China’s Belt and Road initiative (BRI) is perhaps the country’s biggest initiative to date in an effort to energise the global economy via projects spanning 65 countries by building massive infrastructure revolving around transport and energy.
Proposed by China’s President Xi Jinping in 2013 for the joint economic development between the countries and regions involved in the initiative, through the promotion and facilitation of international trade between them.
Taking reference from the historic Silk Road which transformed the nature of international trade links in ancient times, the BRI is attempts to replicate its effect in our modern-day setting by creating two trade routes – the land-based ‘Silk Road Economic Belt’ and the seagoing ‘21st Century Maritime Silk Road’.
The two routes will cover more than 60 countries and regions from Asia to Europe, via Southeast Asia, South Asia, Central Asia, West Asia and the Middle East. These regions currently account for some 30 per cent of global GDP and over 35 per cent of the world’s merchandise trade.
Inclusive of this, the initiative’s blue print also outlines that the Chinese government will work with countries along the BRI routes to plan six economic corridors that will surround the central cities and economic industrial parks along the routes.
The six economic corridors are: the China–Mongolia–Russia Corridor; the New Eurasian Land Bridge; the China–Central Asia–West Asia Corridor; the China–Central Asia–West Asia Corridor; the China–Indochina Peninsula Corridor; the China–Pakistan Corridor; and the Bangladesh–China–India–Myanmar Corridor.
The end game of the BRI initiative as guided by Chinese officials is to bolster these regions contribution of GDP growth to 80 per cent by 2050. All while advancing more than three billion of its population, which currently represent 62 per cent of the world’s population, into the middle class.
Gathering global allies
President Xi Jinping has championed what China formally calls the “One Belt, One Road” or OBOR, initiative to build a new Silk Road linking Asia, Africa and Europe, a landmark program to invest billions of dollars in infrastructure projects including railways, ports and power grids.
The Asian economic powerhouse has dedicated US$40 billion to a Silk Road Fund and the idea was the driving force behind the establishment of the US$50 billion China-backed Asian Infrastructure Investment Bank.
“One Belt, One Road is to date the most important public good China has given to the world, first proposed by China but for all countries to enjoy,” its Foreign Minister Wang Yi said.
“The culture and historical genes of One Belt, One Road come from the old Silk Road, so it takes Eurasia as its main region,” he said, adding that representatives of 110 countries attended.
While China has portrayed the New Silk Road as a genuine effort to share the bounty of China’s economic development and to fund infrastructure gaps, many Western countries are concerned about a lack of detail and transparency in the project and are suspicious about China’s broader political intents.
Still, at a time of uncertainty about the US place in the world following President Donald Trump’s pledges to put America first, China sees an opportunity to become more of a global leader and has found a receptive audience for its New Silk Road.
Having had its first Belt and Road forum in Beijing in May this year, China’s Xi pledged at least US$113 billion in extra funding for the initiative, and urged countries across the globe to join hands with him in pursuit of globalisation.
According to sources, the next BRI gathering in Beijing is slated for 2019.
Malaysia stands to gain?
Overall, the widely debated initiative has garnered equal amounts of positive and negative attention from all over the world. Supporters of the initiative were quick to point out that the BRI would be able to help bring down trade barriers while increasing opportunities for local players on a global scale, but on the hand, its naysayers question whether or not the complex endeavour would be able to navigate through the immense number of political, socio-economic, financial and logistical issues it faces.
Some of our more opportunistic companies have already begun on this path as the recent Belt and Road Forum (BRF) held in Beijing in May 2017, yielded a total of nine memorandums of understandings (MoUs) and agreements signed between Malaysian and Chinese companies.
Among the major projects under the initiative is the Malaysia-China Kuantan Industrial Park in Pahang, Melaka Gateway, East Coast Rail Link and Xiamen University Malaysia.
These agreements were mostly trade based and boasted a total value of US$7.22 billion or RM31.26 billion.
