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PwC's Growth
Markets Centre
February 2016
Introduction
Over the past year China has increasingly towards a more market-determined exchange
made headlines in global news, creating a rate, as well as many other government
constant stream of articles, background reports interventions and policy easing. In the midst of
and opinion pieces. Many of the events covered all these developments, it may be challenging
are having an impact well beyond the country to keep an eye on Chinas long-term goals,
and its own economy. Some of the main events ambitions and initiatives, most notably, the
that have dominated global news recently have massive efforts Chinas leadership is putting
included the ongoing slowdown of the Chinese into its going global strategy. These efforts are
economy, culminating in the slowest annual shaped more and more by the so-called Belt
growth in 25 years, several severe stock market and Road (B&R) initiative, an initiative that
crashes, official recognition by the IMF of the is gaining wider recognition and momentum
Renminbi as a reserve currency and a in public opinion in China, but not necessarily
significant devaluation while it slowly moves yet outside the country.
Belt and Road: a concept, Belt and Road (or B&R) as communicated by
the Chinese government is a concept which
astrategy, a slogan? aims to increase connectivity between the
During various state visits in 2013, Chinas Asian, European and African continents. The
president Xi Jinping announced the Silk Route intention is for this increased connectivity to
Economic Belt (SREB) and the 21st-century enhance trade flows and spur long-term
Maritime Silk Route (MSR). These two major regional economic growth and development,
initiatives were initially packaged and labelled benefiting all those involved.
under the overarching term One Belt, One
Road () or, in short: Belt & Road.1 The official information currently available,
Those who are new to the term may struggle to mostly provided by Chinas state news agency
understand what Belt & Road actually is. It is Xinhua, suggests that B&R comprises two
often communicated as a national vision and physical routes, with numerous side-branches
foreign strategy, sometimes resembling along the way. These two different routes
conceptual propaganda, but it is also ultimately connect China with Europe, Africa
mentioned in relation to concrete investments and Southeast Asia. This impression is further
and projects. enhanced by a map published by the news
agency, depicting both a land route running from
inner China to Southern Europe (via the
Netherlands) and a sea route connecting the port
of Shanghai ultimately with the end point of the
land-based route in Venice, via India and Africa.
Moscow
Rotterdam
Duisburg Almaty
Huoerguosi
Venice Bishkek
Urumql
Istanbul Samarkand
Athens
Dushanbe Lanzhou Xian
Tehran Fuzhou
Beihai Quanzhou
Kolkata
Hanoi Guangzhou
Zhanjiang
Haikou
Colombo
Kuala Lumpur
Nairobi
Jakarta
Silk Road
Maritime Silk Road
Source: Xinhua
3|Chinas New
new silk
Silkroute|PwC
Route|PwC
While in theory much broader in nature, B&R Falling exports, sluggish economic growth,
initially manifests itself primarily as a massive both globally and at home, and a persistent
infrastructure development programme. It is need for China to structurally transform its
based on the logic of using Chinas huge economy from being driven by government
economic leverage abroad and exporting its investments and exports to a more consumer-
strong infrastructure development capabilities driven model are, in essence, all at the base of
to other regions. Chinas recent launch and acceleration of the
B&R initiative. Due to the nature of its
An enormous financing commitment and economic growth model, China has created a
platform is supporting the B&R initiative. problem of serious overcapacity in many of its
Based on analyses, PwC predicts that B&R will industries. Chinas enduring emphasis on
mobilise up to US$1 trillion of outbound state heavy industries over the past two decades, as
financing from the Chinese government in the well as government being a decisive force in
next 10 years. Most of this funding will come the countrys economy are two of the key
in the form of preferential debt funding, but reasons for this overcapacity. By now, the
some will be in equity. The government has government has identified well over a dozen
created specific vehicles to help allocate this industries for which it is taking specific
money to appropriate projects and initiatives. measures to curb further production.
These include, amongst others, the recent
establishment of a New Silk Road Fund In the B&R initiative, the Chinese government
(NSRF), the establishment of the Asian sees a way to offset part of the existing
Infrastructure Investment Bank (AIIB) and the domestic overcapacity by exporting its
government directing large sums of its foreign well-developed engineering and construction
exchange reserves and several of its largest capabilities, materials and equipment and
state-owned banks to the initiatives. self-developed technology. Apart from Chinas
experience in building world-class
If carried out at full scale, the implementation infrastructure, it will mostly export excess
of B&R will cover a long time span of at least capacity with low opportunity cost and
30 to 40 years. 2049 is often referred to as a therefore there isnt necessarily a need to gain
key milestone as it is the year when the 100th quick returns. At the same time, China hopes
anniversary of the establishment of the to spur further demand for its goods and
Peoples Republic of China will be celebrated. services by enhancing connectivity and trade
between regions across Asia, Europe and
Africa, creating medium and long-term
Belt and Roads growth momentum and a boost to the
significance to China countrys GDP.
