By Chris Devonshire-Ellis
Brexit Britain is still dealing with securing many trade agreements, while political differences have developed concerning China. Yet while China may be toxic to many in London, there are potential opportunities in exploiting the very same infrastructure that China has built – without the need to engage or partner with China at all – the BRI involves 146 other countries.
Beijing has placed its Belt and Road Initiative at the heart of its Foreign Policy, putting it at the centre of its updated Foreign Aid Programme and re-stating it is a core pillar of its foreign trade policies. This comes after years of media criticism about China’s intentions, mainly concerning the imposition of debt traps and sovereignty issues riding over the trade benefits that the infrastructure build has given. These can now be discounted, with the UK’s own Chatham House stating that there was in fact, no evidence of debt trap burdens https://www.chathamhouse.org/2020/08/debunking-myth-debt-trap-diplomacy being placed on other nations because of China’s lending. The same institution has also just released a blueprint paper, ‘Global Britain, Global Broker‘ arguing for a post-Brexit role for the UK as, among other agendas, a “Champion of equitable economic growth.” Last week’s claim by US AidData that China’s lending was excessive have also been debunked. https://www.silkroadbriefing.com/news/2021/10/01/chinas-latest-debt-trap-scandal-and-us-aiddata-research/ The stories appeared coincidentally at the exact same time that US President Joe Biden launched his “Build Back Better World” scheme.
But how does this geopolitical jostling fit in with UK businesses and the Belt & Road Initiative?
While China’s BRI is not a Free Trade bloc, countries who have signed off an MoU with China concerning this have seen some benefits in increased trade and investment. In terms of the EU, member nations of that who are also signatories of BRI MoU saw their 2019 exports increase by 5% more than EU members not part of the BRI. Part of this is improved infrastructure, part of it China trade. Export trade from BRI nations to China this year has skyrocketed as consumer production demand across China and Asia has increased.
China’s Developing Free Trade Agreements: The Africa Example
An oft-unnoticed aspect of the Belt & Road Initiative is that China has been developing its soft infrastructure – and especially in the development of new Free Trade Agreements and Special Economic Zones, all designed to reduce the tax and tariff burden. Recent additions to this network are the African Continental Free Trade Agreement (AfCFTA) which China helped broker and reduces intra-African tariffs to zero on over 90% of all products and which came into effect on January 1 this year. That makes sourcing of component parts across Africa far less expensive and cumbersome than before, and that of course applies to all businesses with an interest in Africa.
With the provision of Chinese built Special Economic Zones, a new Free Trade Agreement with Mauritius to act as an offshore Gateway to Africa, and Foreign Minister Wang Yi’s successful trade visits to Africa this year, we can begin to understand from the African example just how expansive the Chinese have been in developing trade routes across the globe. Of note to British investors in this regard is that the UK does have trade agreements with SACUM (Botswana, Eswatini, Lesotho, Namibia, South Africa, Mozambique) and ESA (Mauritius, Seychelles, Zimbabwe) and a Double Tax Treaty (although not a Free Trade Agreement) with Mauritius. The point being that Chinese initiatives in Africa have made it easier for businesses for other countries to operate there too.
We can see where China’s Belt & Road Initiative is when compared to the UK’s current trade reach in the map below.
UK Access To RCEP, ASEAN & The EAEU
There are similar opportunities elsewhere. China has signed off the recent Regional Comprehensive Economic Partnership (RCEP) agreement, which includes all ten ASEAN nations as well as Australia, New Zealand, Japan, and South Korea. This brings benefits to foreign investors, an issue I discussed in the article RCEP: How British Businesses Can Access China’s New £18 Trillion Asia RCEP Free Trade Agreement via the Back Door link to: https://www.china-briefing.com/news/how-british-business-can-access-chinas-new-18-trillion-asia-rcep-free-trade-agreement-via-the-back-door/
ASEAN, the South-East Asian trade bloc, includes Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam. Of these, Brunei, Malaysia, and Singapore are members of the British Commonwealth, while the UK has signed off trade deals with Singapore https://www.aseanbriefing.com/news/uk-exporters-use-of-singapore-as-aseans-supply-chain-gateway-boosted-by-new-bilateral-trade-agreement/ and Vietnam https://www.vietnam-briefing.com/news/vietnam-issues-preferential-tariffs-rules-of-origin-guidelines-ukvfta.html this year. Others will follow.
