China has taken the concept of connecting the world to a new level with the announcement of its One Belt One Road (OBOR) initiative in 2013, which aims to build physical connections among markets, to further enable economic ties.
Globalisation has certainly become the phenomenon of this century, bringing grand opportunities for economic development and cross-border trade for the world's emerging economies. One of the stellar examples of the benefits of globalisation is the rise of China, where economic liberalisation and an exporting boom paved the country's emergence over the past decade, and its status as the world's second largest economy.
China has taken the concept of connecting the world to a new level with the announcement of its One Belt One Road (OBOR) initiative in 2013, which aims to build physical connections among markets, to further enable economic ties. The grand vision takes a page out of the history books, reflecting an implicit revival of China's Silk Road, connecting close to 65 countries, across Europe, Asia and Africa through road, rail and maritime networks.
Though OBOR remains a vision in essence, since its inception, there has been significant progress in its related project agreements and future investments. The financial allocation made for this project by Chinese leadership in itself is testament to their grand ambitions in infrastructure spend. The Silk Road Fund allocates $40 billion of public reserves dedicated to this initiative, on top of the $50 billion collected by the newly formed Asia Infrastructure Investment Bank (AIIB) that China established in October 2014 along with 20 other nations. China Development Bank announced that it will invest more than $890 billion into more than 900 projects across the six economic corridors of the Silk Road.
Andrew Lumsden, partner at Corrs Chambers Westgarth, an independent law firm with an expertise in China highlighted the positive outlook on OBOR, especially for Chinese enterprises looking for outbound investment opportunities. "Parts of Western China are seeing this (OBOR) initiative as a unifying strategy for China's economic priorities, and are clamouring to get involved. I think in a lot of parts of the world, it's being seen pretty narrowly, as a device for Beijing to manage its overcapacity in the construction of infrastructure, but I think it's a lot more than that. It's an attempt from Chinese leadership to step out and lead in this area of infrastructure, in a broader cultural sense, where traditionally US and the World Bank have been leading."
James Cameron, Managing Director and Co-Head of Infrastructure and Real Estate Group, Asia Pacific at HSBC conveyed a similar sense of optimism. "OBOR has been a key focus for the bank, given our strengths in global connectivity and picking up major trade flows. It is multi-faceted and fairly nascent, but still very strategic, and putting the domestic and international goals into one strategic context. It has broader objectives in increasing connectivity, trade flows and investment - both outbound and inbound - as well as increasing financial liberalisation through those greater trade flows."
OBOR has been a key focus for the bank, given our strengths in global connectivity and picking up major trade flows.James Cameron, Managing Director and Co-Head of Infrastructure and Real Estate Group, Asia Pacific at HSBC
Currently, given the increase in M&A activity and increased Chinese outbound investment, a majority of the OBOR activity is led by China-based enterprises. Australia was the second largest recipient of Chinese direct investment between 2005 to 2015, with a 33 percent increase in investment to $11.1 billion in 2015, according to a KPMG report.
Nonetheless, the opportunity for recipient countries to benefit is equally as promising. Mr Cameron highlights that one of the benefits for international companies that have a China element to their infrastructure outlay, is that the connectivity of OBOR will give them access to the "competitive and comparative advantages" that China has to offer, including the lower cost of capital goods and quality of services.
Mr Cameron commented: "There is a key focus on partnerships, and the sustainability of investment over a period of time. For our client base in Australia, where there is an expertise in the infrastructure space, there is an opportunity to enter into joint ventures with Chinese partnerships. They have the opportunity to share knowledge, skill and expertise with Chinese enterprises, and also use these partnerships as a means of entering new markets in Asia Pacific or other regions."
Hastings Fund Management's acquisition of the port of Newcastle, through a joint venture with China Merchants Group for instance, is a key example of Australian companies trying to get their foothold beyond their borders.
Apart from the sharing of skills and opportunities for international expansion, joint ventures between China and Australia also provide Chinese businesses a positive branding and cultural front to leverage on, according to Mr Lumsden. The image and expertise that Australian brands can represent for Chinese firms opens the latter up for a broader investment scope. China has a big share in PanAust for instance, which is involved in a gold project in Northern New Guinea. Mr Lumsden continues that considering New Guinea's relationship with China, the Australian front helped get that deal and "there is considerable scope for this as a pattern of investment."
Australia's strategic location in the Pacific also poses a competitive advantage for Australian businesses reaching out for Chinese business partnerships. Xi Jinping's recent visit to Australia in May of this year officiated Northern Australia's inclusion in the Maritime Silk Road. The sale of the Port of Darwin to private Chinese investors will also provide China with access to the Indian Ocean, South Pacific and New Guinea. The acquisition of John Holland Group by China Communications Construction Company (CCCC), the largest international infrastructure and energy company, in April 2015 highlighted China's devout interest in gathering the expertise and brand history, to further expand its global infrastructure ambitions.
The optimism on the OBOR potential also brings with it practical challenges on quality implementation and investment. While China has allocated a huge sum of money to the development of these connections, "it will be difficult to find good investment" notes Mr Lumsden. Not only will skills and expertise in large infrastructure projects be amiss, there will also be corruption issues and inefficiencies to deal with some of the developing markets along the route. Corporations will have to deal with a delicate balance of political and economic dynamics of the extensive range of stakeholders along the route, for infrastructure opportunities to be fruitful.
Belt and Road Trade Route Map
Issued by HSBC Bank Australia Limited ABN 48 006 434 162 AFSL 232595.