Announced by President Xi Jinping, third from left, at Davos, Switzerland, in January, China's inaugural Belt and Road Forum in May comes at a historic inflection point in the country's economic evolution. (Reuters Photo/Bay Ismoyo)

Why Belt and Road Is More Than the Sum of Its Parts


MAY 05, 2017

Announced by President Xi Jinping at Davos, Switzerland, in January, China's inaugural Belt and Road Forum in May comes at a historic inflection point in the country's economic evolution.

China will showcase major infrastructure projects to advance this ambitious initiative, but the tone world leaders adopt in their dialogue on trade could prove to be just as significant.

The backdrop to the forum is one of uncertainty. The new US administration is reversing past policies designed to increase global economic integration.

The United Kingdom is trying to negotiate a new relationship with its continental partners in the European Union. Recent elections in several countries have marked a political shift from the old order of left-versus-right, to a new order of nationalist-versus-internationalist.

And as policy makers and negotiators wrestle with their new terms of engagement, trade is evolving too.

Digital innovations, plus advances in logistics, are creating opportunities by opening new markets for businesses and challenging deeply entrenched operating models.

Whilst rapid increases in the complexity of global supply chains may have peaked, what we are now seeing is growing interest in inter- and intraregional trade.

China's role in driving these flows is increasingly important, and nowhere is this role more visible than through the Belt and Road Initiative.

By investing in rail, ports and power plants along the centuries-old silk routes, China is seeking to stimulate cross-border trade.

This is not just trade with China's neighbors, but with regions as far afield as Europe, Africa and the Middle East.

The commercial benefits of this initiative are already becoming apparent. In the first nine months of 2016 alone, Chinese companies signed 4,000 engineering contracts under the Bank Rakyat Indonesia umbrella, with a combined value of nearly $70 billion.

Today these projects require construction materials, heavy machinery and engineering services.

Tomorrow, the completion of new infrastructure will simplify supply chains, accelerate physical trade and push down the cost of doing business. Companies will adapt their manufacturing and distribution strategies to capitalize on these new opportunities, with the net result that the volume of trade will grow.

Indeed, China anticipates its trade with countries along the land "belt" and marine "road" will surpass $2.5 trillion annually over the next decade. One example of a project contributing to this growth is the China-Europe freight rail service, which involved more than 3,500 trains linking 27 Chinese cities to 11 European countries since its launch in 2011.

The Belt and Road Initiative will also redefine trade from being primarily about the movement of goods to include the provision of services, from consulting to e-retailing. In March, Malaysian Prime Minister Najib Razak joined Alibaba founder Jack Ma to unveil details about a digital free-trade zone in Malaysia.

The initiative comprises both physical e-fulfillment and satellite services hubs, as well as a virtual e-services platform, aiming to boost small and medium enterprise innovation and the trade of tangible and intangible products.

These are early steps in what will be a multi-decade journey to realize the Belt and Road Initiative's potential. China undoubtedly stands to benefit from this journey, but so do its Asian neighbors and trading partners further afield.

As emerging markets continue to develop and become consumer-driven economies, their expanding middle classes will demand a greater choice of goods as well as services such as health care, education and travel. We forecast that about 3 billion people in today's emerging markets will join the middle class by 2030 – a social change that will pull the center of gravity of human consumption towards Asia.

Preparing for this growth, China has pledged to help Laos build a $6 billion railway linking Vientiane to China's southern province of Yunnan by 2020. Meanwhile the 7,000-kilometer Singapore-Kunming Rail Link is already taking shape, and Beijing has won the contract to build Indonesia's first high-speed rail link – a $5.1 billion, 150-kilometer project connecting Jakarta to Bandung, West Java – Indonesia's third-largest city.

As well as promising to make the movement of people faster and cheaper, this infrastructure will help businesses too. Perishable foods, such as New Zealand and Australian lamb and Philippine fruit, will be able to reach markets in Central Asia, Europe and the Middle East by land through China, potentially shaving precious time off their journey.

Once China Electric Power Equipment and Technology Co completes a new grid in Egypt, 16 million homes will have access to the reliable power they need to be part of the digital economy.

In promoting the Belt and Road Forum, the Chinese government has stated that it "will facilitate a number of major project and cooperation agreements" but that "China does not intend to monopolize all the benefits, or even take the lion's share of the benefits."

The goal is to "work with partner countries to make the pie bigger and divide it equitably."

As a statement of intent, the Belt and Road Initiative is ambitious and positive. It says that by boosting investment, we can boost trade, because this in turn will boost gross domestic product. Given the uncertainties we face today, we should celebrate that world leaders are gathering in Beijing and exhort them to use the Belt and Road Initiative as a catalyst for even greater international cooperation tomorrow.

Natalie Blyth is global head of trade and receivables finance at HSBC.