Navigating the New Silk Road

Expert Perspectives on China’s Belt and Road Initiative TABLE OF CONTENTS

1 INTRODUCTION 1

WHAT IS THE BELT AND ROAD INITIATIVE? 2 ONE BELT, ONE ROAD: CHINA’S GRAND ENTERPRISE 2 Tianjie He, Economist at Oxford Economics 3 CHINA’S RISE: THE AIIB AND THE “ONE BELT, ONE ROAD” 4 David Dollar, Senior Fellow with the Foreign Policy and Global Economy and Development for the Brookings Institution

WHAT ARE THE CHALLENGES FACING THE BELT AND ROAD INITIATIVE? 4 ONE BELT, ONE ROAD: RISKS AND COUNTERMEASURES FOR CHINESE COMPANIES 7 Miao Lu, PhD Executive Secretary General of the Center for China and Globalization 5 WILL THE NEW SILK ROAD BE PAVED WITH RICHES? 10 Ji Xianbai Jason, PhD Candidate at the S. Rajaratnam School of International Studies, Nanyang Technological University, and Europa Visiting Fellow at The Australian National University 6 CHINA CAN’T FINANCE “BELT AND ROAD” ALONE 13 Alicia García-Herrero, Senior Fellow for Bruegel and Chief Economist for Asia Pacific at Natixis 7 CHINA’S BELT AND ROAD INITIATIVE: MANAGING RISKS AND DISPUTES 17 Philip Teoh, Partner and Head of International Trade and Shipping at Azmi and Associates Malaysia WHAT ARE THE POTENTIAL ECONOMIC AND GEOPOLITICAL IMPLICATIONS OF THE BELT AND ROAD INITIATIVE? 8 ONE BELT, ONE ROAD: HOW WILL PARTNERS PROFIT? 20 Tianjie He, Economist at Oxford Economics 9 THE GEOPOLITICAL IMPACT OF CHINA’S ECONOMIC DIPLOMACY 22 BRINK Editorial Staff 10 CHINA-EUROPE TRAINS: A GAMECHANGER FOR HONG KONG BUSINESSES? 24 Wing Chu, Senior Economist of Greater China Research Team at Hong Kong Trade Development Council 11 CHINA’S BELT AND ROAD INITIATIVE: WHAT IT MEANS FOR MALAYSIA 27 Philip Teoh, Partner and Head of International Trade and Shipping at Azmi and Associates Malaysia 12 IS CHINA PIVOTING TOWARD THE MIDDLE EAST? 30 Mirek Dusek et al., Head of Middle East and North Africa, Member of the Executive Committee, World Economic Forum 13 IRAN: EUROPE EYES A NEW SILK ROAD 32 Moritz Pieper, Lecturer in International Relations at the University of Salford 14 CHINA’S BELT AND ROAD INITIATIVE: CAN EUROPE EXPECT TRADE GAINS? 34 Alicia García-Herrero, Senior Fellow for Bruegel and Chief Economist for Asia Pacific at Natixis INTRODUCTION

The articles contained in this publication have been selected for the ways they examine critical issues surrounding China’s Belt and Road Initiative (BRI), namely the initiative’s economic impacts, both domestic and abroad, as well as its geopolitical implications. In many ways, the Belt and Road Initiative represents China’s vision as a global leader alongside the US.

This compendium collates knowledge and expertise from the world’s leading experts to provide practical and timely insights on the various risks and opportunities associated with Belt and Road Initiatives. All articles first appeared on BRINK, the digital news service of Marsh & McLennan Companies’ Global Risk Center, managed by Atlantic Media Strategies, the digital consultancy of The Atlantic. BRINK gathers timely perspectives from experts on risk and resilience around the world to inform business and policy decisions on critical challenges.

1 Marsh & McLennan Companies BRINK Perspective ONE BELT, ONE ROAD: CHINA’S GRAND ENTERPRISE

Tianjie He Economist at Oxford Economics

of China to Western Europe – and economic corridors connecting China with Mongolia and Russia, central Asia, west Asia and Southeast Asia. The Road links China’s east coast to Europe via the South China Sea and the Indian Ocean, aiming to build efficient transport routes between major sea ports and to connect China with Southeast Asia, Oceania, the Middle East, and North Africa through the Mediterranean.

The initiative is a means to multiple ends. Explicitly, it is intended to increase prosperity for the underdeveloped parts of China, particularly in the west of the country, through domestic investment and economic integration with Asian neighbors. It is also meant to foster greater connectivity and Dubbed by some as a modern-day ONE BELT, ONE ROAD, economic development along the Marshall Plan, China’s One Belt, routes, promising an infrastructure MULTIPLE ENDS boost for Asia’s least connected One Road (OBOR) initiative will regions. Moreover, Beijing expects build roads, ports and railway tracks The OBOR also seeks to boost “soft” the OBOR to secure China’s energy along ancient trading routes to Asia, connectivity, such as trade and supply through diversification of Europe, the Middle East and Africa. investment liberalization and social import sources and transport routes. and cultural exchange. Originally a Launched in 2013 by President Xi political slogan forming part of Xi’s Among the more implicit goals, China Jinping, OBOR is a China-backed “China Dream,” One Belt One Road tries to find new sources of growth global connectivity initiative, aimed was fleshed out in more detail in the abroad, especially for construction at creating a better infrastructure action plan for the implementation companies and various industries network across 65 countries that of the initiative released in March suffering from excess capacity. cover 60 percent of the global 2015. OBOR also supports outward population and about one-third of investment and RMB (renminbi) global GDP. The plan maps out the land-based internationalization. “Silk Road Economic Belt” (the While the OBOR will boost China’s Belt) and the oceangoing “21st It helps to diversify export markets global influence and benefit Chinese Century Maritime Silk Road” (the and promote the international construction firms, we do not expect Road). The Belt connects China with expansion of Chinese technology the initiative to have a major impact Central Asia and Europe, focusing as part of its broader plan to upgrade on mopping up excess capacity in on a “Eurasian land bridge” – a its place in global production and China’s heavy industry. logistics chain from the east coast value chains.

2 Marsh & McLennan Companies BRINK Perspective Moreover, the OBOR also expands industries. In our rough estimation, to reform the global financial the political influence and the total annual OBOR spending of governance system to accommodate reach of Chinese power in Asia and $140 billion per year would generate its increased economic influence. elsewhere. around 22 million tons of annual steel demand at current prices. Setting up the AIIB may have sped Furthermore, OBOR could boost That compares to estimates of up the long-stalled reform to the the internationalization of the RMB excess capacity in China’s steel International Monetary Fund by encouraging its use in both trade industry ranging from 250 million governance and given emerging and financial transactions. RMB to 450 million tons per year. market contributors greater voice – trade settlement increased to an this was finally approved by the US average 30 percent of China’s total Moreover, it is expensive to Congress in late 2015. cross-border trade in 2015 from a transport heavy industry products mere 7 percent at the beginning of over long distances; sourcing closer Meanwhile, the Asian Development 2012. However, its share fell in 2016, to the project will often be more Bank pledged to increase its lending largely because of the pressure on economically efficient, especially capacity to remain relevant and the RMB and measures to contain for cement. effective in the region. Regardless capital outflows. of whether these moves were Finally, political considerations directly motivated by the AIIB, China’s capital controls present a make it unviable for OBOR projects healthy competition will improve fundamental constraint for RMB to rely too much on imports and the efficiency of resource allocation internationalization. Without an services from China. Recipient and stimulate global financial open capital account and unfettered countries, especially those with governance reform. access to onshore financial markets, relatively strong governance and the incentive for nonresidents sizable local domestic industries, *A follow-up piece by this author to hold the RMB is limited. But such as India and Indonesia, are very on the implications of OBOR on if China eventually liberalizes its unlikely to be willing to see Chinese countries outside of China will be capital account, we expect the room companies doing all the work and/ published on BRINK Asia later in for RMB internationalization will or accept large amounts of Chinese June 2017. be boosted by the OBOR initiative debt. While this may be different in This article first appeared on BRINK as regional trade and investment countries with weaker governance on June 5, 2017. networks further expand and that are more accommodative, such deepen. as Pakistan or Cambodia, that is a double-edged sword since the For China’s domestic economy, financial risk of projects will be some policymakers see OBOR as a higher. way to find new sources of demand abroad, especially for Chinese construction firms and industries A GREATER ROLE IN with excess capacity. While Chinese THE GLOBAL FINANCIAL construction firms will benefit significantly from OBOR, we do not ARCHITECTURE expect a major impact on the excess capacity in China’s heavy industry. OBOR helps to boost China’s regional and global influence by Based on the scale of OBOR providing public goods and taking investment, the annual demand on significant financial risks that for heavy industry products in other investors would shy away OBOR projects will simply not be from. The establishment of the large enough compared to the scale Asian Infrastructure Investment of overcapacity in China’s heavy Bank (AIIB) shows China’s attempt

3 Marsh & McLennan Companies BRINK Perspective CHINA’S RISE: THE AIIB AND THE “ONE BELT, ONE ROAD”

David Dollar Senior Fellow with the Foreign Policy and Global Economy and Development for the Brookings Institution

Rural migrants to the cities cannot bring their families or truly become citizens of the cities. Reforming the system would help reallocate labor from low productivity (farming) to higher productivity (urban manufacturing and service employment) activities. But local governments worry that they will lack the resources to fund greater social services for migrant families.

China’s Ministry of Finance has announced general plans for fiscal reform to support rebalancing. First are measures to bolster local government revenue, potentially including a nationwide property tax. Second is to collect more dividends from its state enterprises. If this happens at both the local and the China’s six years of breakneck a better chance of success than central level, it would reduce some growth leading up to 2007 were the former. of the bias towards investment accompanied by a rising trade and help ensure resources for surplus. But when that surplus government services. Third is to fell sharply after the global crisis, DOMESTIC ROADS allow municipalities to issue bonds Chinese authorities made up for TO REFORM to fund their infrastructure projects, the shortfall of demand with an rather than relying on shorter-term increase in investment. Today, Domestic reform is a much more bank loans. China is using a lot more investment promising road to deal with China’s The final aspect of fiscal reform may to fuel slower growth than in the surplus problem, and to rebalance be the hardest: Local officials are past: The real-world result of this its economy away from such a generally rewarded for their ability falling capital productivity has been heavy reliance on investment. to provide investment and growth. empty apartment buildings, unused The resolution that came out of the While the system has been successful airports and serious excess capacity Third Plenum in November 2013 at that, it has been less successful in manufacturing. Meanwhile, sketched out dozens, if not hundreds, at meeting other objectives, consumption is very low, especially of reforms. The ones that are likely such as clean air, food safety and household consumption. to have the greatest effect are the high-quality education and health household registration system services. Changing the incentives One response China has taken to (hukou), intergovernmental fiscal of local officials to align with this changing growth dynamic is reform and financial liberalization, rebalancing is a key institutional to try to spur external demand for opening up China’s service sectors reform. Chinese investment, specifically for to competition. major infrastructure projects. The other response has been internal: Under hukou, 62 percent of the To initiate reforms that rebalance population is registered as rural its economy from investment to residents, and it has been difficult consumption. The latter effort has for them to change this designation.