Although often described as a way to revitalise Within China, around 16 of the countrys
ancient trade routes, todays B&R initiative is 27provinces are covered by B&R and an even
much more comprehensive. Rather than a larger number has indicated a desire to
mere recreation of former connections and participate. For many less developed regions,
corridors throughout Central Asia and the mostly in inland China, the initiative is a clear
Middle East to connect China and Europe, opportunity to catch up with the more
B&R intends to go far beyond that. advanced provinces on Chinas East coast.
Central government also intends to bring more
B&R can be regarded as the most important stability to the interior states (most notably
driver for Chinas long-term development Xinjiang) by establishing better connectivity
strategy, foreign policy and in the opinion of with other regions.
some even a way to reform the structure of
its own economy. It is meant to shape both In its current form, B&R is also Chinas grand
Chinas national economic development strategy for developing a larger leadership role
strategy and international activities for the on the international stage and enhancing ties
years to come and is expected to feature with neighbouring nations. With a strategy that
prominently in Chinas next five-year plan seems largely based on loans and aid and
which will be released later this year. therefore helping China to build financial power
(including the wider international use of its
currency) alongside its trade power, the country
hopes to expand its influence in a geopolitical
marketplace where global powers are competing
for influence in emerging markets.
Russia
Mongolia
China
Key opportunities
Outbound capital projects and infrastructure
Technology especially in partnership with Chinese players
expert/ Supply equipment/technology/
licensing
intellectual property
Transportation/ Engineering
logistics services Joint or independent engineering,
export procurement and construction/project
finance
Outbound Belt and Road Joint new client developments
capital (e.g.developing market governments)
projects and Construction/
infrastructure labour Leverage Chinese partnerships abroad for
export accessing Chinese market itself
Leverage Chinese funding for divestment,
Outbound Equipment fundraising, etc.
financing export
Outbound financing/private equity fund
(e.g. joint AIIB, Silk Road Fund, etc.)
Better trade with markets with improved
infrastructure (Europe eastward)
While China has tremendous economic Furthermore, there are opportunities for
leverage which it intends to use abroad, even foreign companies that have previously proved
its pockets arent deep enough to cover the to be less successful in breaking into the
huge investments required to fulfil the B&R Chinese market. These firms could partner
initiative. It hopes to cooperate with different with Chinese players overseas and
governments, companies and investment subsequently leverage these customer
funds, potentially creating opportunities for relationships when re-entering the Chinese
many shared projects and public-private market itself. Its key to realise here that the
partnership (PPP) initiatives. majority of players reaping fruits from B&R
funding so far have been Chinas mega-sized
B&R is expected to have a significant impact state-owned enterprises (SOEs). One or two
on non-Chinese businesses in numerous ways. successful project partnerships with these
The figure above illustrates high-level players can build goodwill and track record to
opportunities brought by the first wave of gain an edge in their domestic bids. In the
B&R, especially for businesses that focus on Siemens-SEPCOIII partnership case
infrastructure building, including suppliers of mentioned earlier, SEPCOIII recommended
technology, equipment and components, raw Siemens to other SEPCO subsidiaries in China
materials and other elements to Chinese based on their good experience.
construction companies. They can partner
with their Chinese customers outside China in As well as industry players, financial players
much the same way as they have done inside such as private equity firms and other
China in the past. While technologies of institutional investors could potentially
Western firms complement Chinas discover investment opportunities. As Chinese
advantages, these complementarities will exist companies are increasingly experimenting
outside China for the Chinese companies as with PPP-type investments into infrastructure
well. B&R essentially expands the demands of in emerging markets, they are aided by very
their customers. Siemens, for example, has substantial Chinese public sector financing
won a US$1 billion order from Chinas and guarantee under the B&R banner. These
Shandong Electric Power Construction 3rd de facto subsidies drastically improve the
Company (SEPCOIII) for the construction of a infrastructure projects risk-return profile.
combined cycle power plant at the Ras Many of the SOE players are arguably too big
Al-Khair Plant in Saudi Arabia. Secondly, to fail and will receive Chinese government
foreign engineering, procurement and backing in negative case scenarios.
construction companies could partner with Furthermore, Chinas state-owned policy
Chinese players in overseas markets, or insurer will cover certain projects during any
conduct joint new market and customer political or social incidents.
development.
Gabriel Wong
PwC China Corporate Finance Leader,
Capital Projects and Infrastructure Leader
gabriel.wong@cn.pwc.com
Acknowledgements
In addition to the above, we wish to thank several foreign government and trade representatives as well
as international correspondents in China for their kind cooperation during the creation of this article.
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