How Belt and Road is taking shape | Standard Chartered

Belt and Road shines through the US-China trade dispute

Kelvin Lau — Wed, 21 Nov 2018 10:29:57 +0000

Launched just five years ago, the Belt and Road Initiative (B&R) has come a long way in a short time. While the rising risk of a prolonged US-China trade dispute looks set to reshape the global trade and investment landscape, we believe that it could fuel B&R’s growth and make it even more important for the long-term development of China and its partner countries.

Belt and Road connections continue to thrive

The latest data indicates that China’s trade with B&R partner countries grew 13.4 per cent in 2017, accounting for over a third of the country’s total trade. In the past five years, China’s direct investment in B&R has exceeded USD70 billion, with an average annual growth rate of 7.2 per cent year-on-year.

B&R’s presence has been felt even more by its partner countries. The continued expansion of South-South trade corridors and rising investment in regional connectivity along B&R routes are key antidotes to US-China trade uncertainty, in our view. China could stand to gain more allies and reduce its dependency on the US via B&R, as trade tensions could persist long enough to reshape the global supply chain.

"China's commitment to expanding Belt and Road in Africa is clear"

About 7 per cent of ASEAN and North Asia’s (ASA) foreign direct investment (FDI) in 2014-16 came from China, while investment from China accounted for 2-3 per cent of GDP in Laos and Cambodia. Meanwhile, China now absorbs a fifth of sub-Saharan Africa’s (SSA) exports, and the region’s imports from China have grown quickly in recent years due to capital-goods imports for B&R projects.

Expanding from East Africa

Beyond Asia, B&R is reshaping investment flows into SSA: Ethiopia and Kenya, which signed up for projects early, are now the top destinations for inbound contract work from China, whereas oil exporters Nigeria and Angola were the top destinations for such work in 2010.

China’s commitment to expanding B&R in Africa is clear based on recent evidence from the China-Africa Cooperation forum, at which Beijing pledged an additional USD60 billion of investment and concessional lending to the region. A notable takeaway from the event was an emerging shift in B&R’s focus beyond East Africa, with trans-regional infrastructure development becoming a key future theme.

Moving to the Middle East, North Africa, Afghanistan and Pakistan (MENAP) region, B&R’s impact has seen the region go from a trade surplus with China to a deficit in recent years due to lower oil prices and rapid growth in B&R-related imports from China. We believe MENAP’s oil exporters would welcome the prospect of China sharing the burden of infrastructure spending, as lower oil prices have hit government revenues.

"Five years of rapid Belt and Road expansion has led to some challenges, but none are insurmountable"

Challenges and risks

Of course, B&R’s fast-expanding scope and the large financial commitments required for its infrastructure projects are creating challenges and risks – but the trade war could be the catalyst that encourages China to address them.

A key growing pain has been the deterioration in trade balances of countries receiving B&R investment. These countries have increasingly needed to import capital goods for projects, but will only see returns at later stages of the investment cycle. Weaker external trade positions increase these countries’ exposure to currency volatility and reduce their policy support options.

B&R projects are also typically costly and often funded with substantial debt, especially relative to the size of many partner countries. The long gestation periods of such projects make debt servicing more difficult.

Worsening fiscal positions in B&R countries, the crowding-out of other viable investment, and rising country risk premia could all become part of a growing debt sustainability problem, although we see low systemic risk at the current stage thanks to bilateral debt relief offered by China.

"If anything, we believe the US-China trade dispute could play a key role in bringing all Belt and Road parties together"

Clearly, no amount of debt relief is enough if countries involved in B&R do not ensure that a project is commercially and socially viable. Improving the transparency of the deals encourages market scrutiny.

We think China should also rely less on bilateral resolution of debt issues, as this may further strain relationships. Rather, China may benefit more from aligning its policies with multilateral conventions, such as having a Paris Club-like collective approach to handling distressed debtors. China could also help domestic companies involved in B&R select appropriate projects and better manage related risks.

US-China trade tensions are unlikely to go away any time soon. In the meantime, prolonged uncertainty is likely to impede global growth, reshape global supply chains, and forge new geopolitical rivalries and alliances. Five years of rapid B&R expansion has led to some growing pains and exposed some inherent challenges, but none are insurmountable, especially if China is to commit to a more transparent and multilateral approach.

If anything, we believe the rising US-China trade dispute could play a key role in bringing all B&R parties together via closer trade and investment links. China gets to cement its new leadership by driving globalisation, while B&R partner countries are likely to get much needed boosts to their infrastructure, production capacity and general competitiveness.

How is Belt and Road making its presence felt?