ASEAN’s collective GDP in 2020 was about US$3 trillion, roughly equivalent to that of the entire Commonwealth and slightly larger than that of the UK itself. ASEAN is a market of about 135 million middle class consumers (24% of the total population) and is expected to double in size in the next decade. It is one of the global trade development drivers, yet the UK’s trade engagement with it is minimal – although the UK has arranged to become an observer state. An ASEAN-UK free trade agreement cannot therefore be ruled out, meaning British businesses should start looking at the ASEAN market for opportunities. One of the problems with having membership of the EU was that Britain to some extent became rather lazy, content to secure markets close by within easy reach. Brexit has now changed this; British Sales & Marketing Directors should be reestablishing a Middle East desk, an African desk, an Asian desk and a LatAm desk to look out for where investment, growth and export opportunities lie.
ASEAN nations, meanwhile, apart from enjoying Free Trade amongst themselves, also have Free Trade Agreements in place with China, India, Australia, New Zealand, Japan, and South Korea.
While Singapore is a wealthy market and a prime position for UK financial services and products, acting as the de facto financial capital for ASEAN, the Vietnam market provides opportunities for British companies who may wish to have an alternative to China, and especially in export manufacturing to service China itself, India, the other ASEAN nations, and the EU. Vietnam signed off an Agreement with the European Union which came into effect from August 1 last year.
Russia like China has diminished in the UK’s political stature in recent years, but that doesn’t mean to say it is totally off limits, and it remains a significant market in its own right. Sanctions mostly affect either specific individuals or Russia’s Oil & Gas sector, while Russia is itself the lead nation of the Eurasian Economic Union (EAEU), which also includes Armenia, Belarus, Kazakhstan, and Kyrgyzstan. Collectively, the EAEU is a market of about 176 million people with a combined GDP of about US$5 trillion.
What is interesting about the EAEU is that it has Free Trade Agreements with Singapore and Vietnam, in addition to Serbia, Iran and China. The latter is currently non-preferential; however, tariff negotiations are underway with progress expected during 2021. Russia-China trade is expected to double from now to 2024, hitting about US$200 billion. The EAEU is also currently negotiating an FTA with India, with signs that this is also expected to be completed this year. Russia’s proximity to China should also be of interest; a subject I explored in the article Opportunities For British Businesses In the Russian Far East. Link: https://www.russia-briefing.com/news/opportunities-british-investors-russian-far-east.html/
New China Opportunities For Britain In 2022?
A common question I am often asked these days concerns the Chinese slowdown of overseas financing of the BRI. To which there is a very simple explanation: it’s nearly finished. China’s ODI and foreign policy for 2022 have in fact already been laid out in statements made by Xi Jinping at the recent United Nations summit, by Foreign Minister Wang Yi at the recent Belt & Road Forum and by new Minister of Commerce Wang Wentao at this year’s Central Economic Work Conference. All quite clearly state China’s intentions: to focus ODI on more strategic investments, such as healthcare and technology, to take more strategic positions within foreign companies in specific sectors, including minority positions, and to rebalance the Chinese economy by moving it to away from manufacturing to a consumer base.
China spent an estimated US$4 trillion on BRI infrastructure – that part of the investment is nearing completion. China has also followed this up by making three strategic changes, introducing a revised foreign investment law last year, relaxing foreign investment in various industry sectors, and introducing a new ‘dual circulation strategy’ designed to spur consumer demand. I summarized these here. link https://www.china-briefing.com/news/what-is-chinas-dual-circulation-strategy-and-why-should-foreign-investors-take-note/
It is a British irony that the political situation between London and Beijing has deteriorated at the same moment that China market access has been the best it has ever been.
Therefore, there are many good reasons why British companies should continue to look to China, both the growing consumer market, and access to an extensive Free Trade Agreement Network.
