The federal government’s lukewarm response to China’s massive One Belt One Road infrastructure plan should not deter Australian businesses from coming up with their own comprehensive engagement strategies.
It is clear to Chanticleer following a week travelling through China talking to senior Chinese government officials, academics, economists, think tanks, bankers and leading research analysts that OBOR has become a catalyst for profound change in China and Central Asia.
It would be foolhardy to ignore the geopolitical machinations bound up with the roll out of OBOR but it would be equally unwise for businesses to turn their back on the wide array of opportunities opened up by what has been called the new Silk Road.
The first silk road
The original Silk Road, which extended from China to Europe, was opened up in 140BC by Zhang Qian, a royal emissary who left for a tour of discovery to Europe from Chang’an, the capital of the Han Dynasty.
More than 2000 years later, the most obvious winners from China’s new strategic move west are bankers, construction companies, infrastructure investors, consultants, professional services firms, equity fund managers and exporters.
Businesses need to understand the financial and economic implications of a co-ordinated infrastructure spending program that spans up to 65 countries.
Australia has not followed the lead of New Zealand and signed a memorandum of understanding with the Chinese government on OBOR. This has annoyed the Chinese who would like to connect OBOR with Australia’s $5 billion northern Australian infrastructure development plan.
There are several reasons why Australia has stood back from any concrete involvement in OBOR.
Sensible to support from the sidelines
As a deficit country with a stable political system, growing economy and attractive investment climate Australia is set to benefit from China’s recycling of its trade surplus. That will happen even without signing up for OBOR.
Secondly, there is a lack of transparency about what a formal relationship will involve. Until this is clear it is sensible to be supportive from the sidelines.
Also, there is an obvious reluctance to have the northern Australia project in some way captured by a Chinese quasi-strategic expansion policy at a time when the electorate is hyper-sensitive to Chinese investment in property and agriculture.
China staunchly denies it is practising a modern day form of mercantilism with OBOR, but it has made clear it is annoyed with countries like the United States that have pushed back hard against the concept.
When the creator of the OBOR initiative, China’s President Xi Jinping, spoke at the official opening of special forum in Beijing last week attended by 29 state leaders, he repeatedly said it was a “win-win” proposition for all involved.
‘Win-win’ also means ‘lose-lose’
There is a view in Chinese government circles that the US has not understood that to achieve a “win-win” there needs to be a “lose-lose”. In other words, compromise is part of any successful negotiation between two parties – each party needs to lose something in order for the other to win.
These geopolitical debates will go on for years. Business should not ignore them. But nor should it ignore the obvious medium to long-term money-making opportunities presented by China’s enhanced economic engagement with its neighbours.
As GE vice-chairman John Rice told Chanticleer last year, every company that GE worked with in China had an OBOR plan.
“The manufacturing companies, the equipment companies, the finance companies, the banks – they are all working to support one belt one road – they all have a plan,” he said.
“One Belt One Road is more than an initiative, it is a way of life.”
China is using all of its power and influence across Asia to open up and develop a geographic area that is home to about a third of the global population.
Capital intensive growth
These people live in countries that are going through the same middle-income growth phase and urbanisation experienced by China. That is very capital intensive.
About a third of the population in Central Asia has GDP per capita of less than $US25,000 ($33,400), according to Alexious Lee, head of China industrial research at broker CLSA.
He says that GDP is growing very quickly in countries in the region and that opens up trade opportunities for Australian companies already exporting to China.
Some companies are already enjoying the benefits of the relatively new rail freight line between Chongqing in western China and Duisberg in Germany.
On Monday a delegation of senior Australian journalists led by former foreign minister and now director of the Australia-China Relations Institute, Bob Carr, visited a logistics warehouse and saw boxes of vitamins from Blackmores and Swisse earmarked for shipment on the Chongqing-Duisberg line.
Lee at CLSA says the success of OBOR will be measured by the extent to which it boosts Chinese exports. He says OBOR provides an opportunity for Australian companies to locate manufacturing facilities in China and export them directly to Europe by train.
