The “New Silk Road” could transform the global economy

The “New Silk Road” could transform the global economy

A Credit-Suisse (Swiss internationally acting bank) evaluation of Chinas New Silk Road Project, an overview of the Chinese outward investment programme in this respect, and an evaluation of 13th Five Year plan, are continuing TextileFuture’s series on China with this Newsletter. These illustrate the latest developments in China. We would like to remind you also on the Newsletter iof past September, containing other facts on the New Silk Road, thus with all features you get an updated view on the actual status.

CSThe “New Silk Road”, connecting all parts of the vast Asian continent with Africa and Europe, is becoming a powerful influence on the global arena. Afshin Molavi, an Iranian-American geopolitical risk and business analyst, examines the changes happening now across this region, and the impact they may have on the world’s future.

The “New Silk Road” is fundamentally transforming our world. The relations and the geo-commercial trade between the Middle East, Africa, and Asia are not only the fastest growing trade corridors in the world but also the fastest growing foreign direct investment corridors. They are fundamentally altering geo-economic patterns, and potentially geo-political patterns.

Five key topics define the New Silk Road.

1. West Asia vs. Middle East

The term “Middle East” was popularised by Alfred Thayer Mahan, an American naval strategist, in 1902 when he was trying to define the land mass between India and Europe . He came up with the term “the Middle East” and it stuck. But geo-commercially, it doesn’t make as much sense as “West Asia”. The Persian Gulf states are arguably far more geo-commercially Asian than they are Middle Eastern.

When you look at the departure and arrivals section at Dubai International Airport, you will see a ‘map’ of this New Silk Road. There are more flights from India to Dubai than there are from India to the rest of the world combined. Africa is another extremely popular destination. Emirates Airlines alone flies to 25 destinations in Africa direct. In many ways Dubai has become the Miami of Africa and the Hong Kong of India.

Outside the airport, there is Dragon Mart, a massive shopping mall and wholesale retail complex for Chinese goods. It is about the size of seven football fields, and you can buy everything – from one teddy bear to 10,000 teddy bears. When you are there, you really feel this New Silk Road. Why? Because of all the Iranian, Syrian and African traders who come to Dragon Mart. They are buying from the largest wholesale market for Chinese goods outside of China, right there in Dubai. Therefore, in many ways Dubai has become the hub of this New Silk Road, this West Asia-East Asia nexus.

2. The Future of the Global Middle Class

There are about two billion people in the global middle class today. By the year 2030, the forecast is that there is going to be about five billion. The vast majority of those new entrants into the global middle class are going to hail from the emerging world, particularly Africa and Asia. Right now, almost three out of four people on earth live in Africa or Asia, and according to future demographic trends, that is only going to accelerate. While populations in Europe are declining, populations in Africa are accelerating. Therefore, when looking at the future of the global middle class, you need to be looking at Africa, Asia and the Middle East. That is another reason why this New Silk Road matters so much.

3. Cities: The Core of the New Silk Road

Worldwide, one million people per week are moving from rural areas to urban areas. We have surpassed the 50 % mark in China, in terms of urban versus rural. We have far surpassed that in most of the emerging world, and in many ways cities are a much better barometer and a much better economic engine for the future than countries are, per se. In consequence,  if somebody asks “Do I want to invest in Indonesia?” the answer may be: “Well I’m not sure about Indonesia, but I like Jakarta.”

4. “It’s all about Shanghai, Mumbai, Dubai or goodbye.”

This is something I heard from an investment banker: “It is all about Shanghai, Mumbai, Dubai or goodbye.” In this new geo-commercial world, this new geo-economic world, you really need to have a presence in the hubs of the New Silk Road, in the big countries like India and China and the emerging markets. Without that presence, you are missing out on the biggest growth story the world has today.

Although, there is a lot of concern about emerging markets’ equities, about emerging markets’ currencies, about volatility in emerging markets, but when you add up the urbanisation, the demographics, the population, the growth that we are seeing in terms of south-south trade and emerging to emerging trade. I think we will still see considerable growth in emerging markets, and particularly considerable growth along this New Silk Road that connects the Middle East, Africa and Asia.

