Impact of Belt and Road big but hard to quantify

Impact of Belt and Road big but hard to quantify

The various forms Belt and Road investment takes makes it difficult to put an exact value on how much has been invested.

China’s Belt and Road program continues to generate high-levels of interest in the global shipping community as its unprecedented scale and heavy focus on trade and transportation infrastructure ensure that will impact the industry enormously in decades to come.

The potential impact of Belt and Road is closely related to its scale and getting an accurate picture of the real size of the program in terms of projected investment levels. Another key question is the eventual reach of its development projects and how that reach shapes the future of shipping.

For many, beyond the headline numbers of multi-billion-dollar investments, Belt and Road is an opaque concept, and industry actors from port operators to tanker owners are in the dark over how and to what extent the program will affect their businesses, and how to develop and implement strategies to benefit from it.

For those watching closely how the program evolves, the fact that direct investment by Chinese enterprises in Belt and Road countries actually shrank in 2016 came as something of a surprise. Despite its high profile as a cornerstone of Beijing’s economic policy, official figures from the central government show direct investment by Chinese enterprises in Belt and Road countries reached just $14.5 billion in 2016, down from around $14.8 billion in 2015.

This is well below 10 percent of China’s total overseas direct investment (ODI) last year, and a good place to begin busting a few myths in terms of how Belt and Road investment and project implementation really works, and why it is such a challenge for anybody to forecast its potential scale with a useful degree of accuracy.

“There is this sense with regard to Belt and Road that Beijing is implementing some sort of grand plan, but it really doesn’t work like that,” said Tom Miller, a senior China watcher with global economic research company Gavekal and author of the newly published “China’s Asian Dream.”

Miller spent the past three years studying and picking apart the overseas expansion of Chinese companies and the policies behind it, including visits to many Belt and Road countries and project sites.

“There are often question marks when it comes to official figures out of China, but the figure for ODI in the Belt and Road countries for 2016 is relatively low and it does not look exaggerated to me.”

The figure is low because it is deals outside of ODI that make up what is by far the biggest segment of projects categorized under the Belt and Road program.

In addition to the $14.5 billion in ODI, Chinese companies last year signed contracts with entities in Belt and Road countries valued at $126 billion, a number more than 50 percent higher than its equivalent in 2015.

It is Chinese construction companies signing contracts to build infrastructure linking trade and transport systems, as well as large port projects and industrial zones, and that are behind those multi-billion-dollar headlines.

These contracts are typically financed by loans from Chinese banks and directly achieve one of the main policy goals of Belt and Road: to provide markets abroad for capital goods and new business for Chinese construction companies.

“The largest part of Belt and Road activity by a long way involves individual commercial companies going overseas and sourcing deals. There is certainly good diplomatic backing and support for those deals, but they are essentially commercial projects arranged by individual Chinese companies rather than state projects,” said Miller.

As commercial projects, they are subject to all of the normal challenges you would expect from commercial deals in what are often very poor countries. This means, for instance, they may or may not come to fruition, and many of them will change substantially in terms of both scope and value before they are completed.

This makes it very challenging if not impossible to come up with accurate projections for investment values for even single Belt and Road projects let alone the entire program, according to Miller.

“Making projections about the potential scale of Belt and Road investments is not too far from meaningless,” he said.

An important example is Gwadar port in Pakistan and the related China-Pakistan Economic Corridor (CPEC), which is probably the highest profile ongoing Belt and Road project. In addition to extensive port infrastructure, the CPEC includes a 3,000-kilometer (1,864-mile) network of highways and railways from western China running down the full length of Pakistan as far as the sea, and a series of energy projects including solar, wind, and coal-fired power stations.

Gwadar is located in Baluchistan, which is home to an ethnic nationalist insurgency as well as operations by sectarian militants with links to Islamic State. The day before a ceremony in November to mark the opening of the newly refurbished Gwadar port, a bomb in another part of the province killed more than 50 people in an attack claimed by Islamic State.

Pakistan has deployed a dedicated security force thought to be more than 10,000-strong to protect the CPEC projects and the port, including troops to guard workers and Chinese employees, and to escort trucks carrying import and export goods through the volatile province.

“These issues can end up resulting in project price tags rising exponentially, or ultimately result in big changes in the nature of projects,” said Miller.

The significant downsizing of planned port and transportation projects in Myanmar is another high profile example of the fluidity of developments under the Belt and Road program.

A planned deep-water port at Maday Island and oil and gas pipelines linking the port at the town of Kyaukphyu in western Myanmar with China’s Yunnan province was eventually completed successfully. However, a more ambitious plan for a $20 billion railway and highway system to support the import and export of commodities besides oil and gas and other goods is on hold and will quite likely be scrapped completely.

“This was a deal that was actually done at elite level when the military junta was in power in Myanmar. As soon as the junta began to allow the country to open up, there was a popular backlash against the Chinese developments that disrupted plans massively.”

Miller points out that while certain projects such as these run into big challenges, making it difficult to quantify outcomes with any real accuracy, many projects proceed relatively smoothly and bring the expected benefits to local economies and industry as well as the individual Chinese companies involved.

The China Merchants-invested Colombo International Container Terminal, where annual container volume passed 2 million 20-foot-equivalent units for the first time in 2016, is a modern and efficient facility that successfully filled an infrastructure gap to support trade growth in Sri Lanka and India.

“Unless we have a black swan-type event, Chinese companies will continues to invest in infrastructure overseas such as ports with the blessing of the government. Not only do you have investment from Chinese companies, the program is also incentivizing investment in infrastructure from other countries such as Japan.

“Ultimately this is good for infrastructure in Asia as well as the other emerging markets where investments are taking place.”

Contact Turloch Mooney at turloch.mooney@ihsmarkit.com and follow him on Twitter: @TurlochMooney.

A version of this story also appeared on IHS Fairplay, a sister product of JOC.com within IHS Markit.