Hong Kong Opportunities
Hong Kong also remains viable, although the market is changing. As my colleague Alberto Vettoretti stated in his Dezan Shira & Associates Partners roundup recently:
“Hong Kong’s geographical location and status (one country – two systems still here till 2047) are its biggest advantages. If taken as a single bloc, the Greater Bay Area would be the 12th largest economy in the world, made from 11 cities with a combined population of over 70 million and an economy which has the 2 billion USD GDP mark in sight (larger than Italy). Hong Kong’s GDP accounted for 20% of China’s in 1997, this has now shrunk to around 3%. Over the same period, China’s growth has been nothing less than extraordinary and while Hong Kong has also played and is still playing an important role in the Middle Kingdom’s success story, it is now time to forget about past glories and start a new phase of proactive engagement across the border.”
An overview of the opportunities in the GBA can be found here. link https://www.china-briefing.com/news/investing-in-chinas-greater-bay-area-new-issue-of-china-briefing-magazine/
The integration of the cities and economic clusters within the Pearl River Delta is not a new subject. Discussion on how to achieve this challenging goal started many years ago but only recently, following a top-down executive decision by Beijing, the agenda is more coordinated at the very top and this has translated into better communication and projects implementation amongst the different governments in GBA. While the 11 cities in the region will also fiercely compete to attract best companies, talents and projects, Hong Kong could carve out a fundamental role based on its privileged status.
The SAR is the de-facto international aviation hub and offshore financial centre (also the largest global RMB clearing centre) of choice for the region. While the 5 international airports in the GBA will always expand their international routes, only Hong Kong will be the hub with more global connections and networks. The recent investment into the Zhuhai airport is a clear indication of Hong Kong trying to cater for a better and faster integration with Chinese internal routes and provide a seamless experience and journey to those global travelers doing business in this part of the world, particularly with China.
After the recent economic and political challenges in the city, promoting an integrated GBA brand and “concept” would help the whole region grow stronger. Cities rivalry will still be there and would also be beneficial to the overall GBA development but the sooner each city will play its strengths under a synchronized agenda the sooner the bay would become a model of sustainable growth for other regions in the world.”
Exploiting The Belt & Road Initiative
Foreign involvement in Belt and Road projects has been limited, as much of the interest and attention has been on participating in the multi-million-dollar infrastructure builds, and these typically come with Chinese state financing, conditional that Chinese SOEs conduct the work. Chinese BRI projects favor other State-Owned partners rather than public companies, both for business cultural reasons and for keeping details out of public scrutiny; while the sheer nature of Chinese financial competitiveness combined with sometimes superior technology and construction expertise, also plays a part, especially on difficult terrain. China for example built the rail to Lhasa, very few if any foreign contractors have that type of experience.
Accordingly, involvement in BRI projects tends to be limited to Chinese contractors and their local partners where the project is situated. In fact, other foreign investors are missing a trick here, as most of China’s BRI projects are now nearing completion with the infrastructure build coming to fruition.
This creates new opportunities for foreign investors to look at the original purpose of building the project in the first place and the increased commercial business flows this will generate. For example, Sri Lanka’s Southern Expressway was completely Chinese built and financed (with a lot of criticism about the cost). However, that spurred a huge growth in the regional tourism industry. I touched on local connectivity projects here https://www.silkroadbriefing.com/news/2020/09/03/sri-lankas-hambantota-port-to-have-national-rail-connectivity-by-2023/ and about the related Colombo Port City development here https://www.silkroadbriefing.com/news/2020/08/11/colombo-port-city-turns-into-belt-road-initiative-cash-cow-for-investors/ which will see Colombo develop into a Southeast Asian office center for back-office functions. All of these provide investment and service development opportunities for foreign investors.
I can relate to these firsthand as I maintain several properties in the southern coast of Sri Lanka. I have personally experienced the developments that the Southern Expressway has brought in and how the Port city development is progressing and have no doubt that this experience will manifest itself across other BRI projects as well. I described some of these as follows:
Belt & Road Projects In Southeast Asia That Foreign Investors Should Be Exploiting (embed links to each)
China-Europe Rail Freight Doubled In 2020. These Are The 44 Key And Emerging European Freight Hubs To Watch
The European Belt, Road, Railways & Ports That Investors Should Be Examining
African Belt & Road Projects Global Investors Should Be Aware Of
The message here is that the opportunities lie where the BRI infrastructure build has been completed, there are asset enhancements and appreciations, and international investors can provide the service elements to support the increased trade and human needs the physical infrastructure provides. But very few businesses are looking at this, although our firm www.dezshira.com provides the market intelligence for them to do so. The penny hasn’t yet dropped, yet there are ways to examine the potential for involvement and exploiting the build.