5. Change Is Inevitable

We are living in a world in which change is inevitable, and change is at a new velocity. All we have to do is look at the Arab uprisings. Vladimir Ilyich Lenin, the Russian revolutionary, once said that sometimes decades pass and nothing happens, and suddenly weeks pass and decades happen. I think Lenin was pre-saging the age of social media and the internet and Facebook, because we do see decades happening in a matter of weeks and a matter of months. It is not just political changes, but technological changes too.

It does make strategic planning more difficult, but then it also reminds us to go back to the basics. Demographics is one thing, I keep going back. Urbanisation is another. When you follow these big geo-economic tectonic plates, I think that one investment approach might be to chase that global emerging middle class that we just described, which the forecast is to go from two billion to five billion by the year 2030.

I will let smarter people than myself, who invest for a living, figure out a way to chase that middle class, but this is a significant, world changing geo-economic event, concludes Afshin Molavi, the author. Afshin Molavi is a geopolitical risk and business analyst focused on four key trends shaping the future: the rise of emerging markets; Middle East political and economic risks; the South-South trade revolution; and US foreign, security, and economic policy. He has written extensively on the New Silk Road, which he describes as “the dramatically growing geo-commercial, geo-economics, and geo-political ties linking the Middle East and Asia”. Molavi is Director of the Global Emerging and Growth Markets Initiative, Johns Hopkins University Nitze School of Advanced International Studies, and Senior Global Advisor at Oxford Analytica.

www.credit-suisse.com

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Belt and Road Initiative Spurs China’s Outward Investment Programme

China is now the world’s third largest source of FDI foreign direct investment. In recent years, the Chinese government has substantially relaxed the relevant administrative measures for dealing with overseas investments and introduced the Belt and Road development strategy in order to strengthen economic cooperation with the regions concerned. In light of this, China’s level of outward investment will further expand, while its investment in countries along the Belt and Road is expected to show sustained growth

Hong Kong is the preferred services platform for China’s outward investment activities, and it has provided a full range of professional services for mainland enterprises looking to invest abroad. In particular, it has specialised in providing assistance in the areas of finance, law, tax, the risk assessment of sustainable operations, and international testing and certification, among others. As the mainland accelerates the pace of its “going out” activities and advances the Belt and Road initiative, more business opportunities will inevitably become available to services practitioners in Hong Kong.

Outward Investment on a Steady Rise

China’s overseas investment activities have continued to grow in recent years, making the country one of the leading sources of global FDI. According to the latest figures from the United Nations Conference on Trade and Development (UNCTAD), China’s total outward FDI rose from about USD101 billion (USD107.8 billion, according to China) in 2013 to an estimated USD116 billion in 2014 (USD123.1 billion, according to China), placing it behind only the US and Hong Kong. This has made China the world’s third-largest source of FDI for three consecutive years, starting from 2012.

FDI Flows from China 1

In recent years, China has substantially relaxed its outbound investment management procedures and actively built platforms to help more businesses in order to “go out” and cooperate with foreign partners to transform and upgrade themselves. In particular, the resolution, adopted by the Third Plenary Session of the 18th CPC Central Committee at the end of 2013, proposed in order to meet the needs of economic globalisation, China should continue opening up both internally and externally, and combine the strategies of “going out” to invest overseas by “bringing in” the advantages of foreign partners, and to achieve the most effective allocation of international and domestic resources.

The National Development and Reform Commission (NDRC) subsequently issued the Administrative Measures for the Approval and Record Filing of Outbound Investment Projects. This greatly narrows the scope of investment requiring the approval of the departments concerned. As of May 2014, general outbound investment projects with an investment level of less than USD1 billion only require filing in terms of a record being kept. At the end of 2014, the NDRC announced the scrapping of approval for general outbound investment projects with an investment of more than US$1 billion (except for projects involving sensitive countries, regions and sectors) [4]. Since then, record filing has replaced approval for all general outbound investment projects, unless those involve sensitive countries, regions or sectors.