China’s ‘One Belt One Road’ initiative will impact industries, businessmen, farmers and even students in Malaysia especially when China has committed to step up investments for infrastructure projects and import more fresh pineapples and palm oil.
During Prime Minister Datuk Seri Najib Razak’s meeting with his Chinese counterpart President Xi Jinping in May, three memorandums of understandings involving the Ministry of International Trade and Industry, Transport Ministry and Ministry of Agriculture and Agro-Based Industry were signed.
Najib said the ‘One Belt One Road Initiative’ would derive massive benefits to Malaysia in terms of excellent infrastructure, connectivity, social facilities, better living standards and abundant business opportunities.
Meanwhile, President Xi described bilateral trade between Malaysia-China “as being at its best” and praised the Malaysian government for its support and commitment towards the ‘One Belt One Road’ initiative.
The five aspects of the Belt and Road
Before we can get into the main impacts that the BRI will bring to Malaysia, it is important to first dive deeper into what the BRI initiative actually entails.
In a report jointly written by the Association of Chartered Certified Accountants (ACCA) and the Shanghai Stock Exchange (SSE), entitled ‘Belt and Road Initiative: Reshaping Global Value Chain’, there are key five aspects that are driving motivation for the implementation of the BRI, namely, policy coordination, connecting infrastructure, promoting unimpeded trade, financial integration and fostering people-to-people bonds.
And besides representing the main motivations for the BRI, these five aspects also represent the main challenges and roadblocks the initiative faces in its successful implementation.
Sitting at the top of the list is policy coordination as a first integral step for increased policy coordination between nations will promote intergovernmental cooperation and communication.
This would in turn lead to the promotion of overall trade, knowledge transfer, increased political trust and stability and the reduction of political barriers for future regional projects.
While the achievement of this would be highly beneficial for all nations involved, it is easier said than done as the ACCA-SSE report cited that, “This requires close intergovernmental cooperation and multilevel intergovernmental mechanisms for macro policy exchange, in order to strengthen interest in the project, enhance mutual political trust and reach a consensus for cooperation.”
On this front, however, Malaysia and China seems to be doing remarkably well as we have not only become one of biggest receivers of BRI related investments, but also one of its biggest beneficiaries.
And to attest to this, an excerpt from Najib’s personal blog showcases our government’s willingness to participate further in the BRI.
“The Belt and Road Forum for International Cooperation has an emphasis on mutual discussion, mutual construction and mutual sharing.
“This is greatly welcomed, and I am confident that the agreements many of the participants, including Malaysia, will be signing will set us on a strong footing for the next phase of this remarkable plan.”
Next up, we come to the most tangible and obvious motivation of the BRI – the push for infrastructure development and connectivity to form an infrastructure network that will bring together all sub-regions in Asia, Europe and Africa.
The idea is that with increased connectivity between BRI regions and countries, this would help bring down some of the most prominent barriers in trade such as logistic issues.
However to make this goal a reality, the connecting of infrastructure needs to be done while respecting every BRI country and region’s sovereignty and security concerns.
In order to achieve this, the ACCA-SSE recommends that countries along the BRI routes and should actively plan ways of connecting their infrastructure and bring technical standards into line, working together to build international passageways.
“This means making improvements to – or entirely new construction of – transportation infrastructure, energy infrastructure, and cross-border cable and other communications networks.”
So far, the push for connecting infrastructure has be a tedious task as government officials of involved countries have all been fighting for their country’s best interest in the initiative.
In Malaysia the effect has also been observed as BRI-related projects such as the ECRL and Melaka Gateway deep-sea port have faced heavy criticism in regards to its necessity, contract awards and funding.
Moving on, the next motivation for the BRI is to create a sound business environment for countries and regions along its route by removing barriers to attract investors, all while creating bilateral investment protection agreements to protect the legitimate rights and interests of them. The objective of this is to expand areas of trade and improve trade structures while exploring new areas of growth and promote balanced trade.
