Market insights

Grabbing the One Belt, One Road opportunity

30 November 2016 by Radhika Dhawan Puri

 

China’s One Belt, One Road (OBOR) Initiative is a blueprint for global economic cooperation at an unprecedented scale. Unveiled in 2013 with a US$40 billion backing by the Chinese government, OBOR aims to extend China's reach across Central Asia by recreating the legendary Silk Route.

OBOR’s vision is to connect China with Eurasia through a pipeline of road and rail routes, oil and gas pipelines, along with a network of ports and coastal infrastructure projects.

When completed, the initiative promises to link 65 countries across three continents with a population of 4.4 billion, contributing to 40 per cent of global GDP.

China’s involvement in the project has raised concerns about the country’s expanding geo-political influence in the region, but none of these concerns will take away the investment potential of the projects, according to Mark Tucker, group executive and president of AIA Group.

“Comparisons (of OBOR) with the Marshall Plan (American aid to Western economies at the end of World War II) are valid. Particularly, at the time of uncertain economic growth, OBOR has the potential to kick-start growth and improve the quality of life in low-income countries in the region,” he said.  

Investment momentum is underway with existing frameworks

When China launched OBOR, the country was in the pink of health and a dynamic engine of growth. Given that China is now struggling with flagging economic growth, how feasible is it that 65 countries can be connected by economic ties, trade flows and an infrastructure perspective? Should investors looking to invest in the region be worried?

According to Bill Winters, CBE, group chief executive of Standard Chartered, the frameworks for investment exist. “There are many different channels and mechanisms for the deployment of this policy objective,” he said. “These will play out and fundamentally change most, if not all, the 65 economies over a period.” 

Winters is referring to the funding momentum that is surely and steadily building up for OBOR-related projects, as banks, governments, pension funds and multilateral funding institutions respond to the US$890 billion opportunity.

By one estimate, 900 OBOR-related deals are underway. Examples include the gas pipeline from the Bay of Bengal through Myanmar to South-west China, and a rail link between Beijing and Duisburg in Germany.

Frameworks to support OBOR projects are also a reality. In 2015, China’s Central Bank transferred US$82 billion to three state-owned ‘policy banks’ – the China Development Bank, Agricultural Development Bank of China and Export-Import Bank of China – for OBOR projects.

In addition, the Asian Infrastructure Investment Bank (AIIB), a newly set-up multilateral development bank backed by 57 countries, will scale up funding for infrastructure projects from US$1.5 billion to US$2 billion in 2016, and around US$10 billion in 2018.

“The role of the international banking system will be to provide a level of technical expertise and bring together different pools of capital,” said Winters. “And in many cases, assist in partnering contractors and investors with local partners, managers and local banks.”  

Where is the biggest investment potential?

For Chinese goods to make their way across Central Asia and to Europe, there will be a massive requirement of roads, rail routes and ports. The OBOR promise is about connectivity, making infrastructure a key investment priority.

“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,” said Wang Yangzhi, president of the Silk Road Fund

As OBOR-related infrastructure unfolds and the money flows into the region, there is likely to be a much-needed spillover effect through Central Asian economies that are underdeveloped.

Moreover, some of the fund’s investment priorities are linked to China’s domestic goals. Investing in manufacturing in these economies will align China’s domestic production capacity with overseas demand. Developing the financial sector in many of these countries is essential for furthering the economy

This is good news for firms that have extensive expertise in sectors such as infrastructure (construction and city planning), connectivity (aviation, ports and logistics) and financial services (project financing and valuation).

For instance, many companies in Singapore have adequate experience in global projects, and are equipped to snap up OBOR opportunities as they emerge. Two companies, Charisma Energy and Sunseap, were awarded a contract to build a 140-megawatt Solar Farm in India.

Governments are facilitating investment opportunities

Governments and regulatory authorities have an important role to play when helping industries assess investment opportunities and ease the path to mutual cooperation with China and economies along the OBOR route.

Government initiatives in the region are underway. For instance, both Hong Kong and Singapore have set up OBOR offices and portals where companies can evaluate bidding opportunities for various projects. Both markets are well positioned to take advantage of this opportunity as important financial hubs in the region.  

The Hong Kong Monetary Authority set up an Infrastructure Financing Facilitation Office and signed a memorandum of understanding (MOU) with the International Finance Corporation and with the Global Infrastructure Hub to help raise funding for infrastructure projects, particularly those that fall under China's OBOR policy.

The wheels are in motion in Singapore as well. International Enterprise (IE) Singapore has signed an MOU with the Industrial and Commercial Bank of China to provide financing services and assist in project structuring, in order to support Singapore companies in OBOR infrastructure projects across Asia.

OBOR’s success is tied to the cooperation of countries along the route. Such bilateral cooperation will send out ripples of reform – positive changes in regulatory apparatus, immense investment potential for private sectors, as well as unprecedented collaboration between government and private sectors.

The opportunity in Asia itself is immense given that the region needs US$770 billion a year in infrastructure, according to the Asian Development Bank. It is important that markets stay ready to take advantage of the opportunities that emerge because the pot of gold is for the taking. 

 

This article was written based on a panel session that Future Ready Singapore attended at the Singapore Summit 2016 (16 – 17 September). The fifth edition of the annual event brought together more than 400 business leaders and experts to discuss future-oriented topics in finance, business and economics with a Global-Asia focus.

Edited by Sophie Chen and Goh Wei Ting