China's new international development program, the Belt and Road initiative, could mean opportunities for Nordic companies, especially those with experience in infrastructure and construction. However, to be successful it is important to understand the financial and political risks associated with large-scale development projects in Asia.
The Belt and Road initiative (B&R), originally proposed by Chinese President Xi Jinping in 2013, is an international development initiative composed of the Silk Road Economic Belt and the 21st Century Maritime Silk Road.1 B&R seeks to upgrade and develop railways, roads, energy pipelines, communication links, ports, waterways, bridges and other infrastructure in order to promote trade, travel, and communication between China and its partners.
The B&R initiative hit the mainstream news in mid-May when Chinese president Xi Jinping hosted a two-day event in Beijing, attended by 29 heads of state. The many voices of support in the audience included British chancellor, Philip Hammond, who was quoted in The Guardian as saying: “I commend President Xi … for setting in train such a bold and visionary project. This initiative is truly ground-breaking … with the potential to raise the living standards of 70% of the global population.” Noticeably, however, only one G7 leader, the Italian prime minister Paolo Gentiloni, attended the showcase. This low attendance could reflect international concerns that the B&R initiative will mean a boon for Chinese companies at the expense of non-Chinese competitors and that it will allow Beijing to boost its geopolitical power regionally and further afield.
President Xi’s proposal is incredibly ambitious. As described, it would connect China to over 60 different countries throughout Asia, the Middle East, Europe and Africa, mimicking the far-reaching success of the historical Silk Road. China itself has said it will invest 4 trillion USD into B&R projects, and some experts have predicted a cumulative investment of up to $8 trillion.
1) The Silk Road Economic Belt comprises initiatives to connect Asia, the Middle East, and Europe via infrastructure development, increased trade and cultural exchange. The 21st Century Maritime Silk Road is a complementary proposal connecting Southeast Asia, Oceania and North Africa via the Pacific and Indian Oceans. Together, they are known as the Belt and Road inititative, the Belt and Road (abbreviated B&R), or One Belt, One Road (abbreviated OBOR).
China’s leading role and the AIIB
B&R signals a shift in China’s approach to world trade. China’s role in B&R projects as investor and coordinator place it at the focal point of new and growing trading blocs. B&R starkly contrasts the approaches put forth in the Trans-Pacific Partnership and the Transatlantic Trade and Investment Partnership, which both revolve around US participation. The scale of the B&R initiative also offers an opportunity for China to increase the significance of the renminbi as an international currency. Speculation suggests this could be the first step towards making the renminbi an international reserve currency.
To provide capital loans and technical services for B&R initiatives, the Chinese government established the Asian Infrastructure Investment Bank (AIIB), based in Beijing, China. The multilateral development bank, operational since January 2016, has over 50 regional and non-regional member states worldwide. Although there is no formal affiliation between B&R and the AIIB, they share similar goals. The AIIB aims to fill an investment gap for infrastructure development in Asian countries which are currently underserved by current finance options.
For interested parties in the Nordics, though, the B&R initiative and the AIIB’s investment goals are still vague. “The Belt and Road initiative is undefined because that is how the Chinese leadership want it to be,” says Dr. Mikael Weissmann, Senior Research Fellow at the Swedish Institute of International Affairs and Associate Professor at the Swedish Defence University. “Concrete policies do and will continue to emerge, but the overall initiative will remain vague as it is an initiative, not a project.”
Current Nordic participation
Currently, Nordic participation in B&R is low, as most B&R ventures are still in the early stages of planning and preparation. As these become more concrete, experts predict that Nordic corporate involvement may be difficult in the face of competition from preferred Chinese companies. “China has a track record of giving contracts to Chinese companies,” says Dr. Weissmann. “Swedish companies need to be aware of this and adapt to circumstances rather than stubbornly demand equal treatment and transparency.”
However, there are substantial business opportunities for companies with expertise in infrastructure construction including roads, rail, ports, electricity, and energy. Long-term, corporates will most likely benefit from lower shipping costs between Europe and Asia as well as lower barriers to trade and investment.
Companies that are already engaged in projects with China and other areas covered by B&R have an advantage. According to Dr. Weismann, “those with a track record of success in China know how to play the game, and right now the label B&R is crucial for the game.”
Risks and opportunities
China has taken steps to follow international standards, such as the Uniform Customs and Practice for Documentary Credits (UCP), as well as to reform some of its policies on cross-border financing. In 2016, the Chinese government reformed its foreign debt quota system, making it simpler for Chinese organisations to acquire international bank loans or issue long-term renminbi bonds. Before the reform, Chinese banks needed to seek pre-approval on a deal-by-deal basis for any payment deferred by 90 days or longer. The reform significantly increases the foreign debt quota and allows Chinese banks to register deals with the State Administration of Foreign Exchange (SAFE) after the transaction has occurred.
“This will benefit Nordic corporates,” says Lin Ge of Nordea’s China operations. “Now our customers, as exporters to China, can make deals with longer deferred payment agreements (such as one year). The more flexible payment structure means that our clients can attract more business than before.”
When considering doing business in China, the standard risks involved with conducting international business apply. Corporates should familiarise themselves with and be aware of political and social stability, regulatory risk and financing and credit risk. Identifying the appropriate country and project will be critical, as credit quality can vary significantly across jurisdictions. With increased exposure to projects, suppliers, and buyers in emerging markets, it is more important than ever for corporates to develop and maintain a vigorous risk management strategy.
“It’s important to understand the local political and social system, bank system and risk, and local culture,” says Lin. “Finding a reliable partner would be helpful to mitigate the risk.” Today, approximately half of the trade finance business coming from China to the Nordics comes through Nordea.
Opportunities and tools for Nordic involvement
Although becoming involved in B&R projects may seem daunting, Nordic corporates have a number of options to consider. Large Nordic companies have the capacity to participate in the bidding process to win projects within B&R countries once the projects have been financed by AIIB or other multilateral banks. Nordic SMEs can consider contributing to the supply chain for large Chinese companies as a strategic choice to stay involved once their Chinese partners engage in projects within B&R countries. Nordic companies can also use subsidiaries in China to cover their risk in B&R countries via the China Export & Credit Insurance Corporation (commonly known as Sinosure), a major Chinese state owned enterprise that offers export credit insurance.
Jesper Segelcke Thomsen, Chief Advisor at the Danish Ministry of Foreign Affairs, is cautiously optimistic about the opportunities for Nordic corporates in B&R projects. “Nordic companies have a lot of know-how that is valuable in the B&R project, so the potential is there,” says Thomsen. “Obviously, it is not going to be easy. But especially for infrastructure consultancy companies there is a lot of potential.”
Thomsen recommends that Nordic corporates partner with Chinese companies to improve their chance of success. This must be done with an understanding of what B&R is and how the goals of the initiative align with your company’s strengths. The Danish Trade Council can help Danish companies become involved with B&R projects, and a good banking partner can help address practical challenges.
To this end, Nordea is poised to introduce corporates to the Chinese banking system and help them navigate new waters. “We help our customers understand the Chinese banking and payment systems and the export insurance system,” says Lin. “We can also refer them to the right Chinese banks, help them to understand China’s Trade Finance products, and help them to solve any problem with Chinese banks they may encounter.”
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