Risks, Regulations and Compliance
The main issue is looking at the local financing and regulatory requirements along with local banking issues. These can vary tremendously and especially along the BRI as by proxy most of the countries involved are emerging economies. Investment laws and service facilities may not be as advanced as in Europe or North America. China gets around this by having G2G agreements that are typically worked out at the diplomatic level, foreign private investors may not have this option. So, the first thing to look at are the local investment laws, and what banking services are provided to foreign investors. This needs to be done on a country-by-country basis as not all have the same legal, tax or operational infrastructure. Many do not possess internationally or even commonly traded or exchangeable currencies. Often local laws permit the investment of foreign currency but restrict its subsequent repatriation. I discussed the varying types of legal and regulatory systems deployed along the BRI in the article Corporate Law Standards And Procedures Along The Belt And Road Initiative. https://www.silkroadbriefing.com/news/2020/10/06/corporate-law-standards-and-protocols-across-the-belt-and-road-initiative/
Also, there are double tax treaties that impact upon applicable rates, these can be used to mitigate against profits tax levels. All this needs to be understood before any investment is made. The first thing any business interested in looking at investing in a second country should do is examine the local foreign investment laws, applicable tax treaties and the local regulatory environment and examine the operational aspect of handling financial transactions.
For South-East Asia, and the ASEAN bloc, all these countries have differing foreign investment laws, different currencies, and levels of banking capabilities. All are part of the BRI and there are huge opportunities for exploiting the infrastructure build that is taking place across the ASEAN region. It can be very difficult for foreign investors based overseas to establish meaningful relations from the UK with local banks in ASEAN. However, Singapore is the de facto financial capital of ASEAN and numerous Singapore banks have relations with their ASEAN counterparts. So, using Singapore as a base for handling ASEAN investments is sound corporate practice and is a subject discussed in the article Why Singapore Is A Good Base For Establishing Financial Treasury Centers. https://www.aseanbriefing.com/news/why-singapore-is-a-good-base-for-establishing-financial-treasury-centers/
There are similar trade blocs in other parts of Asia, the Middle East, South America, Africa, and Eurasia. The good news is the regulatory aspect is defined. What needs to be conducted is the local regulatory research.
There are additional risks that corporate treasury departments must navigate regarding BRI projects, many of which will be familiar to Treasury professionals:
Political risk – the stability of the local government and its credit rating;
Currency risk – especially during these times, assessing currency risks, inflation, devaluation, exchange rate fluctuations and so on all need to be assessed;
Due diligence – checking out the local bank’s viability, the imposition of any sanctions, and operational ability to conduct business – some countries, including China, are extremely reluctant to process banking arrangements with even legitimate businesses due to the extent of US sanctions.
Ability to repatriate funds
Ability to access professional firms at standards able to fold local accounts into consolidated reports to HO regulatory standards.
There may also be issues related to trademark registrations if investors are to introduce their brands to new markets. I discussed that in the article Submitting Trademark Registrations Along The Belt & Road Initiative. https://www.silkroadbriefing.com/news/2020/10/05/submitting-trademark-registrations-along-the-belt-road-initiative/
While the immediate momentum, scale and long-term timeline driving BRI projects has slowed due to the Covid-19 pandemic, Multinationals will increasingly want to take advantage of China’s more pragmatic view on international involvement and constrained ability to be the sole financier of all things BRI. There may have been a slowing of BRI investment right now, but it’s here to stay. China judges the short term by decades, and the BRI is an opportunity for businesses with a longer-term development view. British companies and investors have plenty to consider.
Chris Devonshire-Ellis is the Chairman of Dezan Shira & Associates. The practice provides research, legal, tax and compliance services to foreign investors throughout Asia. Please contact the firm at email@example.com or visit www.dezshira.com
His new book, “Identifying Opportunities Along The Belt & Road Initiative” can be downloaded for free here