4 Marsh & McLennan Companies BRINK Perspective SPURRING INVESTMENT some of which China could finance Changing the – BUT NOT ENOUGH bilaterally. However, the economies of Central Asia are not that large, incentives of It is no coincidence that this period and the potential for investment is of excess capacity at home is the limited. For that reason, China added local Chinese moment at which China launched the idea of a maritime “road.” expensive new initiatives, such as officials to Because “One Belt, One Road” will the Asian Infrastructure Investment be implemented bilaterally between Bank (AIIB), the BRICS Bank and align with fiscal China and different partners, it may the “One Belt, One Road” initiative seem that there is more potential for in order to strengthen infrastructure rebalancing is a China to use this initiative to vent both on the westward land route some of its surplus. But I still doubt key institutional from China through Central Asia and that this will be on a scale to make on the southerly maritime routes a macroeconomic difference for reform. from China through Southeast Asia. China. Developing countries understand Among the various developing the purpose for the AIIB: Many countries along “One Belt, One have moved away from using the Road” routes, there are some with existing multilateral infrastructure relatively strong governance – India, investment banks because they are Indonesia and Vietnam, for example so slow and bureaucratic. The US – that will be hard for China to push made a mild effort to dissuade some around. Those countries will not allies from joining the AIIB, fearing want to accept large numbers of China would use it for narrow Chinese workers or take on large political or economic ends. But a amounts of debt relative to their diverse group of nearly 60 countries GDP. has signed up, making it difficult for China to use the bank to show On the other hand, there are weak favoritism in financing projects. governance countries – Cambodia In fact, the AIIB should be viewed and Pakistan, for instance. It may be as complementary to – and not more feasible for China to send some competitive with – America’s own of its surplus production to these main economic initiative in the countries, but there is a reasonable Asia-Pacific, the Trans-Pacific prospect that in the long run, China Partnership trade agreement. will not be paid. But the AIIB will be too small to make a dent in China’s excess LIBERALIZING capacity problem. If the AIIB is very successful, then in five years it might CHINA’S FINANCES lend $20 billion per year, comparable with the World Bank’s International China’s repressed financial system is Bank for Reconstruction and a third area of reform. Real interest Development. But China would need rates that are close to zero amount to $60 billion per year of extra demand both a tax on household savers and a to absorb excess capacity in the steel subsidy to investment by firms and sector alone. local governments able to borrow from the banking system. Almost The “One Belt, One Road” initiative everywhere in the world has had zero is larger than the AIIB. It started real interest rates in recent years, with the idea that nearby countries but in China, they go back more than in Central Asia could benefit from a decade. The government has taken more transport infrastructure, some initial steps to raise deposit

5 Marsh & McLennan Companies BRINK Perspective and lending rates, as well as to allow OPENING SERVICE a shadow banking system to develop SECTOR TO with better returns to savers and higher-rate loans to riskier clients. COMPETITION

The problem with the current A final area of reform is to open arrangement is that most shadow- up China’s service sectors to banking wealth products are competition from private firms marketed by commercial banks and and the international market. treated as low-risk by households. The modern service sectors are Total shadow banking lending has the domain in which state-owned grown at an explosive rate in recent enterprises continue to be dominant, years and, not surprisingly, some of including financial services, telecom, the funded investments are starting media and logistics. to go bad. The first corporate bond default occurred last year, and The rebalancing from investment that result should help ease the toward consumption means that, on moral hazard that has built up in the production side, industry will the system. The announcement of grow less rapidly than in the past the formal introduction of deposit while the service sectors expand. insurance this year is another China will need more productivity important step in the separation growth in the service sectors, which of a cautious commercial banking is hard to achieve in a protected sector from a risky shadow-banking environment. sector. Central Bank Governor Zhou For other developing countries, Xiaochuan recently announced that successful rebalancing in China interest rate liberalization would be will create both challenges and completed within one to two years. opportunities. While China’s Recent moves to liberalize the appetite for commodities is likely to bond and stock markets so that moderate, rebalancing should lead to private firms can more easily go a rise in its demand for manufactures to the capital markets are also in and services from other developing the right direction, as are moves countries. And China is rapidly to increase the flexibility of the emerging as a major source of exchange rate. The IMF assesses foreign direct investment. A world that China’s exchange rate has gone without Chinese rebalancing, by from “substantial undervaluation” contrast, is likely to be more volatile. to “fairly valued” in recent years, A more in-depth version of this piece so it should not be too difficult appears on the Brookings site and for the authorities to reduce their was condensed from a paper titled, intervention and allow a more “China’s rise as a regional and global market-determined rate. Finally, power: The AIIB and the ‘one belt, one opening up the capital account road,’” which was released in Summer should be the last step in financial 2015. liberalization. This piece first appeared on BRINK on April 27, 2016.

6 Marsh & McLennan Companies BRINK Perspective ONE BELT, ONE ROAD: RISKS Chinese AND COUNTERMEASURES investment FOR CHINESE COMPANIES in One Belt,

Miao Lu One Road PhD Executive Secretary General of the Center for China and Globalization countries amounted to $92.46 BN in 2014, 15x higher than it was in 2005.

China proposed its “One Belt, Small- to medium-sized enterprises One Road” initiative in 2013. involved in manufacturing light This ambitious scheme seeks to goods and technologically advanced connect China more closely with products are also boosting their Europe, Southeast and Central investment activity in One Belt, Asia, the Middle East and Africa. One Road countries. The project is bound up with the promotion and exercise of China’s According to the Chinese National “soft power,” aimed at devising Asian Bureau of Statistics, Chinese solutions for Asian problems. investment in One Belt, One Road countries amounted to $92.46 billion One Belt, One Road is strongly in 2014, 15 times higher than it was influencing the flow of Chinese in 2005. outbound investment. The initiative is creating significant opportunities Like any large-scale and ambitious for Chinese state-owned enterprises, undertaking, One Belt, One Road especially those involved in entails not just great opportunities, transportation infrastructure, but considerable risks as well. railway construction, energy and resources exploitation and shipping and logistics firms.

7 Marsh & McLennan Companies BRINK Perspective POTENTIAL RISKS conflicts, terrorism and religious like investment behavior. Chinese conflicts. It is worth noting that companies planning to “go global” POLITICAL RISKS Chinese enterprises investing by undertaking One Belt, One Road overseas have yet to devise a projects need to up their game when One set of risks stems from the comprehensive security strategy it comes to corporate governance complicated political situation for dealing with such risks. They and investment decision-making. prevailing across large stretches of currently rely mainly on Chinese overland and maritime covered by consular and diplomatic protection, One Belt, One Road. Myanmar is a which are certainly inadequate COUNTERMEASURES case in point. Chinese investment safeguards against major threats in the country fell from $407 million such as terrorism and ethnic and OUTSOURCING EXPERTS TO in the 2012 fiscal year to just sectarian religious violence. CONDUCT RISK ANALYSIS $46 million in the 2013 fiscal year, For its part, China has repeatedly a drop of nearly 90 percent. This Chinese enterprises need to be stated that One Belt, One Road is for plunge was caused by rising anti- business-like and realistic in promoting economic and cultural Chinese sentiment and opposition factoring potential risks into the cost exchange, as opposed to being a to key projects in Myanmar, notably of investment projects. They need Trojan horse for extending Chinese the $3.6 billion Myitsone dam in the to make the best use of top-flight geopolitical influence. But China still northern part of the country. foreign risk analysis firms, while seems to have problems establishing also employing the expertise of the credibility of this message. Big power rivalry in ASEAN leading Chinese think tanks doing countries, South Asia and Central risk analysis, such as the Chinese Asia may also threaten Chinese ECONOMIC RISK Academy of Social Sciences. investment activities in these areas. China and Japan are competing to Chinese enterprises with raise their influence in South Asian investments in One Belt, One Road LET THINK TANKS PLAY countries. At the beginning of 2016, countries face economic risks. A BIG ROLE IN RISK Japan secured Dhaka’s approval to One major risk is the potential MANAGEMENT OF ONE BELT, begin building an 60-foot–deep port of these countries defaulting on ONE ROAD INITIATIVES in Matarbari, on the southeast coast foreign lending and investment of Bangladesh. Meanwhile, China projects. Many of the One Belt, Think tanks, particularly those and Bangladesh were continuing to One Road countries, especially run independently, are in a better negotiate approval for the Sonadia those in Central Asia, are among position to evaluate development deep water port, which is located the poorest economies in the risk. Firms investing in One Belt, about 15 miles away from Matarbari. world and have dysfunctional and One Road should involve such corrupt governments. This lack of organizations in planning for Potential risks also exist in the creditworthiness makes them poor such projects and attempting One Belt, One Road Central bets for investment on the part of to balance the interests of the Asian countries. Conflicts exist China’s government and Chinese stakeholders involved in them. between Kyrgyzstan, Tajikistan financial institutions and businesses. Setting a network of cooperative and Uzbekistan. For example, the One Belt, One Road zone think Uzbekistan strongly opposes China’s Another source of risk lies within tanks should promote in-depth hydropower project in, as the the Chinese companies themselves and comprehensive discussion of proposed dam is located upstream on doing business in One Belt, One the problems and concerns of the the Amu Darya River in Tajikistan. Road countries. A great deal relevant parties. This investment could therefore remains to be done with respect to adversely affect Uzbekistan’s access engineering safety and management to water, a scarce resource in Central issues. At times, firms also have SET UP A SECURITY Asia. difficulties obtaining sufficient MECHANISM TO ADDRESS intelligence and financing to SECURITY CONCERNS SECURITY RISKS effectively carry out investment projects. When these fail to properly In the short term, Chinese Chinese investment in countries gather information and conduct companies ought to beef up their along One Belt, One Road may be due diligence, they are more prone internal security by making use of exposed to regional turmoil and to engage in speculative, bubble- good private security contractors.