“New trading channels, such as crossborder e-commerce, will consolidate and expand conventional business. Investment and trade are seen as complementary: one drives the development of the other.”
In Malaysia, observers have noted that this impact of unimpeded trade between China has already begun with the anticipated doubling of our annual pineapple export to China to RM320 million by 2020, following the signing of the protocol on phytosanitary requirement in Beijing during the BRF.
In addition, the upcoming digital free trade zone set up by Chinese e-commerce giant Alibaba Group Holding Ltd (Alibaba Group), slated to be launched end-2019, will also act a catalyst for increased unimpeded trade for not only between Malaysia and China, but also Malaysia and her other regional partners.
According to an article from The Edge Financial Daily published on March 24, 2017, Jack Ma, the founder of the Alibaba Group has announced to reporters that the digital free trade zone was a private sector initiative to support china’s BRI.
“This is Alibaba’s own initiative to support the One Belt, One Road. We are also paying attention to other regions such as the South America.”
Another vital part of implementing the BRI is to enhance financial integration between the countries involved by building stable currencies, credit system and an investment and financing system.
In this regard, the Asian Infrastructure Investment Bank (AIIB) was formed to fulfil this role and to provide funding and support to the implementation of the BRI.
And further work for increased financial integration will again take place with the establishment of the Shanghai Cooperation Organisation (SCO) development bank to lend more support to the Silk Road Fund.
“The China-Asean Interbank Association and SCO Interbank Association will carry out multilateral cooperation in the form of syndicated loans and bank credit. Governments of the countries along the B&R, and their companies and financial institutions with a good credit rating, will be permitted to issue RMB-denominated bonds in China.
“Qualified Chinese financial institutions and companies are encouraged to issue bonds in both RMB and foreign currencies in these countries, and to use locally raised funds locally in countries along the B&R,” reported the ACCA-SSE report.
With that said, it is anticipated that the countries involved in AIIB and SCO will cooperate in financial regulation to make good use of the Silk Road Fund and sovereign wealth funds, while also encouraging commercial equity investment funds and privates to take part in the construction of the key BRI projects.
Finally, the last motivator of the BRI is to allow for extensive cultural and academic exchanges between the populations of all countries and regions involved.
And if successful, such endeavours will definitely play a leading role in helping strengthen public support, and deepen bilateral and multilateral cooperation between countries.
Case in point, the Xiamen University our very first Chinese university is perfect example of how China is marrying their trade ambitions with cultural and academic exchanges.
In a statement by United Overseas Bank (Malaysia) Bhd economist Julia Goh, she noted that this inclusive and globalised approach China has been taken with its BRI is vastly in contrast to the wider protectionist rhetoric progressing across some parts of the world.
“We see the B&R initiative as a means for countries to come together to integrate resources to achieve economic growth on a global scale.”
“The B&R initiative has the potential to strengthen cross-border dialogue and to foster multinational cooperation, which will in turn create stability and encourage mutual investment beyond the home country.”
What do we gain?
Based on findings from the ACCA-SSE report, there are three main implications for the global economy on the whole – new economic order, rebalancing global economy and the promotion of globalisation.
And these three implications are said to be in a cause and effect relationship as shown below.
New economic order
Currently, high value added and knowledge-intensive sectors such as design, R&D and engineering are all mainly dominated by developed countries while developing countries such as the majority of Asean are engaged in low-value added and labour-intensive sectors such as manufacturing. In the past this has created an unequal relationship where developing countries found themselves to be highly dependent on developed countries.
However, if successful, the BRI’s impact will challenge the status quo of the current economic order as majority of its two routes run through developing countries.
What this means is that the BRI will be able to allow these developing regions to carry out their own economic and trade exchanges, allowing them to grow, thrive and benefit together.
Furthermore, the transfer of more economic clout toward developing countries will also help to solve some certain aspects of international trade that is not equitable.
