The 21st Century Silk Road – China's Belt & Road Initiative
China's "One Belt, One Road" has attracted widespread attention in Asia since 2013. But what is it about? What are the opportunities ahead? And what should foreign investors be aware of?
"One Belt, One Road" (OBOR) is a policy initiative of the Chinese government to promote economic growth in countries along designated routes running from China across Asia, through the Indian Ocean and the Mediterranean Sea all the way up to Europe. The routes span over 60 countries which currently contribute around 30% of the world's GDP in total.
The OBOR concept is rooted in the historic "Silk Road" trade network, which played a critical role in developing economic cooperation between China and other countries. It is hoped that OBOR will achieve the same objective in the 21st century.
What's the purpose of the OBOR?
According to the Chinese government, the key aims of the OBOR are:
- Policy coordination: to promote inter-governmental cooperation and assist policy exchange and communication;
- Facilities connectivity: to carry out infrastructure projects, e.g. relating to transportation and energy;
- Unimpeded trade: to encourage cross-border investments and reduce trade barriers;
- Financial integration: to develop the currency and bond markets in Asia; and
- People-to-people bonds: to facilitate cultural exchange through cooperation in academia, tourism, medicine, science and technology.
From a cultural perspective, it is worth noting that all of these objectives embrace harmony,which reflects the deep-rooted Confucian concept of He (harmony) in human relationships.
So, where's the investment potential?
In December 2014, China contributed US$40 billion to establish a "Silk Road Fund" to implement the OBOR initiative. The fund's first investment is the US$1.65 billion Karot hydropower project in Pakistan. The People's Bank of China heralded the dam a "great match" between the development strategies of the two countries. Other on-going projects include electricity and energy development and railway construction.
As shown in a PwC report published last year, the OBOR initiative creates ample opportunities across many sectors including transportation, logistics, construction and private equity. What is clear is that at the heart of the initiative is a commitment to improve people's quality of living through economic cooperation. Wang Yangzhi, the President of the Silk Road Fund, has summed this up:
"Infrastructure is a core focus area due to the connectivity requirements of OBOR, but there are many areas that are important such as transportation, power generation and water. All these are very close to people’s lives."
What should foreign investors be aware of?
With rapid growth in many economies along the Belt and Road, coupled with relatively low labour costs and tax benefits, the OBOR initiative is extremely attractive to foreign investors. There are, however, a number of issues for investors to consider.
For OBOR investors, it is important to understand the foreign nations' tax systems, which significantly affect the profitability and capital return of their investments. The terms of employment contracts with local staff should be carefully drafted such that local labour requirements are satisfied, for example in relation to the minimum wage and insurance cover. Foreign investors should also be aware of the cultural differences between local and overseas employees. Finally, it is critical that a suitable corporate structure is selected to comply with local legal requirements and accommodate the investor's business needs.
Nowadays, foreign investors enjoy international legal protection through various bilateral and multilateral investment treaties. These agreements provide protection against certain adverse actions taken by the local government. Typical protections include fair and equitable treatment of foreign investment and compensation for expropriation of the investor's property by the government. Subject to the terms of the applicable treaty, investors may also be able to bring a claim against the government through international arbitration.
With the development of OBOR, we can expect huge investment opportunities to arise over the next couple of years – and it will be exciting to see how the new Silk Road set up by China is going to change the world in the 21st century.