8 Marsh & McLennan Companies BRINK Perspective In the long term, however, they need RECRUITING AND to establish trust and build durable NURTURING TALENT WITH AN partnerships with local stakeholders INTERNATIONAL MINDSET in the One Belt, One Road countries targeted for investment. To better understand conditions in diverse and complex foreign ATTACH MORE IMPORTANCE environments, Chinese companies TO CORPORATE SOCIAL investing in One Belt, One Road must RESPONSIBILITY effectively integrate knowledgeable foreign talent into the management Chinese companies investing abroad of overseas investment operations. should be more concerned about Equally important, two-way corporate social responsibility, educational and cultural exchange which can be a key element in between Chinese and local people enhancing China’s “soft power” in in One Belt, One Road areas should the One Belt, One Road area. Firms be promoted. This can play a crucial should pay especially close attention role in promoting cross-cultural to their treatment of local workers awareness between China and and the environmental impact of One Belt, One Road countries. investment projects (both issues in To this end, a One Belt, One Road Myanmar). Effective corporate social scholarship fund ought to be responsibility can go a long way in established to enable students from reducing the internal security risks these countries to study in China, faced by firms seeking to invest in and likewise, Chinese to live and One Belt, One Road countries. learn about places like Kazakhstan, which have very different and unique CAPACITY BUILDING IN cultures and social norms. NURTURING PARTNERSHIP WITH NGOS AND THE This article first appeared on BRINK CIVIL SOCIETY on April 28, 2016.

Chinese enterprises with outbound investments need to pay more attention to local nongovernmental organizations and work with civil society actors in One Belt, One Road countries. One road countries where NGOs are very active are becoming important spokesmen for civil society. While doing projects, NGOs should be invited to express their concerns and interests.

9 Marsh & McLennan Companies BRINK Perspective WILL THE NEW SILK ROAD Developing Asia BE PAVED WITH RICHES? alone needs $8 trillion in Ji Xianbai Jason PhD Candidate at the S. Rajaratnam School of International Studies, Nanyang infrastructure Technological University, and Europa Visiting Fellow at The Australian National University investment to accommodate its growth until 2020.

Until recently, there was the 15th century. It could cover a “responsible competition” between geographical area that is home to two transcontinental economic 4.4 billion people who produce more arrangements: the US-led Trans- than half of global GDP and preside Pacific Partnership (TPP) and the over three-quarters of known energy China-initiated Belt and Road reserves. Initiative (BRI). The BRI will surely come to the fore in 2017 There is little wonder why China as the TPP fizzles out due to the would invoke, or even mildly incoming US administration likely mythologize, its glorious past to embracing retrenchment rather serve contemporary policy interests, than engagement. but the BRI is not an empty political slogan. It is a long-term, multi- The BRI, consisting of the Silk pronged international economic Road Economic Belt and the 21st strategy aiming to link Afro- Century Maritime Silk Road, draws Eurasian economies through policy inspiration from the historical coordination, facilities connectivity, imageries of the millennia-old trade facilitation, financial overland trading routes traversing integration and people-to-people the Eurasian landmass and the exchanges. ancient sea lanes linking China with the Middle East and East Africa via Southeast Asia that dated back to

10 Marsh & McLennan Companies BRINK Perspective DEVELOPMENT A case in point is the planned reduction in railway, air and AND SECURITY Gwadar-Kashgar pipeline, which maritime transport costs could is envisioned to carry one million translate to increases in exports of When China, in 2013, broached the barrels of oil directly to China’s 2 percent, 5.5 percent and 1.1 percent idea of revitalizing the routes of Xinjiang province every day. respectively for countries along the commercial and cultural exchanges routes. In total, China reckons that Despite the overarching domestic explored by the “diligent and the BRI will have a cascading effect motives, the BRI has an explicit courageous” silk traders of Eurasia, of creating some $2.5 trillion in extra international dimension. It places Beijing had two major domestic trade among countries in the loop. due emphasis on connectivity, policy objectives in mind. inclusiveness and multilateralism Also riding the Silk Road is China’s First, the BRI is an outward-looking when isolationism, xenophobia booming outbound investment national strategy for hinterland and unilateralism are becoming as China is transitioning from the development. In the past decades, increasingly commonplace in other world’s largest goods exporter to China was almost synonymous with parts of the world. Specifically, the the world’s largest capital exporter. “growth,” but China’s socioeconomic BRI provides a timely boost to the China’s BRI-related foreign direct progress is highly unequal (the wobbling world economy and ailing investment (FDI) grew 23.8 percent country becomes poorer as one globalization sentiment through year-on-year in 2015, and was up goes west). One explanation of infrastructure, investment and 60 percent in the first half of 2016, the regional disparities is the policy channels in the context of outpacing the growth in China’s availability of extensive, inter- win-win cooperation. overall outbound non-financial modal infrastructural networks – investments. There is a general expressways, high-speed railways, consensus that China’s FDI stock air and sea ports – along eastern WIN-WIN COOPERATION will reach a staggering $2 trillion China’s coast that allow “Made in by 2020, more than three times the China” goods to be transported Infrastructure is essential for level at the end of 2014, and then all over the world. The BRI is economic vitality and unimpeded $4 trillion in time. devised to close this infrastructural trade and investment, but the gap in the hope that the ensuing financing needs of infrastructure Taking advantage of the Chinese inland economic integration with development are daunting across investments that arrive under neighboring markets will catalyze Eurasia. Developing Asia alone the banner of BRI, participating economic development in its needs $8 trillion in infrastructure countries can modernize their relatively backward western and investment to accommodate its economies, lock in key structural central provinces. growth until 2020. On the other reforms, tap into new sources of hand, Europe’s public spending growth, raise productivity and The other geo-economic rationale on infrastructure stagnated in the increase reciprocity of trade behind the BRI relates to China’s shadows of financial crises, austerity patterns. And as labor and land Malacca Dilemma. The term refers measures and a deflationary costs go up in China, Chinese to China’s over-reliance on energy economic outlook, shrinking to enterprises have started to invest imports transiting the Strait of $449 billion in 2015 – around in manufacturing and industrial Malacca, a strategic choke point that 6 percent less than in 2009. capacities in neighboring countries. is often patrolled by the US Navy. This westward and southward flow According to a Pentagon report, over The BRI is China’s policy response of investment will likely ensure 80 percent of Chinese maritime oil to plug the funding shortfall. It that developing countries reap the imports and 30 percent of natural establishes a multilateral platform long-term benefits of the BRI and gas imports have to pass through for leveraging China’s core emerge as integral parts of global the Malacca Strait. To buttress its competences in infrastructure value chains, rather than mere energy security, China is determined construction and pooling the transit points. Of equal importance to circumvent the narrow strait by region’s foreign reserves to is that competition for Chinese developing more reliable, alternative overcome logistical barriers to trade capital will encourage BRI countries land and maritime routes for energy and development. According to to adopt better economic policies, imports along the Belt and Road. Bruegel economists, a 10 percent cut red tape, improve investment

11 Marsh & McLennan Companies BRINK Perspective climate and strengthen coordination Precisely because of its openness and with adjacent countries in a race to inclusiveness, the BRI will always the top. be a work in progress that cannot be defined in its entirety. Interested countries and companies should INCLUSIVENESS proactively shape the agenda of the BRI by identifying, developing Moreover, the network-based and proposing projects that can be conceptualization of the BRI is bracketed under the rubric of BRI, more inclusive than institutional pondering how to cash in on those integration projects such as the commercial opportunities while, in TPP where membership, rules the spirit of the ancient Silk Road’s and principles, and benefits and trailblazers, contributing to BRI’s obligations are legally specified vision of a closely integrated Afro- since day one. It is telling that China Eurasia with new and enhanced abandoned the popular nickname physical, commercial, cultural and OBOR (One Belt, One Road) and digital ties. showed reluctance to publish an official list of involved countries This article first appeared on BRINK in an attempt to promulgate its on January 5, 2017. intention of engaging as many countries as possible. Except for a few geographical considerations, there is virtually no restriction as to whether a particular country can or cannot take part in this open-ended, collaborative development project. The BRI’s openness contrasts sharply with the exclusiveness and discriminatory nature of the TPP whereby non-members have to comply with so-called high standard trade rules – in which they have no say – before they can be admitted.

12 Marsh & McLennan Companies BRINK Perspective CHINA CAN’T FINANCE “BELT AND ROAD” ALONE

Alicia García-Herrero Senior Fellow for BRUEGEL and Chief Economist for Asia Pacific at Natixis

This is particularly important as Chinese banks have been the largest lenders so far (China Development Bank in particular with estimated figures hovering around $100 billion while Bank of China has already announced its commitment to lend $20 billion). Multilateral organizations geared toward this objective certainly do not have the financial muscle. Even the Asian Infrastructure Investment Bank (AIIB), born for this purpose, has so far only invested $1.7 billion on Belt and Road projects.

As if this were not enough, China has lost nearly $1 trillion in foreign reserves due to massive capital outflows. Although $3 trillion of The One Belt One Road Initiative Chinese authorities have come reserves could still look ample, holds great promise for the global up with their own estimates of the Chinese authorities seem economy, but it needs a huge amount the projects that will be financed. to have set that level as a floor of financing. Initial presumptions The numbers start at $1 trillion under which reserves should not that China would be able to and go all the way to $5 trillion fall so that confidence is restored provide all of the financing are now in only 5 years. In the same vein, (Exhibit 3). This obviously unrealistic. Other partners should the official list of countries does reduces the leeway for Belt and consider providing finance for some nothing but increase over time to Road projects to be financed by aspects, especially Europe, which more than 65 – but there is a limit China, at least in hard currency. has much to gain from the project. to how much China can finance.

