Silkroad Explained: "We want to depoliticize this initiative"

I am very grateful for the opportunity to introduce our new initiative Silkroad Explained in an interview conducted by Andreia Sofia da Silva in Hoje Macau. To read the interview (in Portuguese), please click here. The translation to English, please find below.

Silkroad Explained: "We want to depoliticize this initiative"

Demystifying ideas and explaining the steps to be adopted for investment and cooperation are the main objectives of the 'Silk and Road Explained' project, which has the collaboration of academics from various countries associated with China's "One Belt, One Road" policy. Marcus Schütz, university professor and specialist in Chinese investment under this policy, is one of those responsible for the project. He argues that, in this area, Macau has a cultural and diplomatic role, while Hong Kong has not managed to innovate beyond its role as a financial centre.

How did you come up with the idea of creating this project?

The first idea was to bring together a group of academics and collaborators who work on projects related to the "One Belt, One Road" policy. We soon realised that there were different understandings of what this policy is. For me, it is more of a narrative, it is a way of coordinating funds and projects, not just Chinese ones. It is a multilateral effort, although it originated in China. I would say that the Western view of this initiative is very politicised and we want to be away from that. Our aim is to demystify some of the narratives that are out there around this policy, but that is not always easy. We want to depoliticise this initiative with the explanations that we give and invite more participants from China into this discussion. We really want to take a neutral view.

Do you want to move closer to an economic view, perhaps?

The Global Policy Institute in London, which is one of our collaborators, takes a view of policies that lead to better trade relations, better integration and linkages on imports and exports. They look at the financial systems that we are embedded in, we have the US dollar, the euro, the renminbi. This is the policy part, but then we have the practical side, the implementation side, which aims to answer the question: "if I want to be part of this if I want to apply for funding for a project, what steps do I have to take?" And then there is a third part, related to the opportunities that this policy can provide. Now we look mainly at the opportunities for Western companies.

There is the question of the financial dependence of some countries on China, thanks to the loans granted?

Dependency always develops when you have a business partner. We often see the argument that China deliberately lends money to countries that are weaker so that there are difficulties in repaying that loan, to increase the impact on the internal policies of those countries. For example, in African countries, recent research by John Hopkins University looks at the loans given to African countries and no evidence was found that this was done to increase the dependency of those countries.

With the pandemic, do you believe the "one belt, one route" policy faces major changes in how investments are made?

In the area of construction, for example, the good thing is that this sector managed to stay apart and was one of the few that did not suffer from the pandemic. When we look at the investments in the area of infrastructure there is no change, things continue. The only obstacle of the "One Belt, One Road" policy, which I think is significant, is that the average amount of funding that China can allocate to other countries is relatively low. Right now, when we look at these projects, we see that they have been financed mostly by Chinese entities, and then there is very little participation from other countries.

Portugal is an important partner of China in this policy. How do you see the future of this bilateral relationship? Is it a sufficiently competitive country?

I think that it is not necessary to be competitive to participate [in this policy], because there are many different countries participating, with different models. You can be an investment partner, a transit country for trade or for European markets. Portugal, geographically, is a little distant, so the question that arises is what kind of agreements is the country looking for. Portugal is integrated into the European Union and it depends a little on how the discussion takes place and how member states position themselves in relation to the "One Belt, One Road" policy. One example is Greece and the port of Piraeus. This is a narrative and we can play our part in that narrative.

What is the role of the Chinese special administrative regions in this policy? Macau is not a financial centre like Hong Kong, but it appears a lot in the political discourse because of the relationship it may have with the Portuguese-speaking countries.

The roles of Macau and Hong Kong should be very different. I see Macau as a bridge to the Portuguese-speaking countries because of its Portuguese heritage. Hong Kong is different, it is a financial centre and has a currency linked to the US dollar. But, on the other hand, despite being a financial centre, it does not have much to offer to the "One Belt, One Road" policy. When we look in terms of logistics, at the place of the ports of Hong Kong and Shenzhen, the port of Hong Kong is no longer strategic in this regard. I go to Hong Kong once a year where I teach at a university, precisely on the "One Belt, One Road" policy. And I feel that Hong Kong is facing difficulties in its participation. It is a financial centre, but when I talk to partners there I notice many questions about what this policy should be and what role they should take.

The political situation in Hong Kong is also likely to contribute to these difficulties.

Macau has been treated with more sympathy by China than Hong Kong because of that situation. I talk to the students, I know how they feel and I sense that in Hong Kong there is a lot of discontent with the way things are going. The Grand Bay may help bring some rapprochement, but I don't see this policy being part of the "One Belt, One Road" initiative. Hong Kong is undoubtedly facing difficulties on a number of fronts.

Even in relation to the Greater Bay Area project, there are constraints.

Hong Kong, to me, has failed to develop the tools and capabilities, to be truly useful outside the financial sector. That is something that is difficult to achieve. There's no technology, innovation, all these things don't happen and they don't happen in finance either, which is more ridiculous.

