for example, are working in JVs with Chinese SOEs, according to the Centre for Strategic & International Studies). Treasurers should also define the most appropriate hedging policies, working capital models and, of course, approach to financing.

Financial concerns for treasurers

One of the major themes of BRI is sustainability, notes Bewes. Indeed, Chinese policy-makers speaking at the International Green Finance Forum in Beijing in September 2017 put forward their belief that green finance is the key to making BRI a sustainable project. China has issued US$36bn of green bonds, a figure representing 39% of global issuance. “China will honour our commitment to reduce carbon emissions and make more efforts to promote green finance globally, including facilitating green investment in the Belt and Road region,” said Yin Yong, Deputy Governor of the People’s Bank of China, quoted by Global Capital. “We believe green finance should be a key pillar of its success.” It’s an area that treasurers should be looking at.

The broader question of BRI project finance will almost certainly begin to generate the need for creative forms of capital, Bewes believes. “There is a question about how infrastructure is developed further as an asset-class in itself. This will be an important angle, in order to attract and mobilise private sector capital.”

The FT has reported that many western banks are leaving the funding of big state-sponsored infrastructure projects to local banks and development finance institutions. They are instead focusing, for now, on ancillary business, such as providing FX, trade finance, interest rate swaps, or cash management. Strong treasury relationships in this environment are therefore essential.

Whether engaging in a BRI 1.0 infrastructure project or 2.0 trading arrangements, for the incumbent bank to support ongoing local business (and familiarity is a real comfort in any new venture), it is necessary for treasury to establish if its bank has a presence in each new market and whether its data flows can be integrated with group operations; standalone operations massively increase risk. It will also be necessary to discover how well-established the bank is in each location, both in terms of size of balance sheet and connectivity to the business infrastructure (including local regulators, local clearing systems and, for FX, whether it is a market maker or taker).

With capital controls likely to be a concern for inbound investors, this is something treasurers will also have to plan and manage. Indeed, with many different currencies and stringent controls likely to be encountered along BRI routes, at the very least, some complex FX scenarios will be encountered, cautions Cheung.

Manifold issues such as currency, local culture and customs, legal and taxation differences suggest that there are and will be many challenges to be addressed when tackling a BRI project. Partners and advisors are available to assist and should be used fully; it does not have be done alone.

Mindful of these concerns, it is also worth bearing in mind the declaration President Xi made at the May 2017 BRI Forum in which he said, “this is the project of the century”. Treasurers are in a good place to help their organisations become a successful part of it.

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