There is no doubt that Asia Such reasoning was probably well needs infrastructure. The Asian taken when China was flooded HOW TO FINANCE THE Development Bank (ADB) with capital inflows and reserves BELT AND ROAD? recently increased its already very had nearly reached $4 trillion and high estimates of the amount of needed to be diversified. Chinese The first, and least likely, step is for infrastructure financing needed in banks were then improving their China to continue such huge projects the region to $26 trillion in the next asset quality if anything, because unilaterally. This is particularly 15 years, or $1.7 trillion per year the economy was booming and bank difficult if hard-currency financing (Exhibit 1). The great thing about credit was growing at double digits. is needed for the reasons mentioned the China-driven Belt and Road above. China could still opt for The situation today is very different. lending in yuan, at least partially, Initiative is that it aims to address China’s economy has slowed with the side benefit of pushing yuan that pressing need for infrastructure, down and banks’ balance sheets internationalization. However, even especially in transport and energy are saddled with doubtful loans, this is becoming more difficult. infrastructure. But this is easier which continue to be refinanced said than done. The theory is that and do not leave much room for the The use of the yuan as an the financing will be there thanks to massive lending needed to finance international currency has been China’s massive financial resources. the Belt and Road Initiative. decreasing as a consequence of the

13 Marsh & McLennan Companies BRINK Perspective FIGURE 1 ASIA: INVESTMENT NEEDS BY SECTOR FIGURE 2 ASIA: INVESTMENT NEEDS BY COUNTRY Sources: Natixis, ADB N.B. Climate-adjusted estimates Sources: Natixis, ADB N.B. Climate-adjusted estimates

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t South Asia South East Asia Per East Asia ecluding China rsprt China eec Central Asia ter and Pacific sitti

FIGURE 3 GROWTH AND FOREIGN RESERVES FIGURE 4 SHARE AS INTERNATIONAL PAYMENT CURRENCY Sources: Natixis, Bloomberg Sources: Natixis, Bloomberg, SWIFT

P rei reserves BN R BP P N

FIGURE 5 STRESSED LOAN FIGURE 6 INTERNATIONAL CLAIMS Sources: Natixis, CEIC Sources: Natixis, BIS NB locational statistics used for China, available from 2015 Q4

RIIN

N Perri N Perri t rpe i peci eti

14 Marsh & McLennan Companies BRINK Perspective FIGURE 7 BORROWING COUNTRIES FIGURE 8 CHINA LENDING TO THE WORLD THROUGH Sources: Natixis, BIS MULTILATERAL BANKS Source: Natixis

RIIN BIIN Capital Announced Disbursed

si Irstrctre Ivestet B IIB

Ne evepet B NB i R evepi ctries tries te Bet R

FIGURE 9 LOAN TO THE BELT AND ROAD COUNTRIES FIGURE 10 BELT AND ROAD INVESTMENTS BY INDUSTRY Sources: Natixis, BIS Source: Natixis

Industrial Rail Park

Materials Port Energ Road Rest te r Bt cire i ie prects ice iis t ctries te Bet R

stock market correction and currency A second option is for China to $15 trillion, out of which, nearly half devaluation in 2015, but still some intermediate overseas financial is lent by European banks. Out of of the Belt and Road projects could resources for the Belt and Road the $15 trillion, about 20 percent be financed in yuan in as far as the projects. The most obvious way is already being directed to Belt borrowing of a certain host country to do this, given the limited and Road economies, again with would be fully devoted to pay Chinese development of bond markets in European banks being the largest construction or energy companies Belt and Road countries, as well players (Exhibit 7). (Exhibit 4). This quasi-barter as the still-limited size of China’s system can solve the hard-currency own offshore bond market, is to constraint but poses its own risks to borrow from international banks. the overly stretched balance sheets of Cross-border bank lending has been Chinese banks. In fact, their doubtful a huge pool of financial resources, loans have done nothing but increase especially in the run up to the global during the last few years, which is financial crisis. Since then they have eating up the banks’ room to lend moderated, but the stock of cross- further (Exhibit 5). border lending still hovers above

15 Marsh & McLennan Companies BRINK Perspective Still, in order to finance the The key source of co-finance would project should make it a leader on $5 trillion targeted in Xi’s grand plan logically be Europe, at least as long as the financing front bringing the old for the next five years, we would bank lending dominates, which will continent closer to China. need to see growth rates of around be the case for quite some time in the 50 percent in cross-border lending. countries under the Belt and Road. The Belt and Road is great for While such a surge in cross-border In fact, European banks are already supporting high demand in Asian lending is not unheard of (in fact, the largest providers of cross-border infrastructure, but there is a limit it happened in the years prior to loans to these countries, so it is only on how much China can finance. the global financial crises), the a question of accelerating that trend. The slowdown of the economy and real bottleneck would be the rapid Furthermore, the geographical the limits on the use of foreign increase in China’s external debt, vicinity between Europe and some reserves are two of the impediments. which would go from the currently of the Belt and Road countries could Additionally, Chinese bank balance very comfortable level (12 percent make the projects more appealing sheets, the largest source of of GDP) all the way to more than (Exhibits 9 and 10). financing so far, are increasingly 50 percent if China were taking on saddled by doubtful loans, which the debt, or something in between In addition, the European Union limit their lending capacity. As for if co-financed by Belt and Road has its own grand plan for the official multilateral development countries. financing of infrastructure – among agencies, their funding sources other sectors – namely the Juncker remain limited for the extent of A mix of options one and two lies on Plan, which could serve as a basis the project. the use of multilateral development to identify joint projects of interest banks to finance the Belt and Road to both the EU and China. The Against this background, European projects. In fact, China is a major EU-China connectivity platform banks – the largest cross-border shareholder of its newly created was launched by the European lenders in the world – are well multilateral banks (AIIB and New Commission in late 2015 to identify placed to step-up their already large Development Bank) but less so in projects of common interest for the financing to Belt and Rod countries. existing ones (such as ADB, EBRD Belt and Road and EU connectivity Europe’s proximity with some of or the World Bank). This means that initiatives, such as the Trans- these countries can make certain the financing burden can be shared European Transport network. All of projects more appealing for Europe (to a lesser or larger extent) with this bodes well for Europe to become as well. Thus, we should expect other creditors, while still keeping a an active part of China’s Belt and private and public European co- tight grip on the construction of such Road Initiative, not only in providing financing of Belt and Road projects infrastructure (at least in new China- the financing, but also in identifying to increase over the next few years led organizations). While apparently projects of common interest. and, with it, European interest for ideal, the problem with this option Xi Jinping’s grand plan. This should is that the available capital in these It goes without saying that other bring Europe closer to China. institutions is minimal compared lenders, beyond Europeans, are This article first appeared on BRINK to the financing needs previously welcome to finance Belt and Road on May 23, 2017. discussed (Figure 8). projects as the ensuing reduction in transportation costs and improved It seems that China cannot rely on its connectivity should be good for banks alone – no matter how massive the world as a whole. However, – to finance such a gigantic plan. Europe’s particular advantage in this

16 Marsh & McLennan Companies BRINK Perspective CHINA’S BELT AND ROAD INITIATIVE: MANAGING RISKS AND DISPUTES

Philip Teoh Partner and Head of International Trade and Shipping at Azmi and Associates Malaysia

the infrastructure assets. Other investments will be made in logistics and manufacturing.

As the partner countries are at different stages of development and have different legal systems, there will be related challenges. For instance, it can be challenging to match the companies capable of undertaking the BRI projects. At the beginning, parties will need to be certain of both their partners’ standing and their capabilities. In addition to that, the structures of the legal systems in countries receiving the investment will need to be considered.

In most cases, the partner countries will require the projects to be President Xi Jinping reaffirmed While the Belt and Road Initiative undertaken by local companies. China’s commitment to the Belt (BRI) has the potential to boost This necessitates setting up joint and Road Initiative during a recent economic growth and prosperity venture enterprises, which would trade summit of world leaders held through increased trade and deeper be locally incorporated. Setting in Beijing. Xi pledged an investment economic ties, it can also lead to a up these enterprises will be an of up to $78 billion for countries series of challenges around business important prerequisite even before touched by the Belt and Road contracts and their enforcement. the projects commence. Initiative, which he has called the “project of the century.” For complex projects, the joint ASSOCIATED RISKS venture entity may comprise more Since 2013, Xi has been rolling out than two parties. Two of these his Belt and Road plans, committing The BRI involves Chinese companies parties will likely comprise a Chinese funds from China and the Asian investing in or with companies in the party and a party from the BRI Infrastructure Investment Bank countries along the Belt and Road. partner country, and the third will and engaging global financial Many of these investments will be likely be a foreign party with the institutions such as the World in infrastructure and development necessary technical expertise. Apart Bank. This ambitious plan covers a projects such as roads, rail and from this, there may also be a need large swath of territory from China ports. The initial phase of these to engage foreign consultants and through the former Soviet republics projects will involve a gamut of experts to conduct comprehensive to Russia, Africa and parts of Europe activities including preliminary risk studies. These are all areas of and is expected to boost trade and assessments, project financing and potential disputes, particularly if the infrastructure development. setting up joint ventures to build contractual parties and experts are not properly selected.

17 Marsh & McLennan Companies BRINK Perspective The parties’ challenge will be to even before the deciding tribunal Determining secure one another’s commitments embarks on addressing the actual through secure, comprehensive and dispute. which laws will – most importantly – enforceable contracts. This is because legal govern specific contracts are not going to be useful RESOLVING DISPUTES if laws and regulations keep shifting, contracts will which is something that happens in Once the governing law has been many emerging markets. Apart from decided, parties will need to decide be a challenge the terms themselves, which will how they would want to resolve be dependent on the tightness and disputes. This decision must be for Belt and clarity of contractual provisions, it prompted by objective criteria and will also be important to understand not parochialism – there is no point Road Initiative the legal environment of the relevant in settling disputes in a particular BRI partner country or the chosen court when a decision of that court participants. system of law. These contracts need cannot be enforced in the country to be based on an agreed, stable and where the losing party may be understandable system of laws. located.