While it is clear that the main beneficiaries of the BRI are meant to be majority of the developing world, the ACCA and SSE want to make it clear that the initiative is not meant the replace the existing regional cooperation mechanism.
Instead, it is merely a way to help the countries concerned determine their development strategy in a way that works for them, as well as encouraging more free and equitable bilateral and multilateral trade.
And in line with that, the two groups also anticipate that the BRI to be able to promote a more equitable international financial system that addresses the current imbalance between income and risk and the status of financial organisations in developed and developing countries.
Rebalancing the global economy
Once our current economic order is challenged, the rebalancing of the global economy will begin to happen as the BRI is expected to become the world’s third-largest trade axis after the Atlantic trade axis and the Pacific trade axis.
Just like how China’s economy has rebalanced itself to be one of the largest and top growing in our world, the BRI is expected to also boost the economies of the countries and regions involved in similar manner, through industrialisation and development.
This is expected to occur as the upgrading of China’s industrial structures will shift their labour-intensive and capital-intensive industries to countries along the B&R instead – driving growth in their economies and a rebalancing of the global economy on the whole.
To justify prediction, ACCA and SSE highlighted that the annual growth rate of foreign trade and net inflows of foreign capital within the 65 countries involved reached 13.9 and 5.2 per cent respectively under the BRI – achieving 4.6 and 3.4 percentages higher than the global average.
Finally, with the global economy rebalanced and the growth of BRI countries and regions become highly apparent to the rest of the world, the ACCA and SSE expects that current wave of anti-globalisation sentiments to die down.
They argue that the negative sentiments were actually driven by issues of uneven development and insufficient drivers of growth – all of which is addressed by the BRI.
“The B&R Initiative will create new opportunities for cooperation between countries to further global economic growth. It will also cover many developing countries, advocating equality and cooperation for mutual benefit and in pursuit of a common destiny,” they said.
Agreeing with this, Goh also notes that the BRI’s emphasis on cooperation and common development will lead to better economic sustainability in the long term for its participants.
“In an increasingly fragmented global economy, the B&R initiative promotes cooperation and common development. It seeks to boost efficiency in the flow of production and integration of markets to achieve diversified, independent, balanced and sustainable development. As such, the initiative should bring about a greater level of economic activity among participating countries.”
Opportunities for Malaysia
But what about Malaysia specifically? What impacts do we expect in our economy and industry landscapes?
According to Goh, majority of our industries and sectors all set to be beneficiaries of the BRI.
Infrastructure-related development sectors
However, the first sectors and industries set to see tangible benefits are our infrastructure-related development in sea, land, air transport; energy; water information communications; and pipelines.
While majority of the recent infrastructure development projects falling under BRI umbrella have been clinched by Chinese-national companies, reports have noted that provisions put into place by our federal government require that a certain percentage of sub-contracting job packages be awarded to Malaysian companies.
Thus, boosting greatly boosting our infrastructure-related development sector.
One example of a Malaysian company potentially walking away with a subcontracting job soon is Vivocom Intl Holdings Bhd (Vivocom).
In a research report by Midf Amanah Investment Bank Bhd, its research arm shared that it expects China Railway Construction Corp Ltd (CRCC) to clinch a RM450 million to expand Sultan Ismail Petra Airport (SIPA) which is in dire need of expansion as the airport, which is the last stop of the ECRL, has already exceeded its capacity of 1.45 million passengers annual.
The proposed upgrades at the moment for SIPA include an apron expansion, enlargement of runway/taxiways, and the construction of new terminals such as contact pier finger terminals.
Midf Research is anticipating that these packages will be not be segmented, leaving room for Vivocom to potentially end up taking up the entire package.
Adding to Goh’s opinion, industry analysts are also anticipating the property sector to benefit from the BRI projects due to increasing housing demand as more jobs are created from the economic spur in the areas along the ECRL.