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An optimist’s view on climate-friendly infrastructure

Vasuki Shastry — Fri, 08 Jun 2018 09:13:22 +0000

In developed countries, we tend to take infrastructure services for granted. It’s easy to forget, when living in London, Washington, or Singapore, how much lies behind the simple act of switching on the lights.

But as a young person growing up in India in the 1960s, I knew what it was like to live with rampant electricity shortages and terrible roads. It was easy to complain about it, and we did. It seemed, then, that the solution was simple: government should simply cough up the money, get to work, and build the infrastructure.

But there was a lot more we didn’t think about. Behind good infrastructure systems lie much more than concrete, pipes and wires. There are other building blocks as well, such as sound policy, good regulations, viable institutions, and fruitful interactions between the public and private sectors.

I realised this when I moved to Singapore in the 1990s and saw first-hand what a difference these elements make. Much of Asia shared India’s infrastructure challenges, and Singapore seemed to be one of the first countries in the region to pull all the pieces together.

"All infrastructure can be made more climate friendly"

Vasuki Shastry Global Head of Public Affairs and Sustainability

Singapore’s government was focused; it did not approach infrastructure as a patchwork endeavour. Instead, it integrated public-private partnerships with national planning in a way that did not overly burden public finances. In a word, Singapore nurtured infrastructure development.

Today, in my role as Global Head of Public Affairs and Sustainability, I have witnessed a similar, nurturing approach taking root around the globe. We are an emerging markets bank operating in Asia, Africa, and the Middle East. Long-term financing for infrastructure is an essential part of our mission, especially in helping countries transition to low-carbon economies. Our work depends, now more than ever, on fruitful international partnerships.

Public finance and developmental finance are the traditional bedrock of infrastructure financing, but in developing countries, where the need for infrastructure funding tends to far exceed the available sources of public finance, these need to be supplemented from private sources.

There is rising interest in green finance, which can help get renewable energy projects like wind farms off the ground

Planning with climate in mind

I recently took part in a panel discussion run by the Global Infrastructure Facility (GIF), a partnership housed within the World Bank Group, which facilitates private sector investment in infrastructure projects in developing countries. One of the discussions concerned climate-smart infrastructure – an issue which has grown tremendously in importance in recent years.

As floods threaten coastal communities, storms increase in frequency and severity, and centuries-old arctic ice melts away, political leaders must see climate change as a serious public policy risk. And they need support from the international community.

The panel discussion showed that such support is at hand. It was refreshing to see public and private players wrestling with the same issues from the same standpoint, in a collaborative way rather than being at loggerheads. There is agreement, for example, that regulatory incentives, such as in tariff policy, are necessary to spur investment in infrastructure.

Innovative approaches, such as blended finance combining grants, concessional loans, or equity financing, are needed. I have been particularly struck by the rising interest in green finance, which is growing in importance as an asset class. We need to define more precisely what green bonds are and how to ensure their integrity as their use grows.

I have seen tremendous appetite for financing infrastructure that tackles climate change head on. All infrastructure can be made more climate friendly, whether we’re talking about renewable energy or higher quality, more energy efficient infrastructure assets, like green buildings or transportation systems. I believe that investors will be willing to pay a premium for green infrastructure, whether directly or through financial instruments such as green bonds.

"As difficult as the challenges of climate-friendly infrastructure are, my prognosis is positive"

Vasuki Shastry Global Head of Public Affairs and Sustainability

The right players are on board

The GIF is helping bring climate-friendly infrastructure into the mainstream. It brings much more than grant financing to the table. Its projects bear the stamp of quality from the World Bank and harness the institution’s extraordinary convening ability, which brings governments, financiers, and development institutions to the table. It provides structure, knowledge and advice that accelerate the complex process of making climate-friendly infrastructure a reality in the developing world. International banks like Standard Chartered can help by assessing and structuring financing for projects in their risky pre-commissioning stage.

As difficult as the challenges of climate-friendly infrastructure are, my prognosis is positive. The right players are talking about the right issues and have the resources and drive to push climate-friendly infrastructure forward. Environmental and social standards are front and centre in the discussion, and national development strategies are in sync with the needs of the private sector.

Five ways Belt and Road is taking shape

Lan Shen — Thu, 30 Nov 2017 16:59:35 +0000

China’s Belt and Road (B&R) initiative – the ambitious project to build infrastructure and expand trading relationships along a new Silk road – has made significant headway in the past four years, and is now well into the implementation stage. So far, 20 per cent of investment in B&R has been in power and 19 per cent in railways, followed by roads, pipelines and other transport. With China’s government prioritising B&R as a key initiative to help open up its economy, here are five trends that show B&R is taking off in a big way.