If the partner countries that are In international contracts, the home to BRI projects do not have primary advantage of international developed and reliable systems arbitration over court litigation lies of law, there will be a risk of in its enforceability. An international institutional voids – or the absence arbitration award is enforceable of specialized intermediaries, in most countries in the world regulatory systems and contract- according to the mechanism set up enforcing mechanisms. under the New York Convention. Other advantages of international These voids in turn affect the arbitration include the ability to enforceability of contractual select a neutral forum to resolve commitments and could jeopardize disputes; that arbitration awards are the projects or partnerships. final and not ordinarily subject to appeal; the ability to choose flexible Clearly, each party will be most procedures for the arbitration; and comfortable with its own laws – for confidentiality. example, the Chinese investor will be comfortable with Chinese laws For the most part, the general and the investee or BRI companies acceptance of the New York will be comfortable with the laws Convention worldwide means that of their respective home countries. enforcement is not problematic. There may also be a cultural element However, there has been some as international lawyers and evidence of problems of enforcement consultants may be familiar with in China. If this is the case, parties common law rather than the civil law in large infrastructure contracts systems of the BRI countries. will do well to explore obtaining independent security – for example, Therefore, determining which laws by way of performance bonds will govern specific contracts will be that are enforceable in neutral a challenge as there will be multiple jurisdictions. These bonds are often parties involved with a diverse set of subject to a neutral law different preferences – often differing ones. from the governing law in the Failure to agree upon the law will operational contract. mean that there could be disputes about the governing law itself,

18 Marsh & McLennan Companies BRINK Perspective Another area that parties need to China’s BRI is likely to change be mindful of is the language of the world economic landscape arbitration. It cannot be assumed and propel development in that English will be the default many countries; and it will language even in cases where the certainly provide opportunities to contract is laid out in English. international contractors, advisors The Chinese party may nominate and professionals. In their eagerness a CIETAC Centre as its chosen to participate in this initiative, arbitration venue. Lawyers advising however, participating parties the BRI partners would do well should not neglect the need to have to be familiar with the available proper contracts in place, including arbitration centers before agreeing having appropriate law and dispute to a particular center. Regional resolution provisions. arbitration centers such as the Kuala Lumpur Regional Centre This article first appeared on BRINK for Arbitration, the Singapore on June 9, 2017. International Arbitration Centre and the Hong Kong International Arbitration Centre would be able to offer parties independent and neutral venues for dispute resolution.

19 Marsh & McLennan Companies BRINK Perspective ONE BELT, ONE ROAD: HOW WILL PARTNERS PROFIT?

Tianjie He Economist at Oxford Economics

While the impact of the plan is hard to quantify at this stage, China’s trade, investment and construction activity in OBOR countries is on the rise. Its bilateral trade with 65 countries along the OBOR was $962 billion in 2016, one quarter of the total. The share of exports going to the OBOR region has grown steadily to 28 percent in 2016, nearly 12 percentage points higher than the share of exports to the EU and 10 percentage points higher than that to the US.

The share of China’s imports coming from OBOR countries has fallen China’s One Belt, One Road (OBOR) financing coming on stream, such in recent years (measured in US initiative has been the subject of as the flagship 418-kilometer rail dollars). While this is in part because awe and skepticism alike. There are link with Laos and the $46 billion of the fall in commodity prices, it those who believe it will support China-Pakistan Economic Corridor. also points to possible problems with the long-term growth of partner More than 100 countries and China’s economic engagement with economies through the development international organizations have the OBOR countries – that China’s of infrastructure and better joined the initiative, with nearly manufacturing exports crowd out connectivity, while others have 50 having signed intergovernmental domestic production and result in concerns. cooperation agreements with China trade deficits. on joint construction. The initiative can bring benefits if managed well, particularly in some While there is no official data on According to China’s Ministry of of the least developed parts of the the total number/value of OBOR Commerce, nonfinancial outward world; but at the same time, China projects, the China Development direct investment to OBOR countries needs to avoid its engagement Bank said in 2015 that it had totaled $14.5 billion last year, slightly with recipient countries becoming reserved $890 billion for over less than in 2015, when China’s unbalanced. For example, it should 900 projects (in transportation, overall overseas direct investment avoid that its manufacturing exports energy, resources and other sectors) (ODI) – including nonfinancial ODI crowd out domestic production across 60 countries. Meanwhile, – to OBOR countries rose twice as and result in trade deficits that may the Export-Import Bank of China fast as total ODI. Also, the value of lead to economic and/or political said in early 2016 that it had started new engineering contracts signed tensions in countries party to the financing over 1,000 projects in by Chinese companies in the OBOR initiative. 49 OBOR countries. Most of the region has increased steadily – it existing projects are concentrated rose 36 percent year-on-year in 2016. in South Asia, Southeast Asia LARGE-SCALE IMPACT and Central Asia, given their Moreover, China established geographical proximity and close 56 economic and trade cooperation Since its launch four years ago, relationship with China, but there zones in 20 countries along the OBOR has gradually gained are investments in East Africa and route by end-2016, with investment traction with new projects and Southeast Europe also. exceeding $18 billion.

20 Marsh & McLennan Companies BRINK Perspective OBOR countries. The level and FIGURE 11 FUNDING MECHANISMS Sources: Oxford Economics, company annual reports and press releases quality of logistics and infrastructure is generally low, compared to developed countries. Infrastructure BIIN deficiencies mean high transport INSTITUTIONS AUTHORISED RECENT POSSIBLE LENDING CAPITAL SIE LENDING PER YEAR PER YEAR BY EARLY 2020S costs, which hamper market access, Multilateral developent banks cross-border trade and economic si Irstrctre B IIB development. Ne evepet B NB Silk Road Fund If China’s own experience is any Coercial banks estite ii ei te i r s i guide, better infrastructure and Polic banks i evepet B B greater regional connectivity should prtIprt B i I improve access of OBOR countries to the global market, better leverage comparative advantages and underpin long-term development. CHINA REPLACING to infrastructure spending needs OBOR infrastructure could further MULTILATERALS? in the vast OBOR region – the ADB estimates the annual infrastructure boost growth in an already rapidly growing part of the world. To provide development funding for investment needs at $1.7 trillion until 2030, for example. GDP growth in OBOR countries the OBOR, China launched three averaged 4.2 percent in 2014-16, new initiatives recently: the Asian Thus, the OBOR scheme is unlikely compared to the global average of Infrastructure Investment Bank to “crowd out” other international 2.6 percent. We estimate that the (AIIB), the New Development Bank development cooperation. region contributed 68 percent of (NDB) and the Silk Road Fund, global GDP growth in 2016, with with a total initial capital base of Asia’s contribution (including China) $240 billion. LIKELY IMPACT well above 50 percent.

While these new institutions OUTSIDE CHINA We estimate that by 2050 the OBOR have started to play an active role region will contribute 80 percent Responding to criticism that OBOR in project financing, most of the of global GDP growth, with China’s seems a solo act by China, President funding for OBOR projects actually share remaining broadly stable Xi Jinping instead describes it as a comes from China’s policy banks at around 40 percent and that “chorus.” This language is meant to and commercial banks. Based of the rest of Asia doubling from alleviate concerns abroad that China on the annual reports and public the current 15 percent to over will dominate the initiative and announcements by the “big-four” 30 percent. state-owned banks, we estimate projects. that together they have extended This fairly constructive projection We expect OBOR to support long- $90 billion loans to the OBOR of the OBOR region is subject term growth and development countries in 2016, while China’s to downside risks, including in the economies involved. If policy banks are also major lenders. global trade protectionism OBOR is managed well, better and, domestically, supply side infrastructure should facilitate trade Thus, bilateral financing from constraints. OBOR infrastructure, and investment, create new market China’s commercial and policy banks as well as regional trade and demand and contribute to global dwarfs multilateral financing, and investment collaboration, reduce development. OBOR-generated we expect that to remain the case in those downside risks. the future. infrastructure may, in particular, benefit some poorer countries, A previously published piece on Nevertheless, even the combined including in Central and South BRINK Asia by Tianjie delved into annual financing flows likely Asia, which have especially large the implications of the OBOR for to be generated by these and infrastructure gaps and often have China’s economy and global standing. other international multilateral difficulties financing new projects. institutions (such as the World This piece first appeared on BRINK Bank and Asian Development There is clearly much room for on June 13, 2017. Bank) are modest when compared developing infrastructure in

21 Marsh & McLennan Companies BRINK Perspective THE GEOPOLITICAL IMPACT OF “China is CHINA’S ECONOMIC DIPLOMACY not the only country that is BRINK Editorial Staff proposing huge cross-border international projects.”

The prevailing conventional The event, titled The Geopolitical wisdom of a singularly powerful, Impact of China’s Economic hegemonic China is too simplistic; Diplomacy, wove an intricate the interconnected geo-economics tapestry of competing political of today’s world, though often stark interests and subverted economic and abrupt, are woven from a set expectations to be played out of complex and nuanced political by a cast of nations hoping for a realities surrounding the execution reshuffling that might tip the balance of China’s economic diplomacy. of the region in their favor.

That was the uptake from a recent David Dollar, a senior fellow public forum, hosted by the at Brookings’ Thornton China Brookings Institution, in which a Center, began by laying out the panel of Asia experts made the case stakes: according to a recent that despite the enormous influence Asian Development Bank report, China exhibits across the globe developing countries in Asia need today, the story of Asia’s future to invest roughly $26 trillion into would be written by many Asian infrastructure by 2030, far more countries. than previously anticipated.

Although much of the event’s “In recent years, the rich countries conversation avoided China – as a group have not been doing focusing instead on other players very much to meet these needs,” such as Japan, South Korea, Dollar said. the United States and Australia – the economic superpower loomed over China, on the other hand, is well- the talk much as it looms, politically positioned to help developing and economically, over Asia. countries meet those needs,

22 Marsh & McLennan Companies BRINK Perspective Dollar said. “You’re seeing some Moreover, although Kawai Feigenbaum insisted current labor-intensive value chains moving acknowledged the expectation changes in the region were far more out of China,” he continued. “You that China would reshape the than “just a China story” or “just see Chinese construction companies international economic system an infrastructure story.” Instead, that do not have enough business at to be consistent with its interests, the region’s new connectivity was home. So I think from China’s point he pointed out that other, smaller indicative of Asia at large – not just of view this capital going out makes countries were the ones pushing for China – becoming more Central enormous economic sense.” change. China, instead, appeared Asian than Eurasian. These were to be pulling back in the interest of the first signs of a reversion back maintaining the status quo. to historical norms, and away from ‘NOT JUST A the “anomaly” of the past century CHINA STORY’ One example of this, Kawai said, – which had been instituted by were the efforts of Australia, Japan Western countries. In light of the Belt and Road and New Zealand to finalize large Initiative, China might appear free trade agreements despite a to be the strongest candidate to withdrawal of support from China THE US ON THE help fund infrastructure demands or India, the expected key players in BRINK OF ECONOMIC in the region. However, China’s the region. leadership in this area was disputed IRRELEVANCE “The US is backtracking, which is by Masahiro Kawai, the director- very unfortunate,” Kawai said. “But During his presentation, Kawai general of the Economic Research does this make China an aggressive raised the following question: “Does Institute for Northeast Asia. leader? […] China doesn’t seem to China want to challenge the existing “Internationally there are so many be taking leadership by opening its system and somehow change [it] initiatives, even for the Northeast economy and then embracing many in a way that is consistent with Asian countries,” Kawai said. other countries to consolidate a China’s overall political, economic, “Mongolia has its own initiative [free trade agreement] under [the and even security interests, or is called the Steppe Road initiative Regional Comprehensive Economic China [executing trade policy] in which connects Mongolia with Partnership]. That’s not what’s a way consistent with the existing neighboring countries and distant happening.” economic system?” countries,” Kawai said. “Korea has Evan Feigenbaum, vice chairman An underlying assumption of the Eurasia[n] Initiative, which of the Paulson Institute, reiterated this question, and of the event’s connects Korea with Eurasian this point, and suggested that Asian discussions at large, was that the US countries. And Russia has its own history could serve as a helpful guide had retreated from Asia: this had the initiative – Siberian transport for assessing the current geopolitical result of disempowering one set of system and Eurasian economic reality. economic elites, and subsequently partnership initiative [Eurasian empowering another. Economic Union]. And there are “[When China announced the Belt many other such projects driven by and Road Initiative] people said Dollar explained that the US and various national governments.” ‘Oh my god, China’s got this new big China had previously complemented strategic initiative, how are we going each other economically in the “China is not the only country that to react to this?’ as if connectivity region. The real question about is proposing huge cross-border in Asia had been invented in China, Asia’s future, then, is whether international projects,” Kawai said. invented in 2013, and like Athena China will fill the gap left by the US from Zeus’s head had sprung from and other Western powers whose the head of President Xi Jinping,” influence is waning. Feigenbaum said. “It’s easy to forget that for most of its history Asia was This piece first appeared on BRINK an astonishingly interconnected on March 13, 2017. place.”

