Insights from a recent report by ANZ on how the Belt and Road Initiative complements regional free trade agreements by improving local infrastructure while encouraging direct foreign investment and local jobs.
Since the Belt and Road Initiative was announced in 2013, it has gained momentum primarily through massive infrastructure deals with countries along the Initiative’s land and sea routes.
By the end of 2017, 68 countries had signed Belt and Road cooperation agreements with China. Such rapid international adoption of this Initiative is likely to create impressive investment opportunities in roads, railways, sea ports and trade channels.
According to HSBC, Belt and Road infrastructure for Asia will cost US $1.7 trillion each year, through to 2030. AIIB, the Silk Road Fund and the New Development Bank have already contributed around US $1.1 trillion for infrastructure projects along the routes.
While it may appear that other countries could miss out on trade and investment opportunities, a recent report by ANZ indicates this is certainly not the case since the Initiative is open ended.
Beyond infrastructure
“For countries outside the Belt and Road routes, there are obvious benefits from a global supply chain perspective,” explained Betty Wang, ANZ’s senior China economist and co-author of China’s Belt and Road Primer: Five Myths about the Initiative.
For example, Australia is a commodity export country, so if the region’s infrastructure is lifted by the the Initiative, there should be more opportunities for commodities to be traded. Regional financial hubs with technology and consultancy services with expertise in this sector could also get involved.
Rather than dilute or challenge existing free trade agreements (FTAs), Wang said the Initiative complements regional FTAs by improving local infrastructure while encouraging direct foreign investment and local jobs.
One common misconception among ANZ’s commercial banking clients and foreign investors not familiar with China efforts to promote globalisation and regional conductivity is the belief that the Initiative’s real focus is infrastructure.
“For our commercial clients, investment is the most important factor. China is putting a lot of effort into Belt and Road countries and we do see genuine demand coming from these countries with large infrastructure construction,” said Wang. Among Southeast Asian nations, Cambodia, Thailand, Laos and Indonesia were quick to sign agreements with China’s to develop major infrastructure projects including railways and roads worth around US $25.5 billion.
“When the Belt and Road Initiative was first announced we saw a lot of resistance in the form of political and economic concerns but now countries like Pakistan, Indonesia and even lndia are getting involved as people become more familiar with the Initiative and see it’s not only about infrastructure but also trade flows, financial cooperation, connectivity and policy coordination with the rest of the world,” said Wang.
Play to Hong Kong’s strengths
Hong Kong has much to offer those interested in Belt and Road opportunities through its financial services, rule of law, regulatory regime, and location within the Guangdong-Hong Kong-Macao Bay Area.
As a regional financial hub with a very active capital market, it is well placed for companies with infrastructure financing needs such as debt raising and bond issuing. Local banking services provide investors with trade finance and financial market products as well as risk management and retail banking. According to ANZ, Hong Kong is well ahead of the Chinese mainland in legal and consulting services and ready to provide professional services to companies lacking experience in operating across different countries and international legal systems.
In Wang’s opinion both the Belt and Road Initiative and the internationalisation of the renminbi are moving in the same direction with Hong Kong taking a leading role in developing the offshore renminbi market, FX hedging, and cross-border renminbi settlements. This is particularly significant given that by 2020 it is expected that 50% of the Chinese mainland’s foreign trade will be settled using renminbi.
According to ANZ’s report, local Belt and Road-driven infrastructure investment is likely to help drive global commodity trade as demand for raw materials like oil, cement and steel increases. While infrastructure certainly takes centre stage at this point in time, the report predicts the Initiative is creating additional business opportunities outside of infrastructure and infrastructure financing. As Belt and Road-related investment grows, so will trade and financial cooperation, and even tourism as economic and cultural connectivity improves.
