Navigating the new Silk Road

Businesses seeking to make inroads into China's Belt and Road Initiative (BRI) will need to leverage partners with the right networks and expertise in the region.

An ambitious project to revive the ancient Silk Road between China and Europe could unlock the vast potential of a mostly untapped region, and provide new opportunities for businesses in the process.

The BRI, first proposed by Chinese President Xi Jinping in 2013, aims to be a modern-day version of the ancient Silk Road route that connected China by land and sea to South-east Asia, Pakistan and Central Asia, and beyond to the Middle East, Europe and Africa.

The grand plan will call for huge infrastructure projects - including railroads, power plants and seaports - supported by over hundreds of billions of dollars in funding from China and other countries. Reflecting on the immense scale of the project, Mr Xi has said he hopes annual trade between BRI countries will surpass US$2.5 trillion (S$3.4 trillion) within a decade.

AN ENGINE FOR GLOBAL GROWTH

At the heart of BRI is a commitment to drive economic growth, improve standards of living and create new jobs through investments that seek to better connect countries along this new Silk Road.

Significantly, at a time when protectionist sentiments around the world are on the rise, BRI will offer much-needed opportunities to businesses.

In the short term, developing countries involved in BRI should experience an acceleration of infrastructure investments. Looking further ahead, we expect the project to lead to greater innovation, expand value-added manufacturing capabilities and invite more capital flows.

As trade becomes more seamless due to better connectivity, the initiative will also boost trade flows between China and other participating countries.

Recognising the project's vast potential, many of our clients are already making or planning to make inroads into BRI markets by leveraging Citi's expansive network and experience - we conduct business in 58 out of the over 65 BRI countries.

While Chinese enterprises will no doubt be at the forefront of the BRI, the initiative will also present a wide range of opportunities for non-Chinese companies, especially if they are able to transfer their technology know-how and products and advisory services to their Chinese counterparts.

That said, navigating a project of such scale and complexity comes with a wide range of micro and macro risks.

The role of commercial banks like Citi is to complement development banks such as the Asian Infrastructure Investment Bank in helping our clients understand local operating and regulatory environments in BRI countries, on top of project financing, trade financing, forex and hedging. As bank loans will be insufficient for such a large undertaking, Citi is also helping our clients by tapping capital markets to finance infrastructure projects.

ASEAN'S ROLE

As a cog in the wheel along the BRI routes, Asean is strategically important to the success of China's plans. Conversely, BRI will play a key role in helping the bloc achieve its vision of a seamlessly connected Asean, as laid out in the Asean Master Plan for Connectivity 2025.

Both plans have overlapping interests in the areas of developing transport connectivity, and facilitating better access for trade, capital flows, tourism and human capital exchanges.

The region's annual infrastructure needs are expected to exceed US$100 billion in the next 10 to 15 years, which is a big gap to plug. Fortunately, the foundation has been laid as many Chinese companies are already familiar with investing in South-east Asia.

China's foreign direct investment into Asean was over US$9 billion last year, up from US$6.5 billion in 2015.

We expect this pace to accelerate as the BRI plan progresses.

BRI will also boost already strong trade between China and Asean. Today, Asean is China's third-largest trading partner behind the European Union and the United States, while China is Asean's biggest trading partner.

SINGAPORE'S VALUE PROPOSITION

Within the region, Singapore's strategic location makes it a natural gateway for BRI-related investment into Asean countries; channelling investments from China into South-east Asia for infrastructure projects in the short term and capturing trade flows in the longer term.

Singapore is also intermediating capital injection from Asean into China though government-to-government projects such as the Chongqing Connectivity Initiative, which aims to boost growth in China's less-developed western regions. Annual direct investment between Singapore and Chongqing is 22.2 billion yuan (S$4.6 billion), up from 7.4 billion yuan five years ago.

Furthermore, Singapore's status as one of the world's leading financial centres puts it in good stead to benefit from BRI. This is underpinned by a robust ecosystem of financial institutions and professional services providers, an established capital market, its position as one of the world's largest offshore yuan centres and its status as the third-largest forex hub in the world.

These developments come at an opportune time. With Singapore set to take over the chairmanship of Asean next year, the country will have the opportunity to advance the BRI in the region.

A SPIRIT OF COOPERATION

Despite being the world's second-largest economy, China knows it will need the cooperation of the countries along the new Silk Road to achieve its BRI ambitions.

In the same vein, firms looking to tap opportunities presented by BRI will need to form strategic alliances with the right partners to navigate the many uncertainties along this challenging but rewarding journey, and mitigate the avoidable risks that lie ahead.

Looking at the scale of the project and the opportunities it will create, we are positive about the transformation that BRI will bring to businesses, the movement of goods and people, and the uplift it will provide to the entire region.

•The writer is head of Asean and chief executive of Citi Singapore.

A version of this article appeared in the print edition of The Straits Times on October 16, 2017, with the headline 'Navigating the new Silk Road'. Print Edition | Subscribe