23 Marsh & McLennan Companies BRINK Perspective CHINA-EUROPE TRAINS: A GAMECHANGER FOR HONG KONG BUSINESSES?

Wing Chu Senior Economist of Greater China Research Team at Hong Kong Trade Development Council

FAST EXPANSION FOR GREATER COVERAGE

China’s Europe-bound freight train service was launched in March 2011, with the first train setting off from Chongqing to Duisburg, Germany. As of August 2016, more than 2,100 trains have been dispatched via the Yuxinou (Chongqing-Xinjiang- Europe) International Railway.

Currently, the CR Express provides regular rail services to at least 16 Chinese cities, including Chongqing, Chengdu, Zhengzhou, Wuhan and Suzhou, stopping at more than 12 cities in eight European countries. Of particular interest is the fact that CR Express services have grown rapidly in the Since the launch of the China- As the CR Express service improves, past year, with increasing numbers Europe Railway Express (CR Hong Kong manufacturers and of mainland companies relying on Express), linking China with Europe traders could consider using rail rail to transport goods to Europe. by fast-track cargo rail, freight as an adjunct to sea transport to volume has increased substantially, develop inland market opportunities The CR Express provides not particularly in the past year. The CR along the Belt and Road routes in only direct railway transport to Express is of increasing interest to both Asia and Europe. Logistics Europe from China, but also a one- companies that want to transport providers could also strengthen stop service in cargo inspection, Chinese products to Europe cooperation with railway logistics quarantine and customs clearance, while tapping markets along the companies to connect with logistics thanks to the support of relevant Belt and Road routes, including networks in Hong Kong, so as to government authorities. manufacturers in western China further strengthen their niche in and companies in the coastal region international transport and their looking for an alternative to sea logistics in sea and air transport. freight. Some companies even take advantage of these freight trains’ speed and customs clearance facilitation to bring imports into the booming domestic market.

24 Marsh & McLennan Companies BRINK Perspective Notably, the technical specifications IT and other electronic products Generally, CR of the railway system and rail are now the major categories of tracks are different between China, export goods currently carried by express freight countries in Central Asia and the CR Express. Others include Europe. Trains need to change from household appliances, machinery trains transport one rail track system to the others and equipment, auto parts, when crossing the China-Russia food, clothing, general goods, cargo to their border, entering Central Asia and e-commerce merchandise. (countries such as Kazakhstan), and Although many e-commerce destinations arriving in Eastern and Western items are mainly transported Europe. However, such technical by air, they are being carried three times issues have been resolved owing to increasingly via the CR Express. the concerted efforts of the railway Imports mainly include wood faster than and shipping companies concerned. products, food, agricultural goods, Today, most logistics operators are auto parts and finished vehicles. shipping by sea. capable of monitoring the cargo during the whole process and Generally, these China-Europe provide the consignor with clearance freight trains transport cargo to on arrival at the railway terminus, their destinations three times faster warehousing and transshipment to than shipping by sea for one-fifth of the desired destination. the cost of transport by air. While rail freight is still more costly than sea freight, the CR Express can SUPPLEMENTING AIR work as an adjunct to sea and air transport, and rail connections AND SEA FREIGHT are likely to increase as more and more companies use rail services By helping companies to export to expand China-Europe trade. goods to Eastern and Western Europe, the CR Express is playing Europe-bound services from the an important role in China’s Belt Guangdong province have also and Road strategy and helping been launched, such as the service to strengthen bilateral trade and from Guangzhou to Vorsino in investment with countries along Kaluga, Russia via Manzhouli in the route. Furthermore, some Inner Mongolia, which began in logistics operators also provide August 2016. This was the second clients with transit services Europe-bound train service from the from the terminuses in Germany province, following the service from and Poland to neighboring Shilong, Dongguan to Duisburg, areas, effectively extending the Germany, which started operating coverage of the CR Express. in April 2016. According to China Daily, the line covers a distance of The CR Express was earlier used 11,500 km, taking about 14 days. primarily for transporting Chinese exports to Europe. But Chinese Clothing, footwear, computer companies are now increasingly accessories and electronic using the service to import goods equipment produced in the from Europe. In the first half of Pearl River Delta (PRD) region 2016, the CR Express operated were shipped using a standard 619 train services (a 150 percent 40-foot container. The railway increase year-on-year), of which company is planning to strengthen 410 departed from China, and Europe-bound train services from 209 returned (a 318 percent rise Guangdong, and is actively working year-on-year), representing on rail connections with Kazakhstan 51 percent of departures. and Uzbekistan in a bid to transport

25 Marsh & McLennan Companies BRINK Perspective more goods manufactured in the These developments will effectively PRD region and southern China to enhance the transport links markets in Central Asia and Europe. between China and countries in Asia and Europe and strengthen the capabilities of related logistics IMPLICATIONS providers of cargo transportation FOR HONG KONG and distribution. Under such circumstances, Hong Kong COMPANIES? companies may need to consider the feasibility of the further use The recent rapid expansion and of rail transport to enhance their increasing frequency of Europe- flexibility in expanding into bound rail services, and the Eurasian markets. Furthermore, significantly shorter lead time of logistics operators can strengthen 10-12 days for the fastest routes, partnerships and cooperation means rail has gradually become with the relevant railways, helping a viable alternative to sea and air to connect them to logistics and transport for export and import transport networks in Hong Kong, enterprises exploring European enhancing their advantage in trade opportunities. Meanwhile, the international transportation the related railway transport and logistics business. companies are actively working with countries along the CR Express This article first appeared on route to negotiate not only transit www.beltandroad.hk and BRINK on arrangements, but also the feasibility January 9, 2017. of stopovers to collect cargoes halfway on the route. This is to align with the current China-Asia CR Express service, which has freight trains departing from China and heading to Asian countries like Nepal, Kazakhstan and Uzbekistan.

26 Marsh & McLennan Companies BRINK Perspective CHINA’S BELT AND ROAD INITIATIVE: WHAT IT MEANS FOR MALAYSIA

Philip Teoh Partner and Head of International Trade and Shipping at Azmi and Associates Malaysia

in the ASEAN region, just after Singapore. Moreover, Malaysia holds the Strait of Malacca, which can serve as China’s gateway to the ASEAN Economic Community.

Besides being strategically well-positioned geographically in the ASEAN region, Malaysia also benefits from a particularly strong transport and logistics infrastructure and ecosystem that draws businesses.

Owing to these factors, Malaysia stands to benefit from the Belt and Road Initiative.

Chinese interest in Malaysia is already being witnessed in the form of the recent spate of investments Malaysia has been China’s largest based Silk Road Economic Belt and by established Chinese businesses. trading partner in the ASEAN the ocean-based Maritime Silk Road For example, Alibaba recently region since 2008, and it is its third Initiative – and includes two routes announced plans to set up a regional biggest Asian trading partner after stretching from China’s southeast distribution hub in Malaysia. Japan and South Korea. Bilateral ports and the South China Sea. One trade between the two countries, passes through the Indian Ocean and which grew at 4.4 percent in 2016, ends in Europe, while the other ends MALAYSIAN RESPONSE is expected to continue expanding. in the southern Pacific Ocean. TO THE BELT AND ROAD These economic bonds will be Both of these have ramifications for INITIATIVE further strengthened with Chinese Malaysia and Malaysian businesses. president Xi Jinping’s efforts to Malaysia’s attitude toward the enhance regional connectivity Belt and Road Initiative has been and maritime linkage through the WHAT MALAYSIA OFFERS generally positive. Prime Minister Belt and Road Initiative. China’s Najib Razak agreed in principle to activism on the world stage comes Malaysia is better placed than support China for the Maritime Silk at a time when America appears most of its ASEAN neighbors to Road at the Boao Forum for Asia to be pursuing a more isolationist embrace the opportunities created 2015 – the Maritime Silk Road will approach under President Donald by the surge of infrastructure establish ties between Malaysia Trump, and this can lead to a new development and trade deals and China’s Guangdong Province wave of cooperation between that come with increased in the country’s southeast. Malaysia and China. Chinese overseas investment and participation in these areas. Malaysia’s Transport Minister, The Belt and Road Initiative vision The overall infrastructure risk in Liow Tiong Lai, also indicated comprises two initiatives – the land- Malaysia is among the lowest that Malaysia had looked into

