China takes the high road on forg­ing al­liances

The Pak Banker - - OPINION - Liu Mingkang

SINCE its in­tro­duc­tion by Chi­nese Pres­i­dent Xi Jin­ping in 2013, the "one belt, one road" ini­tia­tive - an am­bi­tious plan to re­vi­talise the an­cient Silk Road over­land and mar­itime trade routes link­ing East and West - has at­tracted con­sid­er­able at­ten­tion. And for good rea­son: The pro­ject, which in­volves more than 60 coun­tries and quite a few in­ter­na­tional or­gan­i­sa­tions, im­plies un­prece­dented op­por­tu­ni­ties - and chal­lenges.

The orig­i­nal Silk Road, es­tab­lished more than 2,000 years ago, was a crit­i­cal net­work of trade routes that pro­moted eco­nomic, political, and cul­tural ex­change among Asia, Africa, and Europe. China's new "Silk Road Eco­nomic Belt" and "Twenty-First Cen­tury Mar­itime Silk Road" will do the same, with newly built or up­graded in­fra­struc­ture fa­cil­i­tat­ing the flow of trade, in­vest­ment, cul­ture, and ideas - and thus sup­port­ing shared eco­nomic growth.

From China's per­spec­tive, the logic be­hind the strat­egy is clear. With its sources of GDP growth com­ing un­der in­creas­ing strain, China must con­tinue to make progress in open­ing up the econ­omy. That means build­ing mu­tu­ally ben­e­fi­cial re­la­tion­ships with neigh­bour­ing coun­tries, which can ben­e­fit by tak­ing over some of China's lower-value-added ac­tiv­i­ties. That prom­ises to boost their own growth while cre­at­ing space for the Chi­nese econ­omy to move up the value chain, where pro­duc­tiv­ity and wages - im­por­tant de­ter­mi­nants of con­sump­tion - are higher.

China has al­ready laid the ground­work for th­ese re­la­tion­ships, strength­en­ing eco­nomic co­op­er­a­tion and trade with coun­tries along the "belt and road". It has also spear­headed the cre­ation of mul­ti­lat­eral in­sti­tu­tions - no­tably, the Asian In­fra­struc­ture In­vest­ment Bank - to sup­port the in­vest­ment projects.

China's com­par­a­tive ad­van­tages, in­clud­ing a global fi­nan­cial cen­tre in Hong Kong and a re­gional fi­nan­cial cen­tre in Shang­hai, re­in­force its lead­er­ship role. Add to that the re­cent surge in fast-grow­ing, in­no­va­tive com­pa­nies - such as Huawei, Alibaba, and Wanda - and China is well placed to im­ple­ment Xi's am­bi­tious vi­sion.

But it will not be smooth sail­ing. Like any cross-bor­der ini­tia­tive, the "one belt, one road" ini­tia­tive will re­quire wise diplo­macy to man­age re­la­tion­ships with di­verse coun­tries and care­ful plan­ning to scale up ef­fec­tively. Each coun­try along the "belt and road" faces a unique com­bi­na­tion of risks and chal­lenges. Many face macroe­co­nomic risks, ow­ing to ex­change- rate volatil­ity, large debt bur­dens, and non- di­ver­si­fied, un­sus­tain­able eco­nomic struc­tures. On the mi­croe­co­nomic level, risks in­clude, for ex­am­ple, weak bank­ing sec­tors.

Gov­er­nance fail­ures, rang­ing from cor­rup­tion to in­ef­fi­cient im­ple­men­ta­tion of re­forms, also pose a se­ri­ous chal­lenge, as do so­cial and political ten­sions (and, in some ar­eas, the threat of ter­ror­ism). And one must not for­get the ever-present risk of nat­u­ral dis­as­ters, ex­ac­er­bated by cli­mate change.

Then there are the com­plex and var­ied laws, rules, and reg­u­la­tions shap­ing the busi­ness en­vi­ron­ment in each coun­try. Of course, it is vir­tu­ally im­pos­si­ble for Chi­nese en­ter­prises to un­der­stand fully each en­vi­ron­ment be­fore en­ter­ing it. But any vi­o­la­tion could put a com­pany's en­tire op­er­a­tion and in­vest­ment at risk. The chal­lenges may be com­plex, but the for­mula for nav­i­gat­ing them is sim­ple. First and fore­most, there can be no cor­rup­tion, which would not only hurt the "one belt, one road" ini­tia­tive, but would also un­der­mine China's abil­ity to pur­sue other cross-bor­der ini­tia­tives in the fu­ture.

Se­cond, no in­fra­struc­ture pro­ject should be pur­sued with­out care­ful con­sid­er­a­tion of both its fi­nan­cial costs and ben­e­fits and its eco­log­i­cal im­pact, such as air pol­lu­tion and de­struc­tion of ecosys­tems. Fi­nally, all projects must be trans­par­ent and in­clude ef­fec­tive checks and bal­ances. To re­in­force this ap­proach, the pro­vi­sion of fi­nanc­ing for "belt and road" projects must ad­here strictly to mar­ket rules. Given the scale of most in­vest­ments, pro­ject fi­nance - which is based on pro­jected cash flows, rather than its spon­sors' bal­ancesheets - will prove highly use­ful, as will ef­fec­tive risk-shar­ing mech­a­nisms.

Fur­ther­more, spon­sors should look be­yond a pro­ject's con­struc­tion to the achieve­ment of its long- term ob­jec­tives, such as en­sur­ing prof­itabil­ity and man­ag­ing its last­ing im­pact on the lo­cal com­mu­nity and the en­vi­ron­ment. Con­sul­tants, lawyers, au­di­tors, NGOs, and other en­ti­ties with in­ter­na­tional ex­pe­ri­ence can play a vi­tal role in all of th­ese ef­forts. There are also prac­ti­cal steps that can be taken to mit­i­gate spe­cific risks. For ex­am­ple, to min­imise the risks as­so­ci­ated with op­er­at­ing in an un­fa­mil­iar reg­u­la­tory and leg­isla­tive en­vi­ron­ment, busi­nesses should es­tab­lish links in ad­vance with a lo­cal en­tity to guide their ac­tiv­i­ties. China, as the lead­ing pro­moter of the "one belt, one road" ini­tia­tive, must take steps to en­sure that busi­nesses act re­spon­si­bly.

Newspapers in English

Newspapers from Pakistan

© PressReader. All rights reserved.