But Macau is also looking for economic diversification, for example, because it still has nothing else but gambling.

Nobody is asking Macau to have a specific function, because it's not possible. What is being asked is that it be a link in cultural and diplomatic matters with other regions. I don't see anyone demanding that casinos participate in the "One Belt, One Road" policy. Macau has its own problems, and one of them has to do with the size of the territory.

(Translated with www.DeepL.com/Translator)

China's 14th Five Year Plan

China's plans have always been ambitious, especially in terms of growth rates. But of course, as the world's second-largest economy, quality aspects have been on the rise already long before the latest "Two Sessions" of the People's congress. China's economy is in transition, and it is clearly becoming harder to improve "one dimensional". While in recent history, plainly "horsepower" of the economy also reflected in the general improvement of quality of life and poverty reduction, now efficiency and resilience come more into play. Revealing the draft of the 14th Five Year Plan, it also becomes clear that China will deal with long-term structural issues, starting from overaged demography, socially unsettling topics to further economic reforms and strengthening of domestic innovation. The numeric targets of what has to be achieved by 2026 have become far less assertive than in the previous year, except those which directly measure the quality of life and successes in e.g. the reduction of Carbon-dioxide emissions. A compilation of some of these targets by Merics you find by clicking here.

The year of pandemic, following four years of a trade conflict with the USA and uncertainty about the new US administration, continuing a "tough stand" has left its traces. The American rhetoric is less vulgar but still appears to follow similar principles than the previous administration. Meanwhile, China continues to attract FDI and continues opening up sectors for foreign investment. Economic recovery started earlier in China than in many Western countries, giving some headspace for tackling unemployment, strengthening the middle class, domestic consumption and laying the foundation for becoming more independent in key components and technologies.

Externally, the RCEP Free trade agreement is now combining markets of 3.6 billion people, and some of its member countries, which pick up production of low-cost, labour-intensive industries from China, can now export their goods duty-free to China. Beyond this, China stays committed to partnering with and investing in countries along the One Belt, One Road Initiative. For the relation to Europe, the recently signed China-EU Investment agreement forms a platform on which further co-operation will be achieved. The likely effects of this agreement will also fall into the period of the 14th Five Year Plan.

With reaching the threshold of transitioning away from an emerging economy, China takes another role in the international community. This reflects a stronger economic and cultural presence abroad and is seen in joint efforts tackling global challenges and threats.

Whatever specific measures will be taken to roll out the 14th Five Year plan, we will see changes that go far beyond the "reform" of previous plans in terms of quality before quantity.

The New Silkroad: Opportunities

We are forming a multinational network of experienced researchers and executives on policies, practicalities and opportunities related to the One Belt, One Road Initiative; sometimes also called “The New Silkroad”. Soon there will be a website launched at www.silkroadexplained.com providing information and commentary on the status quo and developments.

When thinking about business opportunities in the New Silkroad context, what comes to mind first are extensive infrastructure and energy projects. Railways, ports, highways, pipelines and power plants, including their financing services, have been in focus in the first stage and still are. But these operations serve a purpose, which is to create economic opportunities along the way. For centuries, where trade routes crossed, wealth immerged, cities flourished, living standards rose, and migration drove goods and services' demands. 

Different countries, participate and benefit differently from the Silkroad. There are those which are getting alternative logistic connections with their traditional trading partners, like Europe's railway connection to China. In the volatility of geopolitical conditions, these can even become a vital lifeline. Other countries benefit from the FDI influx and later use the infrastructure to access new markets, potentially upgrading industries from raw materials, over manufacturing to higher-margin goods and services. Also, transit countries can participate in upgrading handling capabilities, once the infrastructure is in place. Lastly becomes visible, even the direct cost of low efficiency, instability and corruption. Participation in trade need reliable partners, and volatility becomes a missed opportunity. 

Infrastructure opportunities

Infrastructure investments are the main foundation and pillar of the Silkroad. There are myths around infrastructure projects would "all go to Chinese State-owned Companies." Chinese companies have capabilities and technology to operate in environments with thin infrastructure. These reach from building railroad tracks in permafrost to telecom and digital infrastructure. But this does not mean that a large proportion of projects outside China are not projects awarded to Chinese companies. With the need for stronger multinational leveraging of financing, there is no interest in over-dominating Silkroad projects with Chinese contractors. 

Financing opportunities

The AIIB is an example of a multinational bank, based in Beijing, dedicated to investing in Asian infrastructure. But with the need for international leverage, financial institutions and governments from around the world participate in the financing of Silkroad projects. This is also where many of the most capable practitioners are found. 

Increase and movement of purchasing power

Increased purchasing power and migration are the foundation for the demand for goods and services in a region. Rising professional opportunities and standard are like a magnet and in some areas have proved to be able to revert trends of people moving to large cities. This creates opportunities reaching from retail to supporting functions.