27 Marsh & McLennan Companies BRINK Perspective how it should prepare itself for the region, has already started China has developments relating to the participating in port projects Belt and Road Initiative, with in Sri Lanka – the Hambantota been seen as the emphasis being on ports, and Colombo Port City projects, railways and the aviation sector, for example – and the port in Gwadar vulnerable and seaports in particular. “We in Pakistan. already see this as an important when it initiative to benefit the world, and One example of the multi-layered ASEAN in particular,” Lai said. nature of these Chinese-led comes to the infrastructure projects is the Kribi Moreover, the wider Southeast Port project in Cameroon. The protection Asia is faced with a dearth of contract value for the first phase financing required for infrastructure of the deep-water port was set at of its trading development. ASEAN will require $568 million and the next phases of up to $110 billion in infrastructure the project will continue to expand routes in key investment each year through the port by building new shipping 2025 to fully address the region’s berths, with a capacity of over 100 geopolitical infrastructure needs – specifically million tons per year. There is other power, transport, ICT, and water and work underway to link the new areas. sanitation. Malaysia is no different port to major urban areas. It is said – its infrastructure spending is that the ultimate goal is to have an expected to grow by 9 percent a year urbanization master plan designed until 2025, and the government to modernize Kribi’s roads and is aiming to attract $118 billion of buildings. local and foreign private-sector- led investment by 2020. China has been seen as vulnerable when it comes to the protection of The Belt and Road Initiative can its trading routes in key geopolitical play a major role in helping Malaysia areas, especially the Strait of procure this amount of investment. Malacca. This anxiety is also known as the “Malacca Dilemma.” Since the Maritime Silk Road passes SECURING through the Strait of Malacca, it is TRADE ROUTES not surprising that the expansion of an international shipping port in Strategically located, Malaysia Malacca is being planned such that it is no stranger to foreign direct meets international standards. investments in its seaports, some of which are among the busiest in the The chief minister of Malacca, Idris world. As early as 2000, Maersk- Haron, acknowledged the urgency SeaLand had bought 30 percent of with which the state needs to build the Port of Tanjung Pelepas. More a new seaport terminal, and has said recently, in 2013, China’s Guangxi there is a lack of related facilities Beibu Gulf International Port in Malacca at the moment, where Group bought a 40 percent stake in more than 300,000 ships pass every Malaysia’s Kuantan Port Consortium year. On the other side of the Strait, from construction group IJM Group Chinese companies such as Tianjin for a total of $102 million. Port and China Harbour Engineering have recently shown interest in Meanwhile, China, which some financing the development of the believe is pursuing a “String of Kuala Tanjung Port in Indonesia, Pearls” policy to contain the situated close to the Strait of influence of the US and India in Malacca.

28 Marsh & McLennan Companies BRINK Perspective Malacca Gateway in the Southern Whether they are or not, Malaysia part of Malaysia has been earmarked will still benefit from the vast as a key port of call along the Belt and opportunities that will come about Road Initiative’s Maritime Silk Road. from the Maritime Silk Road, and The strategic masterplan of Melaka the expansion of the Malacca port Gateway’s development aligns with will only mark the commencement the principles of the Belt and Road of its participation in this new vision Initiative as strategized by China of the Belt and Road Initiative. This – “improving road connectivity, will also boost opportunities for promoting unimpeded trade, Malaysian businesses that are ready enhancing monetary circulation, to grasp opportunities emanating accelerating policy communication from the evolution of relations and increasing understanding and between the two countries. people-to-people relations.” This article first appeared on BRINK on March 23, 2017. CHINESE PLANS, GLOBAL IMPACT

The Maritime Silk Road is a plan of global proportions that is expected to impact 4.4 billion people across 65 countries, and is expected to boost annual trade volume between China and other Belt and Road Initiative countries to more than $2.5 trillion over the next decade. China insists that both the Maritime Silk Road and its investment in regional maritime infrastructure are just economically motivated.

29 Marsh & McLennan Companies BRINK Perspective IS CHINA PIVOTING TOWARD THE MIDDLE EAST?

Mirek Dusek Head of Middle East and North Africa, Member of the Executive Committee, World Economic Forum

Maroun Kairouz Community Lead, Regional Strategies, MENA at World Economic Forum

ONE BELT, ONE ROAD

Unveiled by President Xi in October 2013, the “One Belt One Road” (OBOR) initiative will direct considerable Chinese financial resources toward infrastructure projects across 60 countries. In particular, the economic belt component would aim to integrate countries that lie along the original “Silk Road,” running through Central Asia, the Middle East, and all the way to Europe.

Through OBOR, China is striving to achieve three objectives. On one hand, it hopes to stimulate the economies of trading partners to At this year’s World Economic Forum MENA region throughout the prop up demand for its exports. By Annual Meeting in Davos, Chinese past decade? establishing a land route for its wares, it would also seek to rebalance its President Xi Jinping declared his economy from the port cities on its intention to host the second Belt east coast toward its more deprived and Road Summit for international NEED FOR OIL western and southern provinces. cooperation, to which most countries In 2015, China overtook the US as At the same time, such a trade from the Middle East and North the world’s top importer of crude route would reduce its dependency Africa (MENA) have been invited. oil. Of the 6.2 million barrels per day on the Strait of Malacca for its (bpd) that China currently imports, international trade, through which This follows China’s first Arab Policy more than half are extracted in the flows an estimated 80 percent of its Paper, outlining the government’s MENA region. This has turned China oil imports. China would thus be at vision for an enhanced relationship into the top destination for several the mercy of a maritime blockade, with the countries of the Middle East. countries’ exports, including both should tensions escalate over the The document indubitably reflects Saudi Arabia and Iran. Underpinned South China Sea, for instance, the Middle East’s soaring importance by solid growth, and as a mounting grinding its economy to a halt. At the in Beijing’s eyes and could very well number of its citizens acquire heart of three continents, the MENA be a harbinger of its future plans. automobiles, its thirst for crude oil region would therefore constitute Indeed, in the decade to 2014, trade is not likely to be quenched anytime an indispensable element of that flows between the two sides have soon. In fact, the International strategy. surged by 600 percent. Energy Agency (IEA) expects its imports from the MENA region For this purpose, China has endowed But does this development indicate to double by 2035. The region is the New Silk Road Fund (NSRF) a Chinese pivot to the region? And believed to sit on half of the world’s with $40 billion, and the Asian what are the key issues around the proven petroleum reserves. As a Infrastructure Investment Bank intensifying relationship between consequence, China’s interest in its (AIIB) with $100 billion, with China and the countries of the stability is only likely to grow. a mandate to invest in partner

30 Marsh & McLennan Companies BRINK Perspective well emerge in this domain as well. FIGURE 12 JOURNEY TO THE EAST Sources: Natixis, ADB N.B. Climate-adjusted estimates Having recently abandoned 103 coal power plants, China’s leadership is BIR R BIIN increasingly focused on ameliorating its environmental conditions i ri by becoming a world leader in renewable energy. Ir re Likewise, according to the Ir World Bank’s Global Financial Inclusion Database, MENA has the Kit highest regional percentage of a tr population that is without access to Isre financial services, with more than pt ite ttes 85 million unbanked adults. At the r forefront of financial technology i (fintech), with trailblazing services offered by the likes of Alipay, Baidu, and WeChat, Chinese expertise countries’ infrastructure projects. more than they do the poor. The has the potential to become a AIIB’s board includes – among International Monetary Fund (IMF) gamechanger in helping the region’s other countries – the region’s two estimates that energy subsidies were poor bypass conventional banking rival heavyweights, Iran and Saudi worth 22 percent of regional public altogether. Arabia. In 2016, the AIIB provided revenue and 8.6 percent of regional $1.7 billion in loans, including GDP in 2011. $300 million of financing to expand A DEEPENING Oman’s Duqm Port and to lay the To manage this transition, RELATIONSHIP groundwork for the country’s governments will need to adopt first railway system. Given the more efficient systems for energy generation and distribution. China Having complementary interests relatively long return horizon for in the fields of energy, renewables, Chinese investors, their experience has become the world’s largest producer of solar electricity infrastructure, trade, and possibly in investing in areas with high technology, the cooperation between political risk, and MENA’s immense generation equipment. Given its geographic position, the MENA China and the MENA countries is need for long-term investment in states would be particularly well- only likely to deepen in the years infrastructure, this first loan could suited to benefit from Chinese to come. Still, with yet more room to be the forerunner of many more technology and know-how in the grow, this burgeoning relationship to come. field. With the leaps that technology has the potential to play a decisive has made in recent years, and the role in their quest for economic CHINESE EXPERTISE significant decrease in its cost, it will transformation and diversification. possibly become competitive even Chinese participation in the World AT WORK in the absence of subsidies in sunny Economic Forum on the Middle regions like MENA. East and North Africa on May As oil prices are expected to remain 19-21 in Jordan – as well as MENA subdued, MENA countries will be Additionally, being one of a handful countries’ participation in the compelled to wean their populations of countries that have not grown upcoming Annual Meeting of the off the costly subsidies bestowed weary of nuclear power plants in New Champions in Dalian in June upon them in the past. In particular, the wake of the Fukushima Daiichi – will be watched closely for any energy and fuel subsidies will not disaster in Japan, China is on track to telling signs of increased mutual only affect the state of their public triple its nuclear generation capacity engagement between the two sides. finances as their revenues from by 2020. With interest rising from energy proceeds dwindle, but are MENA countries, in particular This article first appeared on World also regressive in nature, which in the Persian Gulf, a mutually Economic Forum Agenda blog and means they benefit the well-off beneficial partnership could very BRINK on May 1, 2017.

31 Marsh & McLennan Companies BRINK Perspective IRAN: EUROPE EYES Complicating A NEW SILK ROAD matters for EU companies Moritz Pieper Lecturer in International Relations at the University of Salford wanting to deal with Iran: parts of the economy still subject to sanctions.

The cake is quite big, but everyone The enthusiasm is obvious. wants a slice. Italian prime minister EU high representative Federica Matteo Renzi visited Iran last month Mogherini traveled to Tehran last accompanied by business leaders month accompanied by business from the energy, transportation representatives and seven EU and defense sectors. It was a return commissioners – including those visit after the Iranian president, for transport, energy and industry Hassan Rouhani, had made Italy – signaling the high-level interest. his first destination in Europe on a German industrial giant Siemens, trip intended to drum up European the oil and gas company Shell investments in Iran. and French automakers Peugeot and Renault have indicated their Such investments are now possible, interest. Airbus secured a contract thanks to the implementation of with Iran for the delivery of the JPCOA nuclear agreement, 118 aircraft just two weeks after which lifts all UN-mandated nuclear sanctions were lifted. sanctions as well as EU and US economic, financial and banking sanctions over the Iranian nuclear NOT SO FAST… program. The path is clear for Iran to pursue a new engagement with The Iran rush is tugged back, the world. European businesses are however, by the persistence of eager to jump in, but it will be no sanctions not related to the nuclear easy trick to challenge the position deal, which can very easily apply to of Russia and China. European companies.

