4 September, 2016
The 'new Eurasian land bridge' proposed under China's One Belt One Road (OBOR) plan follows one of the ancient trading routes across Central Asia, Mongolia and Russia to finally reach Europe at Rotterdam.
There is a certain romance, and even logic, to seeking to recreate such historic trade routes, and it represents a marked shift in China's economic policies away from securing inward investment to one which seeks to support a role as an international investor.
Land-based OBOR routes have the potential to provide real benefits to those countries that are prepared to engage with the Chinese vision for stimulation of international trade. Alongside the northern route, improving access to South and South East Asia and the Middle East is logical and has the potential to open up trade in both directions. If China can work with countries along the path of these trade routes, the economic benefits from the infrastructure work and surrounding investments are potentially enormous and may do much to support continued economic growth within China.
However, realising China's economically expansionist vision will be a significant challenge. The building of physical infrastructure in the form of roads, railways and bridges across Central and Southern Asia and Russia will present an engineering and logistical challenge. Even where the physical complexities can be overcome the routes pass through some of the world's most politically unstable regions, in many of which investors and western companies will not engage. There is also likely to be an inherent cautiousness on the part of China's neighbours, particularly in Russia and India, to engage and facilitate China extending its regional influence, although at present Russia appears to be willing to align its strategic infrastructure development programme with OBOR.
No matter how much money China and the Silk Road Infrastructure Fund is prepared to invest, the level of development proposed under OBOR can't happen without local buy-in, political stability, local skills and investment and a pipeline of viable projects. This is where the proposed routes may encounter problems. Many of the countries along these corridors, while undoubtedly requiring substantial investment in infrastructure, lack the skills and resources that China needs. Without geopolitical stability, reliable legal systems or local institutions able to handle and support large-scale investments, China may struggle to get projects off the ground. Careful planning will be needed to minimise these potential issues and this provides an opportunity to western companies to sell their expertise.
Despite these concerns, projects are getting underway. Pakistan recently saw Chinese investment in new energy projects and announcements of support for a new highway and coal mine, all under the OBOR initiative. Clearly there is some positive momentum building and a number of new projects have signed up along all the routes during the first half of 2016, but whether this can be sustained remains to be seen. The potential economic benefits for any country involved in OBOR may be huge if the Chinese vision is realised, providing access to the massive Chinese market, driving down barriers to trade and encouraging movement of people, investment and capital for major infrastructure and telecommunications. However, we will have to wait to see how palatable such policies are, particularly at the western extremities of the OBOR.
There are potentially huge business opportunities for those companies willing to invest despite the challenges. Many of the risks may be manageable with careful project evaluation and mitigation measures. For western companies, those projects supported by the AIIB and NDB are likely to be the most viable. The opportunities are out there but one thing is for sure – it is going to be a long journey.
For further information, please contact:
Ian Laing, Partner, Pinsent Masons
ian.laing@pinsentmasons.com