1. China’s trade with B&R countries has hit a new high

Between 2014 and 2016, trade between China and the countries along the B&R exceeded USD3 trillion, and that momentum has continued into 2017, despite subdued growth in global trade. In the first half of this year (H1), China’s trade with B&R countries totalled USD512.2 billion, up 13 per cent year-on-year. That figures constitutes 26.8 per cent of China’s total trade in H1, which is a record high.

2. Cross-regional cooperation has stepped up a gear

China’s goal to form a more integrated market and support trade connectivity among B&R countries is gaining significant momentum. Currently, 64 nations and dozens of international organisations are participating in the B&R initiative, which is expanding its coverage to more countries in Europe. The B&R and BRICS summits held earlier this year have also solidified policy coordination on cross-regional cooperation for the initiative.

Meanwhile, the Chinese Government has signed cooperation agreements with more than 40 countries and international organisations in relation to B&R, and expanded free-trade agreements with B&R countries in Europe and Asia.

3. Foreign investment is surging

B&R has accelerated growth in China’s foreign direct investment (FDI) flows, which were the second-largest (after the US) among single countries in 2015 and 2016. China’s FDI in B&R countries reached USD129.4 billion in 2016, rising 12 per cent year-on-year and accounting for 9 per cent of China’s total. The value of newly signed contracts between China and B&R countries surged to 36 per cent to USD126 billion last year, and the value of completed projects in B&R countries grew 9.7 per cent to USD76 billion.

"China’s investment in B&R countries could reach about USD300 billion by 2030, more than double the current level"

With China’s cross-border capital flows now more balanced and exchange rate expectations anchored, we expect the authorities to unwind some restrictions on capital account transactions in 2018, supporting the strong momentum of China’s FDI in B&R countries.

4. China is more connected to Europe than ever before

A cross-regional network of railway, port and pipeline projects is taking shape. For example, the China-Europe Railway Express has operated 4,000 trains, covering 27 cities in 21 provinces in China and 29 cities in 11 countries in Europe as of June this year. While infrastructure bottlenecks in some B&R countries are impeding economic development, the need for new projects remains high.

We estimate that China’s investment in B&R countries could reach about USD300 billion by 2030, more than double the current level, and expect these infrastructure projects to yield economic returns and development benefits over time.

5. B&R is gaining interest from across the board

Interest in funding B&R initiatives is coming from a wide variety of parties, not just financial institutions such as the World Bank, but also multilateral development financial institutions such as the Asian Infrastructure Investment Bank (AIIB); investment cooperation funds such as the Silk Road Fund (SRF); China’s policy banks; commercial banks, both Chinese and foreign; and China’s export insurance company. The AIIB alone has provided USD2.8 billion for 18 B&R projects, and the Silk Road Fund has completed contracts for 15 projects.

We expect ‘development financing’ and commercial banks to play an increasing role in meeting the financing needs of B&R projects, especially because China’s Government is promoting development financing as a way to integrate funding resources, bridge state and market interests, and operate independently of government subsidies.

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China’s Belt and Road – don’t miss the opportunity

Patrick Lee — Mon, 20 Nov 2017 10:16:29 +0000

China’s Belt and Road (B&R) initiative is an ambitious undertaking that has the potential to reshape the global economy and transform world trade.

Many governments, multinational development organisations and international corporations welcome the opportunity to support the series of cross-border infrastructure projects.

With over 60 countries and 4.4 billion people included in the route passing from Asia to Africa, covering a third of world GDP, the economic and financial benefits of B&R are likely to go beyond the countries getting new bridges, railway lines and roads.

"Corporations are doubtful that the initiative is relevant for organisations not in the business of building airports and roads"

Countries such as Singapore, which are well positioned along the Silk Road, will form crucial links between China and other countries along the route, helping drive B&R. But many corporations are either unsure of how they can be meaningfully involved or are doubtful that the initiative is relevant for organisations not in the business of building airports and roads. Others are concerned about the risk-return trade-offs of such investments, as they come with long payback periods.

These concerns are not without merit. It is important that organisations conduct proper due diligence and risk assessments before embarking on any venture. However, it is also critical that businesses, regardless of size and types of expertise, proactively seek B&R opportunities or they risk being left behind.

The risk of being left behind

China’s mega project is less about the hard physical aspects of infrastructure than the connecting of businesses and populations. Instead of focusing on pure infrastructure ventures, companies need to consider the business opportunities better-connected B&R countries can offer, as the spillover effect is simply too large to ignore.

"Collaboration and competitive differentiation are key"

Increasingly, organisations across Asia need to view B&R as a business enabler in a region facing an ageing population and increased youth migration. Evolving demographics and urbanisation are expected to transform consumption patterns, changing the way goods and services are delivered as innovation takes shape.

