HSBC’s take on OBOR … (Part 1)KUALA LUMPUR (September 2017): Reproduced below is HSBC Holdings Plc Group Executive Stuart Gulliver’s take on China’s multi-billion-dollar One Belt One Road (OBOR) initiative.
It gives you a macro perspective of the economic and investment opportunities and workings of OBOR (HSBC calls it The Belt and Road Initiative or BRI in short).
Here we go:
> The Belt and Road Initiative is intended to improve the infrastructure of overland and maritime routes to drive trade and capital flows between the east and the west;
> The initiative will connect more than 65 countries across Europe, Asia and Africa covering 63% of the world’s population and 29% of global GDP, and ultimately make it easier for goods and services to reach the growing middle classes as their disposable income increases; and
> Companies of all types and sizes both inside and out of China in the infrastructure, telecommunications, trade, sustainability and financing sectors will benefit – including manufacturers, raw goods suppliers and logistics providers as well as financial and professional services firms and more.
The BRI is a large-scale strategy designed to drive bigger and faster trade and capital flows between the east and the west. Covering two trade routes – an overland route connecting Europe and the Middle East to China by way of Central Asia, and a maritime route that connects China, South East Asia, India and Africa – the overall objective is to increase regional trade and encourage economic cooperation.
Specifically, BRI will connect cities in more than 65 countries across Europe, Asia and Africa. This represents approximately 4.4 billion people, or about 63% of the world’s population and 29% of global GDP. In its full scope BRI is likely to have a meaningful impact on the 21st century global economy in several ways.
The initiative is expected to create jobs and opportunities for people and businesses along the routes as well as companies and investors around the world in areas such as infrastructure, finance, trading, logistics and professional services. Opening up trade corridors will also make it easier for businesses going into and out of China to reach the growing middle classes, which could number more than 4 billion by 2021. In the decade that follows, it is anticipated that 66% of the world’s middle class will live in Asia – many along the Belt and Road. As a result, there will be an increasing demand for a wide range of goods and services as more people become major consumers with a growing disposable income for the first time. According to Stuart Gulliver, Group Chief Executive for HSBC Holdings plc, “The American dream of the 20th century is becoming the Asian dream of the 21st. A house, a car, a smartphone, travel, banking services, healthcare – the prospect of unfettered upward social mobility for many more families.”
The initiative will begin by building or improving the physical infrastructure along these routes including rail lines, ports, power grids and telecommunications networks – which will facilitate the flow of these goods and services. Infrastructure projects will be funded by strengthening the existing financial framework of lending and capital-raising, and will be further supported through new or enhanced customs, taxation and trade and investment policy conditions aimed at making trade between countries easier and stimulating economic growth.
Estimates indicate that BRI infrastructure in Asia alone will cost US$1.7 trillion a year through 2030. While the recently established Asian Infrastructure Investment Bank (AIIB), Silk Road Fund and the New Development Bank have already committed approximately US$1.1 trillion – the amount of infrastructure needed far surpasses the cash available to pay for it. This funding gap means that additional capital-raising and investment activity both inside China and out is necessary.
Mr Gulliver says this will lead to “…opportunities for investors as well as foreign financial and professional services firms to build links with businesses and governments along the Belt and Road – in particular to help investors identify which projects are investable, legal, feasible and sustainable.”
Outlook for China
The purpose of BRI is to simplify and increase cross-border trade – ultimately creating opportunities for Chinese companies by generating more demand for their goods and services. With this, the initiative also closely aligns with China’s “Going Out” strategy, which encourages mainland companies to do business outside of China to boost outbound growth. As Michael Kwok, Region Leader for China for Arup – an independent firm of designers, planners, engineers, consultants and technical specialists – puts it “Arup aspires to connect China to the rest of the world like a bridge. Belt and Road means that in the future we will be doing a lot of Chinese business [beyond borders] rather than just doing business in China.”
The impact is already being seen. In the first eight months of 2016, trade between China and BRI countries exceeded US$600 billion dollars – or 26% of China’s total foreign trade volume. Based on this, the annual trade volume between China and countries along the Belt and Road routes is expected to exceed US$2.5 trillion in the next ten years.
Opportunities Outside of China
Companies inside China are not the only ones who will gain from the initiative. BRI is likely to result in opportunities throughout the infrastructure supply chain, from the largest construction firms to small specialist providers. “Belt and Road may be a Chinese initiative, but it is a global effort involving developed and developing countries, and international organisations,” says Mr Gulliver.
Those who stand to realise an immediate benefit include:
> Equipment manufacturers who provide components for high-speed railways, ports, engineering machinery, high voltage power grids and nuclear power;
> Companies who supply steel, aluminium, cement and other construction-related materials;
> Bulk shipping and logistics services as demand for raw materials increases with the progression of infrastructure projects; and
> Whether building new or improving existing infrastructure, the aim is for projects to stand up to international standards. This includes meeting sustainability goals, which will require the expertise of architecture and design firms specialising in this area. There will also be a focus on expanding and improving telecommunications networks – all of which will require substantial financing.
As Helen Wong, HSBC Chief Executive for Greater China, explains, as the infrastructure improves – cities and countries will become better connected. That connectivity will lead to other economic activity and development, which will result in an increase in regional trade. This will, says Ms Wong, encourage financial sector development in countries along the Belt and Road.
The Role of Renminbi
With the internationalisation of its currency, half of all China’s foreign trade is expected to be settled in Renminbi (RMB) by 2020. An important step toward reaching that goal came in 2016 when RMB was officially included in the International Monetary Fund’s (IMF) Special Drawing Rights basket as an international reserve asset. BRI will also bring them closer to realising their vision.
Peter Wong, Deputy Chairman and Chief Executive, The Hong Kong and Shanghai Banking Corporation Limited says, “As the commercial activities between China and countries along the BRI become more frequent, RMB will gain wider acceptance.” As a result, companies who haven’t already adopted RMB should consider doing so now if they plan on participating in BRI growth and expansion.
Belt and Road may be a Chinese initiative, but it is a global effort involving developed and developing countries, and international organisations.