Where whole cities are built up and redesigned, the spectrum of opportunities reaches from urban planning to architecture projects to development and construction.

Qualification and training opportunities

Building up an operation in a new region to be developed and upgraded always poses challenges in finding qualified human resources. Qualification, training and education are the key dimensions on how to overcome the short supply of workers. It includes cultural integration and exchange as a foundation of bilateral cooperation. 

Health and Sustainability

The Health Silkroad and the Green Silkroad are the newest additions to the programme. They follow the bare necessity of providing better healthcare services in emerging markets and the apparent learning that much damage and cost can be avoided by choosing and implementing more sustainable economic developments models.

What does the EU-China Comprehensive Agreement on Investment mean?

In December 2020, as part of its evolving partnership, the EU and China formulated an agreement on the investment conditions. By catering to both sides' changing interests and demands, it lays a foundation for a boost in economic activity and an interlinkage between these large markets. It remains to be seen whether it really brings about a "level playing field" for EU and Chinese investors, during the process of detailing and ratification by the EU parliament and the member countries. But it will surely be a less "inclined plane" and will therefore have enormous potential for an economic boost. 

Background 

Since the opening of the Chinese economy in 1979, the welcoming of FDI has been a characteristic of the Chinese economic development model. Even so, the full and independent market participation of investors was constrained by regulation. Given the low competitiveness of many state-owned and privatised companies, such restrictions aimed at building up a strong domestic industry, without facing unfettered competition from foreign entrants. This resulted in many "technology for market access deals" and the obligation for foreigners to form Joint Ventures, as for example, the automotive industry and other core pillars of China's industrial development. With China joining the WTO in 2002, the full repatriation of dividends to foreign mother companies became possible. Prior to this, overpayment by Chinese Joint venture partners for goods, services and IP was a common way by foreigners to take money above the line, out of China, with all the implications of the loss of corporate tax incomes for China. 

Since then, Chinese companies have improved significantly in competitiveness, technical capabilities and market access. As a consequence, foreign investors have become more vocal in describing the regulations as unfair. Some even realised that their Joint Venture Partners have grown to become fully fletched competitors on the global stage.  

From a Chinese perspective, it also became clear that "overprotection" of domestic companies, was not helping them develop their own capabilities, but weakened them and kept them dependent on foreign joined venture partners. It became a Chinese interest to find the right level of protection to encourage healthy competition. Simultaneously, the boom in Chinese Outbound Direct Investment (ODI) raised the interest of Chinese companies in creating a level playing field.  

What are the interests of both sides? 

Chinese authorities know about the value of healthy competition in developing a strong industry. For over a decade, they have been withdrawing regulations in order to balance power between foreign and domestic companies. On the other hand, in Europe, there are voices for more substantial restrictions designed to limit inward Chinese investment. For example, A landslide case in Germany was the acquisition of the robotics company KUKA by the Chinese Midea, which led to significant changes being made in the German company law. The question of a level playing field is not about Chinese making concessions, but it is rather a discussion between equal partners with similar interests. 

Most of the EU investments in China fall into manufacturing, 28% for the automotive sector alone and a further 22% for materials. Among others, this includes the production of cars, chemicals, telecoms equipment, and health and medical equipment. 

China's investments in the EU investments include IT and financial services, healthcare, environmental services, international maritime transport and air transport-related services. Due to the concerns of inefficient capital outflows out of China, in 2016, one of the licencing criteria for ODI became a demonstration that the investment should fall under the scope of the "One Belt, One Road Initiative" (BRI or OBOR) 

What are the new commitments from both sides? 

European companies will gain from more consistency for their operations as China reduces entry barriers, and access restrictions and discriminatory practices, or even eliminates them altogether. will  

Chinese State-Owned Enterprises, especially,  will be required to provide "transparency of subsidies, prohibiting forced technology transfers and other distortive practices." 

While China guarantees easier authorisations for European companies and complete administrative procedures, the EU provides access to Chinese companies establishing European bodies for their entities. 

China no longer be able to attract investment by lower environmental and labour standards, so it committed to implementing the Paris Agreement on Climate Change and will make efforts to ratify the International Labour Conventions on forced labour.  

 
Analysis 

The EU - China Comprehensive Agreement on Investment is an ambitious milestone in developing the Union and China's economic ties and partnerships. It is set to be modernised according to changing requirements. 

Clearly, for China and the EU the deal, negotiated under the German EU presidency, is a significant success. However, national ratification by the member states and obtaining the consent of the EU parliament may be more complex. There could emerge an attempt to increase pressure on China in terms of potential human rights issues.  

It remains to be seen, how the US-Chinese relationship develops under the new US-Administration. The newly sworn-in US-Defense secretary has already called on Asian allies to strengthen military ties. The EU will become a subject in the triangulation of geopolitical power. 

For both, EU and Chinese companies, the current agreement significantly reduces access barriers and restrictions, so that volume and quality of transactions, trade and conditions will improve to a new era.