For companies to take advantage of opportunities provided by B&R and changing demographic trends, collaboration and competitive differentiation are key.

Establishing your competitive edge

Smaller companies can partner with bigger conglomerates on B&R projects which the former may otherwise not be able to secure or have the resources to take on singlehandedly.

And instead of competing head-on with Chinese companies with a greater advantage in capital-intensive construction projects, businesses with less construction expertise should focus on their competitive advantages. For businesses in Singapore, this includes competing in areas such as intellectual capital and local infrastructure-related consultancy services, such as designing policy frameworks and structuring projects to ensure appropriate returns on infrastructure investments.

China’s plan of a digital Silk Road, which requires the growth of telecoms infrastructure and networks, will also provide opportunities for online retail and digital businesses, as widespread access to internet services will pave the way for greater cross-border e-commerce.

Brokering deals

Asian countries like Singapore, with their well developed financial capabilities, are likely to become important partners for China’s overseas infrastructure plans. Their renminbi capabilities will provide alternative products to major-currency funding options. Given its financial hub and shipping centre status, Singapore can also broker both capital and trade deals between China and ASEAN.

"The Belt and Road path will require an open attitude and a global vision"

The B&R path ahead is worth travelling. The journey will require an open attitude and a global vision but as long as businesses are able to identify their niche and strengths, the B&R will present more opportunities than can be imagined.

A version of this article first appeared in Singapore’s Business Times in November 2017.

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The chance for banks to show their worth

José Viñals — Wed, 06 Sep 2017 08:00:27 +0000

Ever since the global financial crisis, international banks have been operating in a challenging environment. We have experienced a decade of lower economic growth, subdued world trade, low interest rates, stricter regulation and increasing competition. Recent political controversies about globalisation and a rise in protectionist rhetoric – especially in the West – have further complicated the situation.

Yet we should not let the existence of such challenges obscure when things are changing in a more positive direction. Economic forecasts have been upgraded for the first time since the financial crisis, with global growth projected to improve this year and next and world trade accelerating to advance faster than global output.

Although the US has withdrawn from the proposed Trans-Pacific Partnership (TPP), protectionist rhetoric has not, so far, translated into substantial actions that would undermine the existing global trade system.

Change of tone

The Federal Reserve has already started to raise interest rates in the US and other major central banks are considering starting to normalise monetary policies.

There has also been a willingness of international regulators to reconsider specific regulations that may have led to adverse unintended consequences. Banks are considerably stronger, with more capital, and are investing in new technologies to become more efficient and provide better services.

But let us not be complacent. In many advanced economies real wages are stagnant, productivity is weak and trend rates of growth are lower than before.

"There is more to do to ensure ethics and the right values are deeply embedded in banking"

There are also geopolitical uncertainties whose exacerbation or materialisation would lead to a decline in confidence and adverse economic and financial consequences.

Finally, there are risks stemming from the normalisation of monetary policy in an environment of very low financial volatility and elevated market valuations. A faster than expected withdrawal of monetary accommodation in the US or a premature tightening in Europe or Japan could undermine the global recovery, provoke sharp market corrections and adversely affect emerging markets which are more leveraged or exhibit weaker fundamentals.

Achieving sustainable growth

The question we now face is twofold. First, given these uncertainties, what should the authorities do to put growth on a stronger, more sustainable footing? And second, what can international banks do to contribute to this goal?

Policymakers in both advanced economies and emerging markets should continue to strive to implement a sensible monetary and fiscal policy mix, including measures to safeguard financial stability and much needed structural reforms. It is also vital to preserve the existing multilateral cooperation framework that has served the world so well.

"There are established links between the global economy, international banks and trade which are fundamental to providing prosperity"

We, international banks, must continue to enhance our own performance and tackle our own challenges to better support global growth. We must continue to advance our internal transformation to establish business models that deliver sustained economic value. Our financial strength, culture and controls have all been improved but there is more to do to ensure ethics and the right values are deeply embedded in banking. This is critical to regain the loss of trust in banks by society as a result of the crisis.

We should not forget that there are established links between the global economy, international banks and trade which are fundamental to providing the growth and prosperity on which the world depends.

The economic recovery from the financial crisis is a classic example. The recovery has, to a large extent, been driven by activity in emerging markets, particularly in Asia. Latterly, growth in Europe has picked up and the US economy remains strong. But the role of Asia in supporting world trade is critical and a genuinely historic development.

