Chinese firms’ planned investments of US$350b in projects along New Silk Road exposed to risk

A joint report from Baker McKenzie and Silk Road Associates says while the Belt and Road Initiative offers plenty of new business opportunities, Chinese companies and their partners will be exposed to risks in countries lacking political and legal stability

PUBLISHED : Tuesday, 24 October, 2017, 6:00pm
UPDATED : Tuesday, 24 October, 2017, 10:50pm

Chinese companies and their partners could together pour some US$350 billion on projects in the next five years in the over 60 nations covered by Beijing’s “Belt and Road” trade and investment initiative while fending off a host of challenges, according to global law firm Baker McKenzie.

As infrastructure such as roads, ports, railways and airports get funded and built by Chinese state-backed firms in some of the nations, private Chinese firms and international partners will fund new business opportunities there, according to a report published on Tuesday by Baker McKenzie and consultancy Silk Road Associates.

“While [the initiative] was seen at its inception [in 2013] as predominantly the preserve of Chinese state-owned enterprises, funded by Chinese banks and staffed by Chinese workers ... there will be plentiful of opportunities for those local and multinational companies that can work hand in hand with Chinese organisations,” said Stanley Jia Dianan, chief representative of the law firm’s Beijing office.

While declining to address the political forces associated with the initiative, he noted in some projects, Chinese firms have found themselves bearing the bulk of the financial investment and risks in nations lacking the required capital and that ban foreign majority ownership in key industries.

“It looks just like in the early days when foreign companies entered China, they have to form joint ventures, with the Chinese partners dealing with obtaining government approval and helping get sovereign guarantees,” he said.

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As Chinese firms venture abroad, they will be exposed to the “full suite of project risks” including political and legal environment instability, and foreign exchange fluctuations that would impact project costs and returns, said James O’Brien, global head of Baker McKenzie’s energy, mining and infrastructure practice.

Chinese firms should “proactively seek advice” on risk mitigation, O’Brien said.

Ben Simpfendorfer, founder and chief executive of Silk Road Associates, expected Chinese private firms to be mostly pursuing opportunities in telecommunications, technology and manufacturing in nations covered by the initiative that can provide them with new markets and low-cost production sites.

Also putting his finger on the pulse of the initiative was Kelvin Tay, regional chief investment officer at UBS Wealth Management, who said in a report also released on Tuesday that “outward Chinese investment” linked to the project would be US$190 billion in the next five years.

He, however, said that given the geographically ambitious nature of the project, it is “highly unlikely” that all six corridors of the initiative will be completed by the target year of 2049, especially the high speed link between Central Asia and Europe, while that from China to Southeast Asia is likely to get built first.

Tay attributed this partly to Southeast Asian nations being “less averse” than European nations on getting funding from China-backed institutions and the former “downplaying” possible negative potential environmental impact of infrastructure projects such as high speed railways.