One Way, No Way
China’s bold ‘One Belt, One Road’ strategy may well become a once-in-a-lifetime business opportunity this century. It will literally form an organic economic whole between Asia and the EU.. However some homework must be done to get prepared to this golden age.
It’s not a secret that the Chinese government is facing the challenge of declining growth rates. After years of double-digit growth, annual GDP growth fell to a range of 6.5% to seven percent. In order to boost economic activity and achieve its main development goal, which is to build a ‘moderately prosperous society’ by 2021, China has to overcome several barriers. Of course, Chinese problems are not unique. All emerging markets are facing four great development challenges that include infrastructure, digital technology, sustainability, and human capital.
A lack of infrastructure, especially roads – both railways and highways – not only in China, but also in its neighboring countries, constrains effective logistics of Chinese exports and imports. At the same time, China badly needs broader access to the new export markets; today, the country is facing overcapacity problems (particularly in metallurgy and machinery manufacturing). Another barrier that is closely related to the first one is the fact that within China, there is a striking contrast between the degree of development of the Eastern (seaside and globally integrated) and Western (interior and not globally integrated) regions. That is the problem of sustainable development. Moreover, one should not forget about ecological aspects in this process. The cost of environmental degradation in China has been calculated at about 3.5% of GDP.
The greatest challenge for Chinese economic growth probably lies in the field of human capital and innovation. The country is now facing the problem of the middle-income trap with a GDP (PPP) per capita of roughly $16,000 (economists reckon the trap’s fatal line to be $17,000). In essence, China is losing its competitive advantage ‒the average cost of labor in China is becoming higher than in neighboring countries. To overcome the problem, the Chinese economy must transform into a more value-added and innovation-driven economy. The first step in making the country become competitive in the new innovation and digital industries is to dramatically increase the quality and productivity of workers.
Infrastructure is key
A key way to address the abovementioned challenges is China’s own and unique initiative, the ‘One Belt, One Road’ (OBOR) strategy. It splits into two major parts: the Silk Road Economic Belt (SREB) and the Silk Sea Road. This strategy was announced by Chinese President Xi Jinping in September 2013 during his state visit to Kazakhstan. At first glance, SREB has two dimensions. First, it is supposed to be a powerful Eurasian transportation corridor that links the Eastern part of China with Western Europe (the port of Rotterdam). Second, it consists of several economic corridors with their corresponding infrastructure, which is developing along several routes. The northern road starts in the northwest region of China and passes through Kazakhstan and Russia to Western Europe. The southern way traverses Central Asia and the Middle East, while the third route links China to India, Bangladesh, and Myanmar. The Silk Sea Road includes a traditional route to the Indian Ocean through the Malacca Strait and a daring attempt to link to Northern Europe along the Russian polar coast. That was the initial concept. Yet, as often happens in China, such sophisticated strategies tend to be amorphous in the initial stage. OBOR was not an exception, as there still is no official list of member countries or identified number of projects. As a result, policymakers and economists all over the world have been engaged in guesswork while China is providing a varied range of additions and dimensions to the OBOR strategy.
At the infrastructure level, the overall mega-project budget is today estimated at a whopping $890 billion. It is intended to cover over 900 separate projects touching more than 60 countries with a total population over 4.4 billion people. Powerful financial infrastructure has been formed to manage the funds: the Asian Bank of Infrastructural Investment ($100 billion in capital) and the Silk Road Fund ($40 billion in capital). Chinese ‘policy’ banks are eager to contribute; the China Development Bank, the Export-Import Bank of China, and the Agricultural Development Bank of China are also keen to join. Last year, the People’s Bank of China, the central bank, allocated around $82 billion to the ‘policy’ banks for OBOR projects. The project will also involve funds from the New Development Bank, which isinformally known as the BRICS Bank.
The first infrastructure project under the OBOR strategy was announced by President Xi Jinping during his state visit to Pakistan in April 2015, which is a 720-megawatt hydropower plant in Karot, Pakistan. The Silk Road Fund will invest $1.65 billion in the project. This project will directly address a key challenge for Pakistan’s economy: the energy shortage, which is estimated to be around 4,500 to 5,000 megawatts. Construction of a hydropower plant in Karot started in 2015, and it is to be completed by 2020. Overall investments in Pakistan under the OBOR strategy reached $40 billion, focusing on nuclear energy, coal industry, railways, and highways.
Beyond rails and roads
Beyond infrastructure, the OBOR is important in the institutional and macroeconomic sense. Nowadays, two main trading blocs are in the process of being created; they include the Trans-Pacific Partnership (TPP) and Transatlantic Trade and Investment Partnership (TTIP). Neither sees China as a member-state. The OBOR strategy in that sense creates a potential alternative economic entity that treats Asia and the European Union as a single space. Moreover, the OBOR strategy is important in complementing Russia’s regional integration initiative, the Eurasian Economic union (EEU). An official agreement on coordinating the development of the EEU and the Silk Road Economic Belt (SREB) was signed between leaders of the countries in May 2015. Detailed work on this process is still ongoing due to structural differences (the EUU is an institutionalized integration union, while SREB is still more a concept strategy) and the large number of states involved. Nevertheless, there are several areas for synergy between these two initiatives that can be identified today. They include:
• united trade and investment space (free-trade zone as a long-term goal);
• infrastructure (creating multiregional transport infrastructure);
• finance (use national currencies in bilateral and multilateral trade; establish united bond and shares market); and
• innovation industry (use national competitive advantage to establish high-yield, multinational production facilities and R&D centers).
OBOR is crucial for international trade and investment and, particularly, for Sino-Russian business. It could establish a Chinese cooperation framework for both political and economic domains for the next several decades. In that sense, business cooperation with China will focus on industries that are important first and foremost for Chinese internal economic development. Taking into consideration the four development challenges for the Chinese economy, the key areas of business cooperation will be: infrastructure (in the broader sense, including transport, energy, and telecommunication); high-end digital sectors (which touch on innovations and what is more important, the Internet of Things); talent development (including education services and R&D facilities); and finally, sustainable development (which embraces the environmental industry and alternative clean energy). These cooperation areas are important both for the government and private companies. The former will establish cooperation rules and business models in the broader sense, while the latter will provide services and have the opportunity to realize projects.
Countries’ businesses in both the OBOR
space and the EEU often lack of experience in working as multinational
teams: They simplify each other’s cultural peculiarities, local legal
structures, and effective marketing tools. At a glance, it is obvious
that one cannot use the same business strategies, for example, in China
and Germany. Unfortunately, managers tend to use basically the same
business methods without going into details of each national market. As a
result, in markets with fundamentally different cultures and political
and economic regimes, such a straightforward business approach usually