A Silk Road train sets off from China for markets in Central Asia ExEcutivE intelligence BRiEF

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1 Feature China/Barcroft Media via Getty Images A Silk Road train sets off from China for markets in Central Asia M A R C H ExEcutivE intelligence BRiEF

2 Executive Highlights The March edition of the Executive Intelligence Brief presents the following in-depth, strategic analyses: CHINA MONTHLY REPORT Beijing has signaled that bolstering growth will take precedence over economic reforms this year, as the ruling Communist Party enters a politically charged period ahead of a leadership transition. External pressures are also impinging upon China s agenda, with spillover from North Korean tensions threatening to touch off a regional arms race. CHINA/SILK ROAD President Xi Jinping s New Silk Road initiative has become the centerpiece of an assertive foreign policy advancing a Sinocentric economic order and broader geopolitical goals. The massive enterprise also aims to bolster Chinese manufacturing and construction companies. Opportunities for global businesses will arise across Eurasia and beyond in a host of industrial sectors, as well as in the funding of major projects. TURKEY/ERDOGAN STRATEGY A referendum next month on granting President Erdogan executive powers is likely to bring early elections, which would mean deferral of action that could spare the Turkish economy from a hard landing or even a full-blown crisis. Terrorism, both by Kurdish factions and the Islamic State group, has taken a heavy toll on the economy, and further high-impact attacks are probable. MEXICO/ELECTORAL POLITICS Andres Manuel Lopez Obrador, a populist and nationalist seen by many as Mexico s champion against an assertive US, is leading the race to become president in The popularity of some recent economic and social reforms, especially the overhaul of education, should ensure their survival, even if Lopez Obrador wins the presidency on his third attempt. PAKISTAN/CHINA ORIENTATION After nearly 50 years of carefully balancing relations with both the US and China, Pakistan is now tilting decisively toward an alignment with Beijing. The shift is partly a reaction to America s embrace of India, but China s plan for an economic corridor through Pakistan (as a branch of the New Silk Road) is also a very strong inducement.

3 March 8, 2017 CHINA SILK ROAD China s New Silk Road will offer global investors myriad opportunities in huge economic development projects. This Executive Intelligence Brief assessment serves in part to introduce a forthcoming, comprehensive study on China s One Belt, One Road project. This unprecedented global enterprise, which is well under way, will encompass prodigious investments and infrastructure development by China in some 60 countries around the world. Starr s executive consultants will examine the opportunities for American companies interested in participating in this undertaking, and be available to help them, on an exclusive basis, to identify, evaluate and mitigate risks for individual lines of business. Publication of the full study is planned for early summer. KEY FINDINGS President Xi Jinping s New Silk Road initiative has become the centerpiece of an assertive foreign policy advancing a Sinocentric economic order. The massive enterprise aims both to further Xi s broader geopolitical objectives and to help bolster Chinese manufacturing and construction companies. Opportunities for global businesses will arise across Eurasia and beyond in a host of industrial sectors, as well as in the funding of major projects. ANALYSIS As the global range and complexity of Chinese economic and security interests have multiplied, President Xi Jinping has sought to elevate China s global standing through wider trade and investment linkages. Xi s ideas for a new geopolitical order in Asia reflect a renewed emphasis on restoring national greatness by creating space for China to resume its rightful place as a foremost player in world affairs. The centerpiece of Chinese economic diplomacy under Xi has crystallized as a highly ambitious, multifaceted initiative officially termed One Belt, One Road (OBOR). Billed initially as a network of regional infrastructure projects, OBOR over the past three years has morphed into an enterprise promoting cross-continental connectivity through policy coordination, infrastructure construction, liberalized trade, financial integration, and cultural interchange. What is the scope of the initiative? Official depictions of OBOR seek to evoke the ancient Silk Road network of linkages that ran from China through Central Asia and the Indian Ocean basin to the Middle East and Europe. The plan envisions construction of high-speed railroads, highways, pipelines, energy transmission and distribution facilities, and fiber-optic networks through an overland economic corridor from Shanghai to Rotterdam, with industrial zones along the route targeted for economic development. A concomitant maritime component aims to link China s southeastern ports with the Persian Gulf and Mediterranean Sea. If it comes to fruition, OBOR will have 5

