July 10, 2017

Silk Road revamp creates potential for Chinese expansion

http://www.consultancy.uk/news/13549/silk-road-revamp-creates-potential-for-chinese-expansion



 15 June 2017 Consultancy.uk

China is set to invest trillions into regional economies as it seeks to improve its trade corridors, transform is economy and improve its cultural connection with its neighbours. The investment is largely set to revitalise the ancient Silk Road between China and the West. Investment last year totalled around $186 billion, representing around 2% of global investment demand from developing countries over the next decade.

In a new report from PwC, titled ‘Repaving the ancient Silk Routes’, the planned Belt & Road (B&R) investments are considered in light of planning as well as wider investment outlook and potential for businesses across the Silk Road region of China.

The Silk Road dates back more than 2000 years, when Chinese regional emperor Han Wudi incorporated its construction into plans to connect the region with the western empires and city states. The road was broadly successful, creating a corridor of information and trade between the provinces.

In 2013 President Xi Jinping announced plans to invest trillions in a revitalisation of the ground connection between China and regional and cross continental countries. The plan, called the ‘belt and road’ project, involves up to $4 trillion in investment over the coming decades, with up to 65 countries connected to China’s economic network through rail and other land transport options. The aim of the project, among others, is to improve international trade flows – as well as longer-term cultural and economic influence.

The B&R project has a number of primary and strategic goals for China. Key among them is to increase exports and facilitate trade, while addressing the country’s surplus in industrial capacity and enhancing its geopolitical sphere of influence across the region. The country also has a number of strategic goals, some of which correspond to its primary goals. These include the establishment of a global infrastructure capacity, internationalised and diversified currency risks as well as continue the country’s wider economic reform policy – which sees it move away from focus on manufacturing.

Demand for investment in infrastructure projects across developing countries between 2015 and 2025 is estimated to come in at around $10 trillion. Investment from China in B&R countries is set to hit a total of around $4 trillion of that during the project as a whole.

In 2016 Chinese organisations invested a total of around $186 billion into B&R countries. Policy banks invested the biggest segment at $110 billion, followed by Chinese commercial banks at $67 billion. The Silk Road fund contributed around $6 billion while multilateral banks accounted for $3 billion.

Belt and road projects averaged around $600 million each in the categories of construction, energy & utilities and transport – all up from the previous year – while social projects increased from around $100 million each to close to $200 million.

The project has various extensions. One of the major extensions is a railway connection between China and Europe, the plan for which was released in October last year. The connection, which passes through Kazakhstan and Russia, before entering Poland and Germany, saw the first train bring various goods, from homeware to clothes and socks, to western Europe, while heading east are precursor materials, and a range of foodstuffs.

The new connection plan included a link between Zhejiang in eastern China to Barking, East London, and saw the time for goods crossing the regions fall to 18 days, having been transported 12,000 km, a distance around half that of other options – while at the same time providing access to a range of stops along the way.

Region-wide investment

Another area of major investment comes closer to home, with various projects aimed at extending regional corridors, with plans for ten cross national highways and a high-speed railway included in the scheme. The rail project, with a $23 billion investment price tag, connects China with Singapore and travels through various countries in between. The railway project, which currently passes through five countries, is planned to be completed by 2026. Various agreements have been signed with regional players joined forces with China to develop the project.

One of the larger projects in the B&R project more widely is a $46 billion investment in Pakistan. The investment includes both energy and transportation development across the region. In total $34 billion is to be invested in energy, including various energy projects that will add around 1 GW of capacity in the form of fossil, as well as renewables to the grid in Pakistan.

In addition around $12 billion will be invested in various transportation projects, including 2,000 miles of railway that connects Kashgar to Gwadar, various new highways, a fibre optic network, as well as airport upgrades and port upgrades.

Commenting on the potential of the project for global businesses David Wijeratne, PwC’s Growth Markets Centre Leader, noted that the B&R initiative had already seen multiple stories of successful partnerships resulting in mutual benefits. However, Wijeratne also warned that, "companies need to fully understand the potential risks of infrastructure projects, especially those unique to B&R in order to prepare for success. Acknowledging that B&R projects are different, companies can enhance their chances of success by taking proactive actions.

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