Long-term planning: China’s 21st century Silk Road strategy will take time to reap rewards

Experts say Chinese government must convince private firms to get involved in belt and road projects in addition to participation of state-owned enterprises

PUBLISHED : Tuesday, 01 November, 2016, 11:34am
UPDATED : Tuesday, 01 November, 2016, 5:37pm

For all the talk of one belt, one road, most Hongkongers are still in the dark about what is actually going on, and what processes are taking place.

The initiative to link China to the West by land and sea, through trade, economy and infrastructure, is still in its early stages. Projects are moving along, agreements are being signed, and this has placed the plan into the bigger picture of Chinese cross-border funding initiatives.

“We should not view it as a short-term project,” says Hu Yifan, chief China economist at UBS Wealth Management. “People categorise things as ‘belt and road’, but we probably view it as a much longer time, because in the short term, I would say China is building up the fundamentals.”

The view that belt and road projects will be slow burners is shared by Liao Qun, chief economist and general manager of research department for China Citic Bank International. “Most of the [initiative’s] infrastructure projects should basically be commercially viable, but with [a belt and road] strategic background,” Liao says. “Hence the profitability of them will be low or even negative at their initial stages.”

The economist says that in the long term, prospects will improve for belt and road projects, particularly within the context of China’s strategy of creating a 21st century Silk Road.

“The profitability should improve, by enhancing the sales prospects of the projects themselves from commercial perspectives, and by bringing in other business opportunities such as trade and direct investment as well as geopolitical benefits from strategic perspectives,” Liao says. “Eventually the projects should become profitable.”

Key to this transformation are private firms, and experts say that the Chinese government should seek not only to have the participation of China state-owned enterprises, but also actively pursue the role of private firms in belt and road projects. Liao says the Chinese government would be wise to “relax the controls on the size, financial strength, and operational experiences over private firms. Meanwhile, it should ease the restrictions on obtaining cross-border or overseas financing for the private firms”.

Hu also stresses the importance of taking an approach that involves private firms. “The funding issue has to be solved in a more market oriented way, jointly supported by the governments, policy banks and international organisations,” she says.

The funding issue has to be solved in a more market oriented way, jointly supported by the governments, policy banks and international organisations
Hu Yifan, chief China economist, UBS Wealth Management

This type of model would see collaboration between the private sector, domestic banks, and international organisations. Global organisations engaged in belt and road projects include the China-led US$40 billion Silk Road Infrastructure Fund, the Asian Infrastructure Investment Bank (AIIB), a development bank run by member states across the globe, and the New Development Bank, administered by BRICS nations (Brazil, Russia, India, China and South Africa).

The great question is whether Hong Kong is optimally placed to take advantage of opportunities, and analysts believe this is the case, particularly in its ability to become the premier multichannel financial hub for belt and road, as a large number of projects seek the city’s expertise and positioning on the international trade crossroads.

“About 60 per cent of China’s ODI [outward direct investment] projects have their first investment destinations in Hong Kong, while Hong Kong has a world-class financial market with multifinancing channels,” Liao says.

Hu, meanwhile, emphasises the city’s place as a source for funding, strong connections to China, contacts within global capital markets, and ease of communication with other Asian countries. “Hong Kong can bridge these two parts together, and find its own unique niche in the process,” Hu says. “The city is also well placed as an offshore RMB centre, and will be able to promote the globalisation of RMB, and that is an important advantage for Hong Kong in [belt and road].”

Overall, the belt and road is just one part of the opening up of China’s financial system to

the world, and will add to the internationalisation and liberalisation of the yuan.

“Belt and road will help China find new markets for its overly strong industrial capacity as well as overly affluent capital liquidity, making Chinese companies more internationalised as well

as more internationally competitive, forging closer economic ties between China and B&R countries and enhancing China’s trade and outward investment outlook,” Liao says.

As capital outflows from China rise, global assets are also becoming more appealing to Chinese investors in their drive to diversify assets. It means that belt and road projects may fit the bill for investment, which in turn may create momentum for more initiatives.

“With belt and road supported by private funds and the Chinese government, this private-public partnership could really boast projects in the fields of infrastructure, resources, and manufacturing,” Hu says.