Belt and Road – boosting world trade

China, a leading world economy, is overtaking the US to be the driver of world free trade. It is the world’s mega-trader. China’s share of world trade rose to nearly 14 per cent in 2016, up from close to 9 per cent 10 years ago.

The US may have pulled out of TPP, but China has pressed on with attempting to finalise its own regional agreement, the Regional Comprehensive Economic Partnership (RCEP). This covers countries amounting to about a third of global GDP and will substantially benefit manufacturing by removing tariffs on goods. While these benefits might not be as large as those TPP offered, they are very welcome.

The biggest Chinese initiative is, however, the Belt and Road (B&R), a potentially major force to boost world trade and investment and to foster globalisation by deepening links between East and West. China has signed co-operation agreements with over 30 countries along the B&R route and six key trade corridors, with economies along the route accounting for about 60 per cent of global population and 30 per cent of global GDP.

"A progressive series of market-friendly reforms over the last decade have improved economic governance"

Fortunately, China is not alone in embracing economic reform. A progressive series of market-friendly reforms over the last decade have improved economic governance and made economies and financial systems more resilient than they were in the crisis of the late nineties.

That said, many emerging economies do need to address outstanding vulnerabilities, notably those derived from the significant increase in corporate and household leverage in recent years. China stands out, with corporate debt of more than 160 per cent of GDP. The authorities recognise this, and are taking steps to address it.

In advanced economies, while financial systems have become stronger and budget deficits reduced, there has been insufficient focus on enhancing growth and productivity through structural reforms and investment, especially in infrastructure, R&D and education.

Do banks have a social purpose?

The role for international banks in this environment is vital. We are able to support world trade and investment, by lending our expertise to clients and governments and providing the financing to corporates needed for a growing economy.

International banks support exports by facilitating access to finance and providing products that exporters need, such as letters of credit to overcome credit risk and derivatives to hedge currency risk. This link between international banks and cross-border trade, which is itself an important driver of investment and economic growth, is absolutely fundamental to understand our role.

"We must continuously work hard to put our own houses in order, including deeply embedding a culture of ethical banking"

Bankers are often asked; what do they do that is socially useful? The answer is simple. We support the real economy, by financing trade and investment to foster economic growth and development. But we do not take that role for granted. In order to accomplish our goals for our own businesses, our clients and the societies where we operate, we must continuously work hard to put our own houses fully in order, including deeply embedding a culture of ethical banking.

A version of this article originally appeared in The Banker, a Financial Times magazine, on 1 September 2017.

Belt and Road – why the UK will gain

Sam Xu — Thu, 22 Jun 2017 08:00:54 +0000

As one of the world’s biggest renminbi hubs outside of China, the UK stands to play a pivotal role in the Belt and Road (B&R) initiative.

Chinese investors, according to our conversations with clients, are not that concerned about Brexit and are eager to reinforce trade ties with the UK.

Since its launch in 2013, B&R has achieved steady progress and global influence, amassing project contracts worth USD926 billion in over 60 countries, with the UK serving as a key financial hub. Most banks in the West, including Standard Chartered, now use London as their renminbi centre.

Golden opportunity to strenghthen ties

B&R, which spans 65 countries across Asia, Africa and Europe, will boost the renminbi’s
internationalisation by encouraging its use in both trade and financial transactions.

The UK has already significantly contributed to China’s grand infrastructure project by becoming the first major European country to join the Asian Infrastructure Investment Bank, which focuses on projects across the Asia-Pacific region, including B&R countries, unlocking opportunities for British companies.

In global money centre terms, London’s expertise and financial infrastructure is rivalled only by New York, and the UK’s share of the offshore renminbi market already outpaces the US’ by some margin – 14.6 per cent versus 4.6 per cent respectively, according to our index.

"Finance is the lifeblood to sustain Belt and Road"

The UK government described B&R as ‘an opportunity to strengthen ties’ with China during a recent trip to the country. The appetite to trade more with the world’s second-largest economy could help cement London’s position as the world’s top financial centre after Brexit, bringing a boost to the UK.

Finance is the lifeblood to sustain B&R and effective risk management is vital to encourage investment. With its expertise and financial infrastructure, the UK is in a strong position to benefit hugely from B&R, especially as it seeks to increase trade ties with China post-Brexit.

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China’s Belt and Road gains traction

Lan Shen — Fri, 02 Dec 2016 15:34:56 +0000

Whilst still a confusing concept to some in the West, China’s Belt and Road (B&R) initiative – launched three years ago – is now gaining significant traction.

The ambitious project – effectively linking trade in around 60 Asian and European countries along a new Silk Road – is China’s most important strategic initiative, and a crucial component of President Xi’s foreign policy.

