4 Insights on China's Belt Road Initiative

I interpreted recently for the inaugural meeting of the Silk Road International Association (SRIA), a high-level discussion on what is arguably the most ambitious pan-regional agenda taking place in the world economy right now. A few interesting take-aways from these discussions help to shed light on where the BRI stands today, and where it might be headed in the future.

The Belt and Road is a new paradigm for globalization.

One function of the conference was to offer various interpretations of President Xi’s (and by extension, China’s) vision for the BRI. A few major themes emerged:

• The scope and significance of BRI has expanded greatly since Xi’s initial proposal in 2013: from regional to global, from Chinese-led to multilateral, from a government economic program to a new paradigm for globalization in the 21st century.
• This new paradigm is being offered as a natural response to the populist and anti-globalization movements that have swept the world in recent years. The historical narrative of globalization being proposed begins with the colonial/industrial-age of the 18th to early 20th centuries; evolves into the liberal free-trade globalization of the post-WWII era; and is now being pushed into a third era of globalization that must be defined by greater inclusivity, greater connectivity, and greater sensitivity toward environmental, social, and governance issues.
• This expanded vision of BRI will require a lot more resources and a much more diverse set of stakeholders than originally conceived. (More on this below).

“Local approval” means more than government approval.

The conference invited representatives of Chinese companies that have been investing and building operations in countries along the Silk Road to reflect on their experiences and share policy recommendations for improved cross-border collaboration.

Here’s a pretty obvious recipe for trouble that unfortunately seems to be standard operating procedure right now:

1. National political leaders sign a bilateral investment MOU — ->
2. Chinese corporate gets approval from a local government to build a factory — ->
3. Chinese corporate invests in local infrastructure and employment and expects the community to thank them — ->
4. The community actually resents them. :-(

What went wrong? Could be a lot of things: mismatched expectations in terms of culture, religion, language, governance, management style, probably all of the above.

The Chinese side is often genuinely (and a bit naively) surprised by these outcomes — after all, they really are investing in these communities, and at least in their minds there is nothing exploitative or colonial about that investment. And what’s more, they got approval from the local government! (Which back in China, at least, is often all that one needs to invest confidently in a new market).

Anyway, moral of the story is that Chinese companies’ are struggling to communicate effectively with host communities, even if their hearts are in the right place, and part of the problem is that government relations (at both the national and local level) are being used as a proxy for community relations.

Chinese banks need to step up their game.

Chinese companies are going global, but the financial institutions that serve them aren’t keeping pace. In particular, Chinese investment banks and insurers — long sheltered from competition in the domestic market — seem to lack both the will and the capacity to serve their corporate clients as they structure, finance, and operate deals overseas.  

 Things have changed a bit on the Silk Road since the days of Marco Polo, and modern merchants need a dizzying array of financial products and services, from infrastructure leasing to and currency swaps to overseas worker comp and liability insurance

 The major global banks have a lot more experience structuring these products, of course, but (a) they don’t have the client relationships with Chinese corporates and (b) it’s not likely that a white-shoe Wall Street bank is any more familiar with the situation in, say, Turkmenistan, than their Chinese peers.  

 Of course, a lot of the financing issues are structural and will need to be resolved at a political level: local currency settlement, for example, and loosened capital controls on RMB accounts.  

 But still, point is, Chinese banks need to step up their game.

Diversity in governance

The call for more diverse and inclusive forms of governance was perhaps one of the most interesting themes to emerge from the conference. This theme

• Multilateralism: While most of the preliminary work and funding of the Belt and Road Initiative has been China-led, the Chinese have made clear that the long-term vision for the project is solidly multilateral: as Xi Jinping himself has said, the BRI was not composed as a “solo for China”, but rather as “a real chorus” for all its partners to sing. And indeed, there are signs that the world is ready to sing along: the Asian Infrastructure Investment Bank (AIIB) exceeded expectations in winning investment from not only developing countries along the Silk Road, but from developed nations as far afield as the U.K. and Australia, while the Belt and Road Forum this past May drew 30 world leaders to Beijing, including the Presidents of Argentina, Chile, and other non-Silk Road nations. Early indicators suggest that the inclusion of non-regional actors is more than just lip service; the AIIB’s Board of Governors, for example, is stacked
• Public/private stakeholders: The initial focus of the BRI was largely on cross-border infrastructure, whose investment profiles (long-term capital commitments and relatively low, stable returns) naturally skewed toward public sources of funding — thus the early involvement of public facilities such as the Silk Road Infrastructure Fund, the BRICS’ New Development Bank, and the sovereign-wealth-backed AIIB. As the BRI vision expands, however, and as early-stage public investment begins to de-risk individual projects and even entire markets, there is a greater call for — and interest from — the private sector to invest alongside the public sector. Already, project architects up and down the Silk Road are experimenting with new models of PPP (public-private partnership), BT (build-transfer), and BOT (build-operate-transfer) in order to get the right balance of ownership, upside, and risk among stakeholders.
• Demographic diversity — There was broad recognition that having exclusively Chinese management teams overseeing operations in countries with vastly different cultural and political contexts is not the way forward; and that Chinese boards of directors would do well to diversify, as well. It was also pointedly noted that of the 20 or so leaders invited to attend the SRIA’s high-level dialogue, there was a sum total of one woman at the table (that was Jenny Shipley, the former prime minister of New Zealand). And, of course, the requisite call for young people to have a greater voice in governance, as well.

Was some of this simply lip service? Surely. Yet there was also a palpable tone of sincerity behind many of these remarks — and an earnest recognition that without increased inclusivity, the BRI will fall into the same trap that the Washington Consensus-style of globalization has over the past several decades. 

 The Belt and Road Initiative is still in its earliest days, and still in its most nascent form — its course can still be shaped and influenced. While the SRIA only lasted two days, the ideas that are discussed at these forums can often help to frame thousands of other discussions over the course of a year, and in turn have an impact on the course of history itself.  

Keep an eye on Silk Road leadership in the second half of 2017, and see if any of the themes mentioned here wind up shaping the discourse.

Notes:

The SRIA is itself the brainchild of the International Finance Forum, a Chinese-led club of former prime ministers, central bankers, and economists.

Jonathan Rechtman is co-founder and chief interpreter at Cadence Translate, a leading provider of translation services to the global business and investment community, and an innovator in real-time translation technology.