John Holland platform for expansion
Chongqing now has some of the most generous tax breaks in China for companies in technology and biotech, according to the deputy director of the Chongqing Economic and IT Commission, Liqiong Yang.
One Australian company that is a clear beneficiary of the Chinese push into infrastructure investment across Asia is John Holland Constructions, a subsidiary of China Communications Construction Company.
Its chairman, Liu Qitao, is believed to be close to President Xi. CCC’s purchase of John Holland provided the company with a platform for expansion in Asia.
James Cameron, HSBC’s co-head of infrastructure and real estate in the Asia Pacific, says the John Holland deal gave the Chinese very strong technical expertise and a big presence not only in Australia but in south-east Asia.
“CCC have been very active in what we have seen in south-east Asia in developing metro lines in Singapore, whether it is double tracking railway lines in Malaysia or urban rail development in Malaysia,” he said.
“I am sure that the technical expertise, the project planning expertise and input that would have come from the John Holland platform they acquired would have been very useful. That makes them competitive and to make sure their investments are sustainable.”
HSBC, which is the largest international bank in China, helped finance CCC’s purchase of John Holland.
Plenty of work for bankers
Cameron says the OBOR seems to be designed to put a framework around China’s outbound investment policy.
“In the past we have seen quite a lot of outbound investment from China but it has been less controlled, less coordinated and less disciplined,” he said.
Cameron says the OBOR is attractive to bankers because it creates a lot of work including foreign exchange services, risk management, cash management, setting up payrolls for Chinese companies expanding into Asia, providing construction bonds and project finance.
Lee at CLSA says the Chinese have been particularly clever in the way they have used the OBOR to achieve a range of strategic goals. Since 2013, China has signed dozens of agreements valued at more than $US600 billion, with nearly half related to transport, power and energy.
About a third have been oil and gas related and with countries outside of OPEC. This has helped China with its objective of energy security by reducing its reliance on Middle East oil and gas.
Lee says the OBOR investments so far have included many significant government-to-government projects. This allows Chinese construction companies such as CCC to get work without having to bid against international companies in tenders.
Usually these government-to-government liabilities have been underpinned by oil and gas revenues.
China’s overseas direct investment in the form of cross-border M&A, joint ventures and greenfield investments rose to $US170 billion in 2016, up 89 per cent from $US90 billion in 2013, Lee says.
While Donald Trump has boasted of a $US1 trillion infrastructure investment plan over a decade, projects bearing the OBOR won about $US500 billion in Chinese funding guarantees between 2014 and 2016.
Enter the big multilateral institutional funders
China has been accused of sticking the OBOR label on every infrastructure-related project entered into over the past five years even though President Xi announced OBOR only in mid-2013.
Another criticism is that the funds available to invest in projects across Asia are now much less than in 2013 because the country’s foreign exchange reserves have shrunk from $US4 trillion to $US3 trillion.
But this ignores the funds that will be harnessed from the balance sheets of a range of domestic and multi-lateral institutions including the Export-Import Bank of China, the World Bank, the Asian Development Bank and the newly established Asian Infrastructure Investment Bank.
AIIB’s vice-president and corporate secretary in Beijing, Danny Alexander, says six multilateral banks had signed up to finance OBOR projects including the European Bank of Reconstruction and Development and the European Investment Bank.
Alexander, who set up the Green Investment Bank in London when he was a minister in the British government, says AIIB will only fund projects that are economically beneficial, environmentally sustainable and socially acceptable.
So far it has funded $US1.7 billion worth of projects.
“What we have funded is a bunch of good projects that will make a significant difference to the lives of people in those countries,” he said.
The same high standards set by the AIIB in its financing decisions should rightly be used by businesses assessing their involvement in OBOR. But don’t walk away from serious analysis of OBOR just because the federal government wants to stand back and watch.
by Tony Boyd
The author travelled to China as a guest of the Australia-China Relations Institute at UTS.