China has now signed project contracts worth USD926 billion with over 60 countries along B&R. A series of cross-border infrastructure projects are in construction, such as a new China-Laos railway, a highway in Pakistan and a port in Vietnam.

"China’s infrastructure projects will expand quickly to more countries and regions"

So far, China’s infrastructure projects are mainly in Southeast and Western Asia, but we believe they will expand quickly to more countries and regions. We also expect more Chinese companies and private funds to join B&R projects in the future, provided the government-led projects prove successful.

Becoming a major capital exporter

Already, the B&R initiative has boosted trade and investment considerably. Trade between China and countries along the land and sea-based routes exceeded USD1 trillion in 2015, a quarter of China’s total trade value. China’s exports to B&R countries now exceed those to the US and the European Union (China’s top two export destinations), and the gap is widening.

China has developed over 50 overseas economic and trade cooperation zones with countries along B&R, and has expanded its free trade zones trial from four to seven provinces, including inland regions, which will help push B&R investment projects, simplify cross-broader transactions and improve trade liberalisation.

B&R has also accelerated China’s shift from being the world’s biggest goods exporter to becoming a major capital exporter. China’s outbound direct investment (ODI) to countries along B&R grew 23.8 percent year-on-year in 2015, and was up 60 per cent year-on-year in the first half of this year. We expect China’s cumulative non-financial ODI to reach an impressive USD2 trillion by 2020, more than a doubling of end-2015 levels.

Rallying the renminbi

Another important effect of B&R is internationalisation in the Chinese currency. So far, China has expanded its bilateral local-currency swap programmes to 21 countries along B&R, granted renminbi quotas to institutional investors in seven countries, and set up renminbi settlement banks in eight countries. These steps have helped renminbi trade settlement increase to more than 25 per cent of China’s trade in early 2016, from a mere 5 per cent at the beginning of 2012. Renminbi trade settlement is set to be boosted further as Chinese companies pursue opportunities along B&R.

New financing mechanisms, set up by China, demonstrates the leadership’s strong commitment to B&R. China has encouraged commercial banks, quasi-official regional cooperation funds and private capital to participate in B&R projects, to boost limited official resources and make projects more commercial.

The Asia Infrastructure Investment Bank, New Development Bank and Silk Road Fund, together with China’s policy banks, have taken the lead and started to participate in cross-border investment projects.

Overcoming obstacles

Despite the progress, obstacles to the B&R initiative persist. Projects in some countries have been suspended or postponed, highlighting the need for China to address concerns about outcomes and costs. B&R is not a foreign aid programme, but a commercial project which requires participating countries to make a long-term commitment and contribute investment.

The Chinese leadership has called for better coordination among participating countries, but, to achieve this, China will need to articulate clearly the mutual economic benefits of the initiative, and demonstrate through existing projects that B&R will create jobs, improve trade connections and improve living standards.

Meanwhile, the Chinese companies leading the investments need to gain more experience and knowledge in operating and investing in B&R countries, navigating debt, foreign exchange and geopolitical risk.

These risks can be mitigated, as long as companies conduct project assessments and implement appropriate risk management before operating – using credit insurance protection and overseas investment service platforms to help manage the projects. We think China could make it easier for private companies to control their risks, by encouraging multilateral institutions to participate in projects, and by continuing to promote international adoption of the renminbi.

"Uncertainty around the trans-Atlantic and trans-Pacific trade deals amid Donald Trump’s victory could renew efforts for alternative regional trade deals"

The B&R initiative is undeniably important to China’s growth prospects, but the initiative goes far beyond benefiting China, especially given today’s economic headwinds.

The uncertainty around the US-led trans-Atlantic and trans-Pacific trade deals amid Donald Trump’s election victory, along with the rising risk of an anti-globalisation push by the US, could renew efforts for alternative regional trade deals.

If implemented effectively, the B&R initiative will improve global trade and commodity demand at a time of rising uncertainty, bringing a much-needed boost to global growth.

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Why Africa needs Asia to reach its growth potential

Sunil Kaushal — Thu, 13 Oct 2016 15:15:15 +0000

Western governments and multinationals have played a significant role in Africa’s growth in the past with the European Union (EU) being the continent’s biggest trading partner. But, in a post-Brexit world, Africa will be looking increasingly to the East for investment and expertise.

Asia-Africa trade has been growing exponentially in the past decade. Alongside China’s ‘One Belt One Road’ initiative, more Asian economies are now showing interest in ramping up their African investments, attracted by rising urbanisation and consumerism across the continent.

"Asia’s leading financial centres are keen to play a central role"

The fact that Japan chose to host its annual Tokyo International Conference of African Development in Africa for the first time is just one example of the growing ties between the two continents. The conference in Nairobi at the end of August explored the potential improvements in Africa’s health system, paving the way for stronger multilateral cooperation and future trade partnerships.

