18 Jan 2018
The Belt and Road Initiative
By LehmanBrown International Accountants
Opportunities the Belt and Road Initiative can offer Foreign Investors
By building greater connectivity and developing nations, once completed, the initiative will make it easier for large multinationals and start-ups alike to reach new large consumer markets. It has been estimated that the growing middle class in Asia could number 4 billion by 2021 and following on from this (according to HSBC) 66% of the world’s population could be living in Asia by 2030. This will mean a continuously growing buyers’ market in Asia demanding luxury goods and services. It is worth noting that the initiative will reportedly be open to all nations and not limited by geography. Thus, the benefits of easy access to a growing market will be accessible to all investors regardless of their geographic background. Consequently, through the initiative this immense market will be accessible for all.
The Belt and Road Initiative could be a good investment for private investors due to President Trump’s move to back out of the Trans-Pacific Partnership (TPP). The action means the Belt and Road Initiative is likely to gain more popularity and momentum as it is aimed at providing a vast network for international trade similar to the TPP. As the US are starting to become more introverted there is gap being left on the world’s economic stage which will likely be filled by China. This view is supported by Louis Kuijs, head of Asia Economics at Oxford Economics in Hong Kong. By investing in the initiative’s developing countries, investors are investing in creating more buying power and establishing efficient routes to fully utilise these new markets.
The Chinese government are encouraging a mixture of foreign investment and domestic investment in Belt and Road projects. Various banks and funds such as The New Development or ‘BRICS’ Bank and The Asian Infrastructure Investment Bank (AIIB) are providing loans for such projects. In 2016 AIIB committed $1.73 billion USD to nine development projects along the Belt and Road. According to the Articles of Agreement of the Bank they will “provide or facilitate financing to any member, or any agency, instrumentality or political subdivision thereof, or any entity or enterprise operating in the territory of a member, as well as to international or regional agencies or entities concerned with economic development of the Asia region”. AIIB has three main requirements for financing projects: sustainable in operation, environmentally friendly and widely accepted by public society. According to a China-Britain Business Council (CBBC) report, “immediate key sectors are infrastructure, maritime and logistics, banking and financial services, professional services and energy. Further opportunities also exist in the agriculture, fishing, food processing, light equipment manufacturing, education, tourism and consumer sectors.”
Currently there are many large corporations who are in cooperation with Chinese banks and companies in countries along the Belt and Road for example BP and CNPC who in 2015 saw the highest record of oil production in Iraq since 1990. Chinese enterprises such as Changan, China Mobile and BCEGI Construction and foreign owned enterprises such as Pinsent Masons and NVC lighting are finding many opportunities for their service and expertise along the Belt and Road in aiding the development of the initiative.
Key Investment opportunities
Banking and Financial services
Firstly, with the implementation of BRI there will be a large demand for expertise in complex financial tools, the participation of financial institutions in BRI will mean long-term access to capital and a more liquid and diverse market. Thus, companies investing in BRI will need both traditional services e.g. loans and settlements but also complex financial tools e.g. investment banking, third party agency facilities, risk control and financial management. Furthermore, BRI will push RMB to expand thus creating the need for overseas financial centres. Environmental sustainability is very important for BRI and much of it needs to come from private investors. This creates opportunities for financial intermediaries to support financial institutions and governments in identifying, monitoring, supervising and evaluating green projects as information disclosure and risk control become more in demand.
Many banks such as the Bank of China (BOC) and China Construction Bank are issuing billions of dollars’ worth in BRI bonds. The bond market e.g. Panda and Dim Sum Bonds, offers early access for foreign and private capital. Growth in BRI bond markets is likely to attract new bond issuers beyond Chinese banks thus creating greater opportunities for foreign enterprises. With the initiative, there is an increasing demand for commodities trading. This is evident by BOC launching 2 offshore global commodity business centres in Singapore and providing £40 billion in financial services to support Chinese and Singaporean companies who want to invest in BRI. For other foreign investors, opportunities lie in providing input for the fostering of secure, efficient and robust commodity trading and RMB commodity financial innovation.
The immense size of BRI and the nature of there being much risk in investing in the initiative means there are many opportunities in this field risk management and insurers. Insurers can develop novel insurance products and services to aid companies investing in BRI. In addition, there are more opportunities for asset managers to act as collective financing mechanisms who can provide smaller or private investors access to large infrastructure projects. This is promising as much of the funding for the initiative is expected to be from private investors.
BRI investments require legal advice and services due to the complexities that emerge with operating in many of the BRI countries. Many countries along the Belt and Road have different policies and practices and so need specialised help to find a common understanding and follow the legal requirements. For example, Clifford Chance advised the Industrial and Commercial Bank of China, Bank of China, China Construction Bank Corporation and Export-Import Bank of China on £1.2 billion financing oil project in Jordan and Linklaters advised China Development Bank Corporation on the largest Chinese-led power project in Indonesia. In addition, many BRI countries are developing and thus have basic tax, accounting and audit regimes. However, investors must have an understanding of the differences. This provides the opportunity for foreign enterprises to aid Chinese enterprises in understanding local regulations and practices and assist them in following local tax and auditing laws. There are many opportunities for foreign enterprises in assessing investment environments and conducting feasibility studies as BRI requires strategic advice and practical business solutions. Examples of foreign companies who provided advice to Chinese parties includes JLT and PWC. China’s role in the shipping industry has grown and with it there are a multitude of legal requirements to be satisfied. A good opportunity for British investors lies in advising maritime services as English law is used in international maritime issues and processes. The size of this opportunity is immense given that China is currently producing 90% of the world’s standard dry cargo. BMT group and Pinsent Masons have already become involved in this prospect.
Infrastructure planning and development
Given the scale and nature of the initiative there are innumerable joint opportunities for international specialised companies and Chinese companies to build railways along the Belt and Road. Furthermore, there are numerous amounts of power generation and industrial development projects in BRI. Oil and gas pipelines as well as electricity transmission/distribution networks need to be sustainable and efficient and so need international specialists to aid these projects. In addition, water and waste management projects need specialists in city layouts, supporting regulatory frameworks, co-developing and operating the infrastructure. More infrastructure projects along the Belt and Road means increased supply chain manufacturing facilities and research centres in 3rd countries which provides many prospects for Sino-Foreign Joint Ventures. The development of the corridors increases the movement of goods, commodities and people thus requiring efficient logistics centres to cope with these ‘macro-flows’, DP world is an example of a company already invested in this project. In all the vast urbanisation projects across the Belt and Road there emerge many opportunities such as investing in education within these new cities.
Over half of the infrastructure funds along Belt and Road will go towards electricity supply thus meaning there are many opportunities in this sector. Areas in the ASEAN region have much gas and oil. There is thus, a demand for international expertise on marine environments, resource exploration, developments and optimal exploitation. The Keller Group are already involved in this opportunity. Similarly, coal/nuclear power generation requires legal, technical and operational/management support. Renewable energy projects are becoming more price competitive thus creating opportunities for smaller solar and wind power plants. In 2017 China announced a nationwide carbon trading market however, they need expertise on trading markets, carbon credit obligations schemes, regulatory frameworks and professional services that support planning and development. KPMG have already aided China in this area…
Please click to read the One Belt One Road full report.