4 China s New Silk Road Initiative Overland Route: One Belt Maritime Route: One Road Source: The Signal Group created the world s largest integrated economic nexus, spanning some 60 countries with a combined population of 4.4 billion and an economic output of $21 trillion. Recent official statements indicate the scope of OBOR will extend well beyond infrastructure construction. The initiative also includes efforts promoting financial integration and use of the renminbi by foreign countries; creation of an Information Silk Road linking regional information technology and communications networks; and a negotiated reduction in barriers to cross-border trade and investment. How does the initiative fit in China s strategic game plan? Protection of trade routes and access to resources and markets on a global scale have become an important strategic imperative for Chinese leaders, who seek to attenuate potential outside threats by securing the country s Eurasian periphery while cultivating a host of energy and commercial ties to the west, south and north. In an effort to assuage foreign misgivings about Chinese geopolitical ambitions, Xi is attempting through OBOR to reframe the country s image internationally as a rising but responsible global player. In so doing, he nevertheless is sending an unmistakable message that China is intent on becoming pre-eminent in Eurasia. As part of its effort to rebalance the Chinese economy and put it on a sustainable growth path, Beijing seeks to shift low-end industrial activity away from eastern coastal provinces to relatively underdeveloped inland regions. At the same time, an expanding coastal consumer base would be expected to absorb manufactured goods from the newly industrialized interior: New and revamped overland transportation linkages under OBOR will be essential for bringing about this geographic shift to correct China s internal disparities. Improved connectivity between China s inland industry and new markets in neighboring countries to the west, north, and south will also be extremely important. executive intelligence brief

5 Investment in energy and mineral resource extraction under OBOR would reduce China s reliance on commodities imported via vulnerable sea routes and choke points such as the Strait of Malacca. What are the potential opportunities for foreign investors? As specific components of the OBOR initiative begin to take shape, global businesses and investors are sizing up prospects for participating in what has been called the largest economic development project in history. Beijing estimates that $890 billion in investments will be entailed in implementing OBOR transport, energy, and communications projects. Its success in garnering international support for the launch of the Asian Infrastructure Investment Bank in 2014 swiftly enlisting 58 charter member countries, including most of Western Europe evinces widespread global interest in participating in Asian investment opportunities. The eagerness of western corporations to take part in OBORrelated projects may spark a broader revival in the mining, commodities, and construction sectors: The rush initially could be led by global mining giants, as the area encompassed by OBOR holds huge mineral reserves, including precious and industrial metals as well as large oil, natural gas, and coal deposits. Global energy and engineering firms and transportation equipment manufacturers also will be assessing opportunities linked to opening new infrastructure routes and establishing a more efficient and better integrated energy network among OBOR countries. Participation could take various forms including joint partnerships, investment funding, technology transfer, engineering and construction, public-private partnerships, procurement support, and supply-chain development. A financial structure to support OBOR has begun to take shape, with China s central bank having transferred $82 billion to three state-owned policy banks for OBOR projects and with the sovereign wealth fund backing a new Silk Road Fund worth $40 billion. While there are elements of aid in some projects, it appears the bulk of OBOR funding will come from loans, with the China EximBank and China Development Bank as key lenders. The prominence of loan financing underscores the importance of assessing potential risks with OBOR projects, since government support will not necessarily ensure viability, and prospective investors will face the challenges of performing due diligence in uncertain political, economic, and regulatory environments. Chinese lenders have begun to syndicate participation in OBOR projects to a range of international investors and lenders. The shift entails syndication to international pension funds, sovereign wealth funds, insurance companies, and private equity funds. Global investors such as these may be attracted by the prospect of long-term returns of 6 8% on OBOR infrastructure development. Coinvestment could offer opportunities for international investors interested in gaining a foothold in OBOR activities, as Beijing has begun encouraging foreign companies to join with Chinese construction firms in rail, power, and dam investments in OBOR partner countries. Outlook In the wake of Washington s decision to withdraw from the Trans-Pacific Partnership, Beijing will likely pursue a strategic opening in which OBOR could be used to draw neighboring countries into China s geopolitical orbit. By proffering Chinese financial resources and capabilities in large-scale infrastructure construction, OBOR may induce governments to pursue greater cooperation with China. Implementation of the full range of OBOR initiatives would boost commercial and financial connectivity between China and the rest of Eurasia, helping to entrench Sino-centric patterns of trade and investment. Beijing is looking to OBOR to bolster the world s secondlargest economy, while helping to address challenges, such as domestic regional growth and income disparities, as China transitions to a slower and more sustainable growth path. Furthermore, at a time when China s manufacturing and construction sectors are saddled with chronic overcapacity, OBOR could help to ease entry of Chinese products into foreign markets via new regional supply chains. New Silk Road initiatives could also win more contracts for Chinese manufacturing and construction companies along with foreign businesses investing in or partnering with them throughout Eurasia and beyond. 7

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