Kuantan in particular is expected to see a housing boom as the city is set to position itself as maritime hub in the east coast of Peninsular Malaysia as the ECRL is actually part of its maritime route that stretches from the Port of Gwadar, Pakistan to supply liquefied natural gas (LNG) to China’s cities in Pearl River Delta, Yellow River Delta and Baohao Rim.
And in order to meet the housing demands, the research arm of Midf Amanah Investment Bank Bhd (Midf Research) is speculating that the Kuantan Township Kota SAS of which Gabungan AQRS Bhd (Gabungan AQRS) is a established developer of, is expected to be one of the major recipient of increasing housing demand.
Once most of the BRI related infrastructure is up and running, Goh expects that tourism related industries will see a huge boost in the long-term.
“With better infrastructure and greater global connectivity, we expect to see a boost in demand for tourism-related services in industries such as food and beverage, hospitality, leisure and entertainment, shopping, education and healthcare,” she explained.
Our healthcare industry in particular, maybe a strong beneficiary seeing as the medical tourism market is predicted to grow at a compounding annual growth rate (CAGR) of 30.05 per cent over the next eight years, reaching US$3.5 billion in worth by the end of 2024.
The figure was given by a report by the transparency Market Research (TMR) who explains that they anticipate the extraordinary growth due to ‘persistent government activities synergising the medical tourism industry and the lower cost of medical services compared to their counterparts in developed nations’.
And with more connecivity and cooperation with other nations expected from the BRI, surely, we can expect this figure to grow further.
Higher demand for ringgit
Beyond just growing our economy, Goh also anticipates that our ringgit will see more demand due to the encouraged use of local currencies in the BRI instead of major currencies such as the US dollar.
“In doing so, the risks of exchange rate fluctuations and the cost of foreign exchange conversion could be reduced while also promoting the use of RMB and increase other local currency-denominated funding across the region through issuing more local currency than US-denominated bonds,” she explained.
And with higher trade and investment beginning to be conducted among BRI countries and the rest of the world, this will also lead to increased supply and demand for local goods and services.
“This should result in higher demand for local currencies, including the Malaysian ringgit.”
Risks and challenges
In spite of these benefits, several risks persist for Malaysia stemming from the BRI. In a risk assessment report from the Economist Intelligence Unit Ltd, operational risk of BRI in Malaysia is among one of the lowest in all 65 nations involved.
While this does help quell some concerns of the BRI, the research report highlighted that our labour market would be our biggest risk due to our dependence on foreign workers.
Even without the BRI, the issue of our foreign worker dependence has been ongoing debate for many years now as companies complain about labour shortages and expensive foreign worker levies that would cut profit margins.
And addition, the research house also surmises that our lack of skilled workers would also cause cost issues in BRI projects.
“Over the short-to-medium term, foreign companies are likely to have to import skilled or specialist workers for their Malaysian operations, which will significantly raise production costs,” they explained.
Besides our labour market, main concern political parties and industry observers have also raised is whether or not we have the ability to meet the loan payments of these large scale infrastructures.
For financing, various reports have indicated that the RM55 million ECRL, our biggest BRI project, will have 85 per cent of its project value be funded through a 3.25 per cent 13 year soft loan from the Exim Bank of China, with payments starting only in the seventh year.
The total interest incurred from the loan at the end of its period will be around RM19.75 million, translating to a required payment of RM9.5 million per annum once payments are required to begin in seventh year.
This is as significant amount of interest and does warrants valid concerns on whether we have the ability to pay it off as we are still attempting to service the remaining US$602.73 million payment owed to the International Petroleum Investment Company PJSC (IPIC).
However having said that, it is worth noting that it is unfair to merely view our BRI investments in just monetary terms as we would need to include the benefits it would yield on our economy on the whole to get a more justified picture of the situation.
And as the imitative is still in its early stages of implementation in Malaysia, it would be up to us as major stakeholders in our own economy to shape the impacts yield by appropriately assessing both its benefits and risk.