32 Marsh & McLennan Companies BRINK Perspective The US, in particular, will retain regulation because Chinese or the JCPOA agreement. It is unlikely secondary sanctions that target Russian subsidiaries of larger US Russia will face serious competition dealings with Iranians on their corporations are far less common. in this sector of the Iranian economy. Specially Designated Nationals List (SDN), a collection of individuals Chinese companies had been willing But it’s not a one-way street: With the US deems to be a risk on grounds to provide goods that Iran could no economic sanctions gone, the of terrorism, nuclear proliferation longer receive from the West. In prospect of increased Iranian oil or human rights. According to 2014, the Sino-Iranian trade volume supply to Europe could signal tough White House guidance, anyone totaled $52 billion (compared to competition on the European energy found to have had dealings with a Russian-Iranian trade volume market. This comes after the oil those on the SDN list would “put of only $1.6 billion and $10 billion price slump, which has strained the themselves at risk of being cut between Iran and the entire EU-28). Russian state budget. It means that off from the US financial system. During nuclear sanctions, China was any hindrance to growth in Iran’s oil This includes foreign financial Iran’s most significant foreign trade infrastructure, thanks to continued institutions, who would risk losing partner, exporting capital goods and sanctions, might be met with a sigh their correspondent account with engineering services and investing in of relief in Moscow. This does not US banks.” infrastructure projects. With nuclear mean that Russia is desperate to sanctions now lifted, China seems to prevent Iran from emerging as an European subsidiaries of US be aware that, whatever the obstacles energy competitor. But it does buy companies can get operating licenses for European firms, it might face time for Russia, and indeed Europe, for businesses in Iran, but will need increased competition. to prepare for a shift in global oil to “firewall” their US activities supply dynamics. from their foreign operations. Losing no time Chinese president This may prove to be a challenging Xi Jinping paid a visit to Iran in It’s a tough call for European requirement, given the intertwined January, signing a Sino-Iranian businesses. They can only challenge nature of companies and the banking comprehensive strategic partnership China’s position in Iran’s capital sector. It remains unclear whether and announcing 17 agreements in the goods and construction market in even emails going through US energy, trade and industrial sectors. as much as the complex sanctions servers could be considered as using Iran is important for China’s One architecture allows them. Russia the US to facilitate transactions. Belt, One Road initiative that would also stands in a stronger position join markets from China to Central as far as its “traditional” sectors of Complicating matters still further Asia and the Middle East. interest are concerned. The truth for European companies is the is that banks and businesses are extent to which parts of the Iranian risk-averse, and the ambiguities in economy will continue to be MOSCOW’S INTERESTS US financial legislation will feed this controlled by entities still subject concern. It ensures that the lifting to sanctions. For example, there Russian commercial interests in of sanctions is no “free for all,” but a are banks on the US’s SDN list for Iran concentrate on the restart of slow, tentative walk through a legal carrying out terrorism-related arms sales and the nuclear industry. minefield. transactions; construction, trading Russia has made it clear that it and transport companies tied to the was planning to capitalize on the This article first appeared on Iranian Revolutionary Guards Corps eventual lifting of arms embargoes The Conversation and BRINK on or telecom companies. from Iran. While the UN weapons May 13, 2016. embargo will only be lifted in five years, states can apply for UN RIVALS STAND IN authorization beforehand. THE WAY The nuclear industry is more These obstacles will leave European lucrative in the mid-term. firms struggling to catch up with Russia’s state-owned nuclear China, which has largely benefited company Rosatom has held a relative from western embargoes. Russia is monopoly position on the Iranian also well-placed in Iran’s nuclear nuclear energy market – having built energy market. Both China and Iran’s only nuclear power reactor in Russia are simply less likely to be as Bushehr – and is currently closely affected by the “foreign subsidiary” involved in the implementation of

33 Marsh & McLennan Companies BRINK Perspective CHINA’S BELT AND ROAD INITIATIVE: CAN EUROPE EXPECT TRADE GAINS?

Alicia García-Herrero Senior Fellow for BRUEGEL and Chief Economist for Asia Pacific at Natixis

In fact, Chinese authorities have begun to consider free trade agreements (FTAs) with Belt and Road countries. The issue is that EU countries have yet to be included. More problematic is that it is only possible for EU countries to collectively strike trade deals with China. This means that the chance for the EU to benefit from FTAs is slim.

If the Belt and Road Initiative focused on FTAs instead of infrastructure, the EU would be isolated from a sizable free trade area next to its borders. As one can imagine, this scenario is much less appealing than the previous one focused on infrastructure. Although there are many Among the many benefits of interpretations as to the ultimate improved connectivity, trade is THREE POSSIBLE objectives of China’s Belt and Road at the forefront. The idea that Initiative, there is one that nobody improved transport infrastructure SCENARIOS can deny: support of its exports. fosters trade is intuitive, but which When the transportation cost is countries win or lose the most reduced, the EU is the largest winner Indeed, the initiative seeks to depends partially on their distance of the Belt and Road Initiative from improve trade connectivity by from the improved infrastructure. upgrading transport infrastructure a regional perspective. Halving the across much of Eurasia. The In a recent Bruegel working paper, cost of railway transportation is undertaking spans a massive results show that 10 percent responsible for the large gains in geographic area covering as many reductions in railway, air and rail transportation within Europe, as 63 countries, accounting for maritime costs would increase particularly for landlocked countries. 60 percent of world’s population trade by 2 percent, 5.5 percent and If China establishes an FTA zone and 30 percent of global GDP. 1.1 percent, respectively. with Belt and Road countries, the This massive project is centered on EU – previously the biggest winner two main routes over land and sea. CAN THE INITIATIVE GO from the reduction in transport costs – now suffers slightly. Enhanced On land, the focus is on transport ANOTHER DIRECTION? and energy infrastructure. By sea, integration means that China and Belt and Road countries will investments in new ports serve as While the current focus is centered pillars for promoting trade. Heavy substitute EU trade with trade on infrastructure, there is another among themselves. investment will ease transportation way it may evolve: dismantling bottlenecks affecting cross-border trade barriers. trade, and thereby impact Europe massively.

34 Marsh & McLennan Companies BRINK Perspective FIGURE 13 REGIONAL TRADE IMPACTS OF REDUCTION IN TRANSPORTATION COSTS Source: Bruegel working paper

I N R

rpe rpe si Rest N te r

The Asia region then becomes the On the other hand, a free trade biggest winner, followed by non-EU agreement between China and Belt European countries, which also and Road countries – which leaves benefit from the elimination of out the EU – would hurt EU trade trade tariffs. slightly. The negative effects on the EU of a neighboring free-trade area Under a situation with both are much smaller than the benefits of improved transportation improved transport infrastructure. infrastructure and FTAs, most And a potential FTA would benefit Asian countries become the biggest Asian countries the most. winners since they benefit from both a reduction in transport costs Therefore, the effects of the Belt and the elimination of trade tariffs. and Road Initiative on Europe are Some EU countries also benefit considerable. Trade is only one of significantly, but less so than the many channels through which Asian ones. the initiative may affect Europe. Financial channels, such as FDI and portfolio flows, are also very relevant POLICY IMPLICATIONS and should also be studied. It goes FOR THE EU without saying: more research is needed. With the scenarios above, it may be in the EU’s interest to more This article first appeared on BRINK actively take part in the Belt and on March 7, 2017. Road Initiative. The EU is better positioned to take advantage of cheaper rail and maritime transport than Belt and Road countries financed by China. The EU clearly benefits from stronger trade links – and without an attached financial cost, at least for now.

35 Marsh & McLennan Companies BRINK Perspective About Oliver Wyman Oliver Wyman is a global leader in management consulting. With offices in 50+ cities across nearly 30 countries, Oliver Wyman combines deep industry knowledge with specialized expertise in strategy, operations, risk management, and organization transformation. The firm has about 4,500 professionals around the world who help clients optimize their business, improve their operations and risk profile, and accelerate their organizational performance to seize the most attractive opportunities. Oliver Wyman is a wholly owned subsidiary of Marsh & McLennan Companies [NYSE: MMC], a global professional services firm offering clients advice and solutions in the areas of risk, strategy and people. Marsh is a leader in insurance broking and risk management; Guy Carpenter is a leader in providing risk and reinsurance intermediary services; Mercer is a leader in talent, health, retirement and investment consulting; and Oliver Wyman is a leader in management consulting. With annual revenue of more than $13 billion and approximately 60,000 colleagues worldwide, Marsh & McLennan Companies provides analysis, advice and transactional capabilities to clients in more than 130 countries. The Company is committed to being a responsible corporate citizen and making a positive impact in the communities in which it operates. Visit www.mmc. com for more information and follow us on LinkedIn and Twitter @MMC_Global.

About Asia Pacific Risk Center Marsh & McLennan Companies’ Asia Pacific Risk Center addresses the major threats facing industries, governments, and societies in the Asia Pacific Region and serves as the regional hub for our Global Risk Center. Our research staff in Singapore draws on the resources of Marsh, Guy Carpenter, Mercer, Oliver Wyman, and leading independent research partners around the world. We gather leaders from different sectors around critical challenges to stimulate new thinking and solutions vital to Asian markets. Our digital news service, BRINK Asia, keeps decision makers current on developing risk issues in the region. c viret epitics ciet ec

BRINK Asia gathers timely perspectives from experts on risk and resilience to inform business and policy decisions on critical challenges in the region. It is the online news service of Marsh & McLennan Companies’ Asia Pacific Risk Center, managed by Atlantic Media Strategies, the digital consultancy of The Atlantic.

ctctrisic riescsi BRINK si itter BRINK si iei Copyright © 2017 Oliver Wyman All rights reserved. This report may not be reproduced or redistributed, in whole or in part, without the written permission of Oliver Wyman and Oliver Wyman accepts no liability whatsoever for the actions of third parties in this respect. The information and opinions in this report were prepared by Oliver Wyman. This report is not investment advice and should not be relied on for such advice or as a substitute for consultation with professional accountants, tax, legal or financial advisors. Oliver Wyman has made every effort to use reliable, up-to-date and comprehensive information and analysis, but all information is provided without warranty of any kind, express or implied. Oliver Wyman disclaims any responsibility to update the information or conclusions in this report. Oliver Wyman accepts no liability for any loss arising from any action taken or refrained from as a result of information contained in this report or any reports or sources of information referred to herein, or for any consequential, special or similar damages even if advised of the possibility of such damages. The report is not an offer to buy or sell securities or a solicitation of an offer to buy or sell securities. This report may not be sold without the written consent of Oliver Wyman.