Embracing the BRI ecosystem in 2018

By Deloitte

Executive summary

It is difficult to think of any recent venture that has generated such a mixture of optimism and discussion as China’s transcontinental development project, the $900 billion Belt and Road Initiative (BRI).

Some in the West perceive it as simply a vast infrastructure project. Others fear its benefits are overestimated and the political, economic and environmental risks poorly understood. Or they worry BRI might, as the Financial Times put it in an editorial, “export the worst aspects of the Chinese economy, while increasing the strains on its already stressed financial system.”

The view from China is quite different. For President Xi Jinping, BRI is “the project of the century.” BRI’s proponents point to its successes to date and the promise of more to come in revitalising infrastructure ― and by extension trade and economic growth―across Asia and beyond.

A common complaint is that BRI has mainly benefited China’s state-owned enterprises (SOEs). That is largely true and, given the long investment horizon associated with infrastructure projects, will remain a feature of BRI. However, changes are afoot. BRI’s initial focus was on energy and infrastructure; it is now widening to trade, manufacturing, the Internet and tourism. Multinational corporations (MNCs) with competitive advantages are winning BRI-related deals, and we predict more will do so in the near future. In addition, geopolitical and financial risk considerations mean China will need to ensure more widespread participation in projects.

If we were to draw an analogy, it would be this: BRI is a journey, one with opportunities and risks, and one that―four years in―is still closer to its start than its end. That means investors need to take a longer view of projects than they are accustomed to doing. And while we do not downplay the risks, we believe they are less severe than many assume.

Although it remains to be seen how successful BRI will be, it is indisputably here to stay. In May 2017, a senior official at the top economic planning body, the National Development and Reform Commission, said China would spend a further $600– 800 billion over the next five years on outbound investment, and that “a fairly large proportion . . . will go into markets related to the Belt and Road Initiative.”

And, in October 2017, BRI was written into the Communist Party’s constitution, a sign of the project’s policy significance, and an indication, too, that Beijing wants to boost the participation of private firms.

In short, BRI, which has been a large part of the investment landscape across a swathe of the world for four years, will become increasingly important.

This paper summarises Deloitte’s key BRI insights for 2018, and also explains how firms can best position themselves to seize the ever-widening range of BRI investment opportunities.

Conclusion: Three key insights and predictions

Our experience with BRI projects over the years has allowed us to develop three key insights and predictions, all of which have appeared in this report in some form.

Firstly, BRI is much more than a Chinese-funded infrastructure project. And although SOEs have undertaken the bulk of BRI projects to date, we expect many more POEs and MNCs will become involved in the near future. Linked to this, many projects are underpinned by strong bilateral relationships between China and the countries concerned, which makes these investments more secure than outsiders might imagine. And while most participants are developing countries, it is also true that developed nations are increasingly involved.

Secondly, BRI’s opportunities will become increasingly plentiful, but a longer timeframe is needed when measuring returns―10–15 years rather than 3–5. And although many projects involve higher risks than conventional investments, it is important to keep those risks in perspective and deal with them dynamically.

Thirdly, BRI is a collaborative ecosystem that to date has focused on energy and infrastructure, but that over the next five years and beyond will evolve to concentrate on trade, manufacturing, the Internet, tourism and other aspects.

It is worth saying, too, that Beijing’s view of BRI is not well understood abroad: It sees this initiative as comprising a different interpretation of globalisation, one that is about optimising returns, not about maximising them in solely financial or commercial terms. This is encapsulated in the principle underpinning BRI: 共商共建共享, which translates as, “Trade together, build together, enjoy together.”

And so, while BRI is in part an initiative designed to push China’s economy to the next stage, to Beijing it is more too: a way to create a more equitable global economic system. MNCs that manage to position themselves well should find BRI a striking, multiyear opportunity.

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