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Next stop, Asia

By Peter Wong, Deputy Chairman and Chief Executive, The Hongkong and Shanghai Banking Corporation Limited

Peter Wong considers how China's belt and road initiative is truly linking up Asean, and the wider region

In the wake of more isolationist political thinking in the West, with many developed economies turning inward, China is reaching out, seeking stronger trade and investment links with its economic partners.

China's "One Belt, One Road" is a prime example of this reaching out policy. Under the initiative, China aims to trigger demand for materials and goods at home by investing in strategic infrastructure projects abroad, developing economic ties along its old Silk Road to Europe and along newer maritime links in and around Asia and as far away as Africa.

At its heart, the plan is to enhance global supply chains, primarily though debt-financed infrastructure projects, across more than 60 countries. China expects annual trade with these countries to be worth US$2.5 trillion within a decade – up from US$1 trillion in 2015.

Given the economic importance of the Association of Southeast Asian Nations to China, and its geographical proximity, a key focus of the belt and road initiative is Asean’s burgeoning economies. Formed in August 1967, the bloc is one of the most developed economic zones in Asia and beyond.

The year 2016 marked the 25th anniversary of the open-dialogue relationship between China and Asean. Economic relations between China and Asean economies have been growing strongly. By the end of May 2016, the two-way investment had exceeded US$160 billion, with Asean remaining a major destination for Chinese companies.

Bilateral trade has also increased massively, from US$7.96 billion in 1991 to US$472.16 billion in 2015. Asean and China are seeking to double their trade value, setting a target of US$1 trillion by the end of 2020.

The belt and road initiative will play a key role in this, further bringing together two of the world's most dynamic economic regions by strengthening economic linkages among the 10 members of Asean, as well as between Asean member countries and China.

If major Western economies are really going to roll back on their traditional global economic links, China's belt and road policy is set to fill some of the openings that will develop.

For Asean member countries, the initiative will help address an infrastructure deficit, and lift industrial development. While the formation of the Asean Economic Community in 2015 is bringing Southeast Asian economies together as a single market and production base, the belt and road initiative will offer further integration by developing physical infrastructure and a robust trade regime. The region will be ideally positioned to sit at the centre of global value chains.

For China, the belt and road initiative will provide an ideal platform to develop ties with neighbouring Asian countries while fostering the development of its own extensive high-speed rail network as a means to export high-end technology and services. With more than 20,000km of track laid, China has more highspeed railway than the rest of the world combined.

The effort has already made some practical achievements. Among the countries of Asean, Malaysia, Thailand, Laos and Indonesia have joint belt and road deals with China, mainly in railway construction.

There will be a new high-speed rail line running from southern China through Laos to Thailand's industrial eastern coast.

China has given a new pledge to cash-starved Laos for the construction of a US$6 billion railway project linking Laos' capital Vientiane to China's southern Yunnan (雲南) province by 2020. Once operational, the railway will be Laos' longest and fastest line, with an average speed of 160km/h and 60 per cent of the line being bridges and tunnels.

The network of rail links that will connect Singapore and Kunming (昆明) in Yunnan is already taking shape.

Beijing has also won the contract to build Indonesia's first national high-speed rail link – a US$5.1 billion, 150km rail project connecting the capital Jakarta to Bandung, Indonesia's third-largest city.

Infrastructure financing, until now, has been a challenge for most Asean countries. With the exception of Singapore – which has a highly developed infrastructure base – and to a lesser extent Malaysia, the nations of Southeast Asia are by and large confronting major infrastructure financing deficits.

Indonesia, for example, the largest economy in Southeast Asia, now spends just 2-3 per cent of its gross domestic product on its infrastructure. The need for better roads and railways for long-distance distribution and improved urban transport is quite evident.

Fortunately for China's belt and road goals, seed funding for infrastructure projects along the initiative has mainly come from the Chinese government, with support from the Chinese commercial banks.

China has also set up three new financial institutions to help fund the belt and road infrastructure goals: the Asian Infrastructure Investment Bank, the New Development Bank and the Silk Road Fund. Between them, these three institutions have a registered capital of US$240 billion, and they are starting to become active investors along the belt and road routes.

In addition, more than 300 Chinese- funded enterprises have been set up in 26 economic cooperation zones in eight Asean countries, investing a total of US$1.77 billion by October 2016.

Even these combined funding capabilities cannot fully meet Asia's immense need for infrastructure financing. The Asian Development Bank estimates that US$750 billion a year will need to be invested in Asia between now and 2020 as developing nations strive to raise their economic productivity and deal with rising urbanisation.

However, Beijing's drive and financial commitments are sizeable, and will have a significant impact across Southeast Asia. China's belt and road initiative is colossal in scale and ambition, setting out a vision for China’s investment in the coming years.

Implementing the belt and road agenda will require a high level of mutual cooperation, understanding and trust. But with careful analysis and handling of the regulatory, political and financial risks involved, it will provide Southeast Asia and China quality and longlasting economic growth – especially in these times of global uncertainty.

This original article was published on the HSBC web site. Please click to read the full article.

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