Asia’s leading financial centres are keen to play a central role as finance, shipping and aviation hubs for increasing Asia-Africa trade.

Singapore’s expertise in consumer industries such as airlines, education and healthcare could pave the way for more Asia-Africa business collaboration. The city state is already sharing its experience in how to achieve sustainable economic development through its Singapore Cooperation Programme, and we expect to see more growth-supporting initiatives like this in the future.

Improving business prospects

Of course, trade between Asia and Africa is not without its challenges, limiting near-term trade potential. Red tape and poor infrastructure make investing in Africa harder, but as relationships between African and Asian governments strengthen, long-term business prospects will improve.

While some people worry the slowdown in global growth and subdued commodity prices will impact Africa’s growth and investment potential, the continent is demonstrating resilience. Its key drivers for growth remain intact, including attractive demographics, urbanisation and a rise in consumerism.

Côte d’Ivoire, Tanzania, Kenya, Senegal and Ethiopia are just some of the African economies currently performing well, and Sub-Saharan Africa is expected to post growth of 4.1 per cent in 2017 and 5.2 per cent in 2018.

"Africa has about 13 per cent of the world’s population, but only half of its citizens have access to electricity"

Attractive opportunities abound, including in the power sector. Africa has about 13 per cent of the world’s population, but only half of its citizens have access to electricity, so the opportunity for Asia to play larger role in powering Africa is huge.

Investing in Africa requires strategy and commitment. However, given European growth uncertainties in the wake of the UK’s decision to leave the EU, we expect Africa’s relationship with Asia to evolve. By investing in the growing opportunities and sharing expertise, Asia is set to play a bigger role in Africa’s future.

A version of this article first appeared in Singapore’s Business Times.

One Belt. One Road. One Bank.

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Now is not the time to sell China short

Bill Winters — Wed, 08 Jun 2016 08:53:05 +0000

China continues to dominate discussions about the health of the world economy. Many are concerned about China’s slowing growth and its ability to manage the difficult transition from a controlled economy dominated by manufacturing to a more open economy with greater reliance on domestic consumption. Some policy decisions last year also scared the market.

While the risks are many and real, they are manageable and well-understood by China’s policymakers. This is not the time to sell China short.

Expect more investment

The government is determined to achieve its average 6.5 per cent growth target between now and 2020, and it has the means to do so. We expect increased investment in regional development, support for production of higher value goods, and improvements to infrastructure.

The government also plans to reduce the cost of doing business and will buffer the social and economic dislocations that inevitably arise as economies evolve. Recent official figures, and our bank’s experience on the ground, suggest such measures are taking effect, building the foundations for a more balanced economy.

Services sector is growing

For many in the west, China is the land of export-oriented smokestacks and assembly lines, but the economy is already rebalancing. The dynamic, innovative services sector makes up more than half the economy and is growing annually at a high single digit percentage.

Alibaba has become the world’s biggest retailer by building an ecosystem customised for more than 400 million Chinese online consumers who increasingly shop on mobile devices. Wanda, China’s largest commercial property company and cinema operator, has built and runs shopping malls in 100 Chinese cities and is growing a financial services business to serve the 30,000 tenants of those malls.

By issuing millions of loyalty cards to retail customers, Wanda gains valuable knowledge about how its tenants are trading, allowing them to offer financial products, such as payment cards, tailored to customers’ needs. This is old economy transitioning to new economy before our eyes – and on a massive scale.

"300 million people – roughly the population of the US – are expected to move from the countryside to Chinese cities"

Over the next 20 years another 300 million people – roughly the population of the US – are expected to move from the countryside to Chinese cities. Alibaba, Wanda and many others are plugging directly in to this burgeoning domestic economy. We expect China to navigate its way to self-sustaining growth less dependent on exports.

Winding down manufacturing

The other side of China’s economic rebalancing requires the government to wind down zombie manufacturing companies that are redundant in today’s economic environment. This careful dismantling will take many years and will cause upheaval as millions of workers are required to move to new locations and jobs.

The government faces a tricky task to achieve this transition without social unrest, but it is capable of doing so, through measures such as greater social security provision. The cost of addressing dislocated labour for targeted industries may be expensive, perhaps as much as 1-2 per cent of GDP.

But in a more centrally-planned economy, much of it state-controlled, China may manage the process better than the US and Europe did in the 1970s and 1980s.

China’s gross debt has reached levels which may be uncomfortably high by international standards. The debt could well rise further, as China tries to apply counter-cyclical stimulus to give itself breathing space to drive through much-needed reforms.

