In terms of geographical and economic scope, China's Belt and Road Initiative (BRI) has far exceeded initial expectations. And while the current coronavirus outbreak has caused business interruption affecting China as a whole, trade goes on, and it is going on specifically as a result of the BRI. Opportunities abound, and as more and more multinational corporations become involved in the BRI's various projects, treasury departments must be ready to take full advantage.
In November 2013, Chinese President Xi Jinping officially unveiled China's Belt and Road Initiative (BRI) – an ambitious foreign policy programme designed to develop trade infrastructure and connections globally. The proposed development serves as a homage to the historic Silk Road, which, 2000 years ago, was the most important trading network in the world. Flash forward to today and China's BRI programme now extends from the East to the West and from the Pacific to the heart of Europe, connecting 30 international organisations and 137 countries along its routes.
As the strategic economic vision behind the BRI has gained traction, this in turn has exposed multinational corporations – particularly those in commodities, infrastructure and machinery industries – to BRI-related transactions. Amid these opportunities, demand for BRI-related risk management, financial and banking solutions has necessarily increased. Treasurers looking to capitalise on China's global project, especially those entering new, riskier jurisdictions, must prepare for the journey.
Since its inception, the scope of the BRI has far surpassed expectations. Today, it touches as much as 65% of the world's population, covering half of the global gross domestic product (GDP), 75% of all known energy reserves, and a quarter of all cross-border goods and services trade. The range of jurisdictions involved has also evolved far beyond the original parameters. In January 2018, for example, China issued an open invitation for countries in South America and the Caribbean to join the initiative – a far cry from the historical Silk Road.
What's more, while the BRI is still primarily an infrastructure investment programme, the projects undertaken have come to encompass much more. Power generation, utilities, oil and gas pipelines, telecommunications and even social infrastructure – such as education, healthcare, software and innovation – each now constitute a key part of the project's vision. Opportunities along the route are continuing to grow.
As the project expands, opportunities for corporates are emerging outside of the traditional markets and across numerous sectors. Given the project's primary focus, a significant amount of work has been created for companies involved in the infrastructure sector. Corporates involved in the supply of raw materials and specialist parts, contracting or construction, and professional services, such as electrical, engineering, legal or insurance, can all capitalise on China's global project. Of course, while opportunities abound, corporates should ensure they have the necessary funding and risk mitigation tools in place.
Funding the project
So how is this ambitious project being funded? First and foremost, financing is being driven by the Chinese Government – with the project receiving significant backing from Chinese financial
institutions including the four state-owned commercial banks, the country's export credit agency Sinosure, the Export-Import Bank of China, and China Development Bank.
Outside of this domestic input, BRI projects have gained support from numerous non-Chinese industry bodies, including the European Bank for Reconstruction and Development (EBRD), German government-owned development bank KfW, the International Finance Corporation and the International Monetary Fund.
In addition, several multilateral financial institutions are associated with BRI investments, including major players such as the World Bank, the Asian Development Bank, the Asian Infrastructure Investment Bank and the New Development Bank.
Although such foreign financial institutional involvement is still limited, growth is anticipated – and is now even being promoted by China. This comes at a pivotal point, with China seemingly nearing the limit of the financing capacity it is prepared to commit, despite an estimated $1.9tr. worth of annual investment still required to fund the project.
Securing funding is just one piece of the puzzle for corporates looking to engage in the BRI. If third-party markets – such as France, Germany, Italy and Singapore – are to meaningfully increase their participation, businesses will want to ensure that the projects they engage with can properly manage the accompanying risks.
Many of the locations along the route have a relatively unattractive risk profile – making compliance a particular challenge. Foreign banks can play a crucial role in mitigating these risks, providing local, on-the-ground support and experience of the laws and regulations in various jurisdictions. This, coupled with the addition of a more diversified financial participation, can help strengthen BRI projects' resistance to geopolitical and financial risks.
Given the size and scale of many of the infrastructure projects involved, environmental, social and governance (ESG) factors also need to be taken into consideration. In April 2019, with the aim of mitigating some of these risks, 27 institutions signed up to a set of voluntary principles known as the Green Investment Principles (GIP), to incorporate sustainable development and low-carbon practices into the BRI. As of October 2019, the principles, which align with the United Nations 2030 Agenda for Sustainable Development and the Paris Agreement, have been signed by 33 financial institutions with a further nine supporting institutions.
A promising direction
As the scope of the BRI has expanded, so has the number of opportunities for foreign corporates and their partner banks. Even in countries perceived to have a higher risk profile, BRI projects can positively impact all participants – from those that work on or finance a project, to the local and wider communities that they affect. Of course, structuring the project in the right way will be key. Luckily, the ambition of the projects is being met with equally ambitious tools – helping to ensure that any challenges can be met, and the risks hedged.