China’s Belt and Road Initiative - A guide to market participation
In its heyday, the Silk Road was the most important trading network in the world – connecting East to West and stimulating economic, diplomatic and cultural development. Some 2,000 years later, China has set out to rebuild this historic highway. Today, the Belt and Road Initiative (BRI) has expanded far beyond its original scope, reaching as much as 65% of the world’s population, while covering half of world gross domestic product (GDP), 75% of all known energy reserves and a quarter of all cross-border goods and services
As Michael Spencer, Deutsche Bank’s Chief Economist explains, the BRI is “first and foremost an economic venture”, reflecting the government’s confidence in its economic development model, which holds that rapidly building infrastructure prevents bottlenecks that constrain growth. However, the initiative has come to encompass much more than just transport infrastructure, expanding to include healthcare, education, tourism and media-related ventures as well. Deutsche Bank has developed this white paper in response to client demand for a comprehensive guide to the BRI, and what opportunities it brings existing and potential participants.
Head of Belt and Road Initiative Office, Deutsche Bank
Environmental, social and corruption risks are ever-present in such large-scale developments. With the aim of mitigating some of these risks, 27 institutions – including Deutsche Bank – first signed up to a set of voluntary principles known as the Green Investment Principles (GIP) in April 2019, to incorporate sustainable development and low-carbon practices to the BRI. This list has since expanded to 33 with a further nine supporting institutions (the full list can be viewed in Figure 6 of this white paper).
Meanwhile, ensuring a project’s success also means securing funding and ensuring debt sustainability. An estimated US$1.9tn worth of annual investment is still required to fund the BRI – and the Chinese government, which has been funding projects through the use of its foreign reserves, has likely committed as much of these as it is prepared to. Instead, the country has turned to borrowing to fuel the initiative, prompting concerns over Chinese debt levels, which were already estimated to reach 300% of GDP in May 2017.
Third-party country partnerships
"Business and economic ties between China, Europe and BRI countries continue to strengthen. By committing to the Green Investment Principles, we are pledging that we will not only help steer BRI’s open collaboration across countries from China to Europe, but also strive to ensure these projects are as sustainable as possible."
With China’s financing capacity stretched, collaboration with third-party countries and investors is being increasingly encouraged. Cooperation with international banks and foreign investors will not only bring in much-needed funds, but also ensure a diversified financial participation that makes projects more resistant to geopolitical and financial risks.
Partnerships between China, a project host country and third-party investors can also help BRI projects balance Chinese financial investment with additional quality assurance and risk mitigation from best-in-class providers. Section 4 of the white paper shares a selection of Deutsche Bank BRI deals that were made possible because of partnerships with the Chinese government.
The road ahead
Over the next few years, the continued success of this project will likely be driven by growing interest from global banks and investors prepared to fund projects within higher-risk regions. The backing of China’s big four state-owned banks, along with support from Sinosure and the country’s development banks, represents a huge advantage – reassuring participants of the strength and stability of BRI projects.