While this stimulus is having diminishing effectiveness, I believe the transition is manageable, especially considering China’s debts are, by and large, domestically held and backed adequately by state and local assets. China’s net debt is comparable to levels in the US, UK and Japan, even after allowing for the debt of state-owned enterprises and the possible need for additional bank capital.

Many question whether the costs of rebalancing will be borne by banks via loan losses. Were the manufacturing industry to restructure quickly, and were the inherent losses to accrue to those companies’ lenders, non-performing loans could be significant.

While it is not clear how this will play out, given the degree of state ownership in the banking system and the state’s available resources, we believe the country has the capacity to absorb the rebalancing costs.

Sense of willingness

Recent events have revived concerns about central control of the economy and policymakers’ willingness and ability to embrace a free market. China knows it has to loosen the reins and continue to open up its capital account.

"Policy communication has been clearer this year"

In conversations with officials, I detect a renewed sense of humility and a willingness to recognise past mistakes, such as missteps over last year’s equity market bubble and poor communication around the devaluation of the renminbi. Policy communication has been clearer this year and officials accept there will be bumps on the road to a sustainable economic future, but they are committed to its success.

China’s short-term challenges are significant. We don’t expect a smooth path during its transition. But for those who are willing to invest for the long term, the end goal remains enticing.

A version of this article was first published in FT’s beyondbrics 7 June 2016

What the renminbi’s rise means for Africa and the Middle East

Sunil Kaushal — Mon, 04 Jan 2016 15:12:54 +0000

The recent announcement of a joint investment fund worth USD10 billion between China and the UAE underscores the strengthening economic ties between the two countries.

Likewise, for the wider Middle East and Africa region, China is becoming an increasingly important partner for trade and investment. For this reason, countries here stand to benefit significantly from the internationalisation of the Chinese currency, the renminbi (RMB).

The rise of the RMB gives emerging markets an important alternative when it comes to currency investment and hedging.

In Africa, the regional constraints associated with currency fluctuations and frequent shortages of US dollar liquidity could ease a little now, which could benefit many economies.

"The opening of the first RMB clearing centre will support the growing trade and investment between China and the Middle East"

In the Middle East, the opening of the first RMB clearing centre earlier this year is a key milestone, which will support the growing trade and investment between China and the Middle East economies. This means that deals will no longer have to be directed to China or Hong Kong for clearing.

Gaining influence

The rise of the RMB – cemented by the recent inclusion of the RMB in the International Monetary Fund’s Special Drawing Rights basket of currencies – will help countries in Africa and the Middle East to reduce their dependence on developed market currencies.

An additional major, global currency brings diversity, choice, and ultimately increases the general influence of emerging markets on the global currency stage.

"Adopting the RMB can make Chinese imports cheaper"

Trade remains the primary economic driver in growing emerging markets. By switching to RMB, importers and exporters who trade with China are able to reduce the risk and cost associated with converting local currencies into US dollars.

Adopting the RMB can make Chinese imports cheaper, with some Chinese suppliers willing to lower their prices to reflect lower foreign exchange costs.

Settlement in RMB set to increase

According to a survey conducted in October 2015 by Standard Chartered in association with The Asset magazine, 80 per cent of Chinese exporters anticipate their trade settlement in RMB will increase in the next six months

In Africa, in the central banks of Angola, Nigeria and Tanzania have already invested part of their reserves in RMB, with all three countries taking a pioneering step into ‘Dim Sum Bonds’ (bonds issued in RMB).

Qatar is the Middle East’s first RMB clearing centre, with Dubai touted to be the next obvious choice for RMB clearing, followed by South Africa.

We see China’s ‘Belt and Road’ (B&R) initiative as another key development for the Africa and Middle East region, with focus on infrastructure connectivity, investment, trade and financial cooperation. This will boost Africa and Middle East’s significance as a valuable trading partner for China, and spur economic growth.

The B&R initiative is likely to shift China from being the world’s largest goods exporter to a major capital exporter, boosting the use of RMB in financial, investment and trade transactions along the B&R.

"Adopting the RMB can make Chinese imports cheaperThe benefits are no longer a distant forecast, but an imminent reality"

The RMB’s rise to fame is a great opportunity for emerging markets, strengthened by China’s commitment to new and mutual beneficial partnerships – such as the newly announced China-UAE fund.

Adoption of the currency by local companies and traders in Africa and the Middle East is gradual, but positive. And with the increasing number of clearing hubs and the inclusion of RMB in central bank reserves, the benefits are no longer a distant forecast, but an imminent reality.

A version of this article first appeared in The National on 20 December 2015