Belt and Road: A Long-term strategy and a Boost to Investments

China is now promoting the Belt and Road initiative, an external development strategy centring on the Silk Road Economic Belt and the 21st Century Maritime Silk Road. In March 2015, China issued Vision and Actions on Jointly Building the Silk Road Economic Belt and the 21st Century Maritime Silk Road (Vision and Actions). This proposed the acceleration of the Belt and Road Initiative in order to encourage countries along the routes to achieve economic policy coordination, promote the orderly and free flow of economic factors and undertake a more efficient allocation of resources and a deeper integration of the relevant markets. The ultimate aim is to create an open, inclusive and balanced regional economic cooperation architecture that is of benefit to all parties concerned.

FDI China to Countries of the Belt 2

The Vision and Actions document stresses that investment and trade cooperation are the key requirements for building the Belt and Road. In line with this, China hopes to work with the countries along the Belt and Road to improve bilateral investment and trade facilitation, and to remove any investment and trade barriers. The purpose is to create a sound business environment within the region and in all of the relevant countries. Hence, considerable emphasis will be placed on pushing forward negotiations with regard to bilateral investment protection and double taxation avoidance agreements in order to protect the lawful rights and interests of investors, while expanding mutual investment areas.

Notably, China’s FDI outflow to countries along the Belt and Road has increased rapidly in recent years. Such outflows rise from about USD 400 million in 2004 to US$13.66 billion in 2014, growing at an average annual rate of approximately 43% in the period. This pace of growth is far higher than the average annual growth rate of 36 % enjoyed by China’s overall outward FDI flows during the same period. The share received by the Belt and Road countries as part of China’s total outward FDI flows also increased from about 7 % in 2004 to 11.1 % in 2014.

According to the figures published by the Ministry of Commerce (MOFCOM), Chinese enterprises made direct investments totalling USD 12.03 billion in 48 countries along the Belt and Road between January and September 2015, up 66.2% from the same period last year. The key destinations for China’s FDI outflows were Singapore, Kazakhstan, Laos, Indonesia and Russia.

FDI Flows from China 3

FDI flows from China 4

China’s implementation of the Belt and Road strategy is expected to further boost outbound investment by many mainland enterprises in the countries along the Belt and Road. China has also indicated that it will adopt a more proactive opening up strategy, giving full scope to the comparative advantages of different regions, including the Pearl River Delta (PRD), the Yangtze River Delta (YRD) and the Bohai Rim area. All such regions will be granted a greater degree of economic openness as well as enhanced economic strength in order to promote the building of the Belt and Road and comprehensively raise the level of China’s open economy. China’s outbound investment, including that destined for countries along the Belt and Road, is expected to further expand in the future in line with this scenario. In line with the Vision and Actions agenda, the major investment projects in the countries along the Belt and Road are likely to focus on the following areas:

  • Infrastructure construction, including facilities relating to roads, shipping, aviation, energy and communications.
  • Agriculture, forestry, animal husbandry and fisheries, including the production and processing of related products.
  • Oil, gas, energy and metal ores, including cooperation in exploring and developing traditional and new energy resources.
  • Emerging industries, such as new-generation information technology, biotechnology and new materials.
  • Cooperation in science and technology, including establishing joint laboratories and carrying out technology transfers and maritime cooperation.

Opportunities for Hong Kong Companies

  • Over the years, service practitioners in Hong Kong have helped countless mainland enterprises handle their trading and investment businesses both in Hong Kong and in many overseas markets. With its inherent advantages when it comes to supporting mainland enterprises in their overseas investments, such as its free flow of capital, abundant international information resources and world-class professional services, Hong Kong is the preferred services platform for many mainland enterprises when they look to undertaking overseas ventures. Its professional services cover all aspects of such endeavours, including finance, law, taxes, the risk assessment of sustainable operations, and international testing and certification.
  • Hong Kong is the main channel for China’s FDI outflows. In 2014, the amount of China’s outward FDI carried through Hong Kong amounted to USD 70.9 billion – or 57.6 % of the mainland’s total outward FDI flow. In terms of cumulative investment up until the end of 2014, the total amount of outward FDI from the mainland carried via Hong Kong was USD 509.9 billion, accounting for 57.8% of the total cumulative investment as at end-2014.
  • According to surveys undertaken by HKTDC Research in the PRD, the YRD and the Bohai Rim between 2013 and 2015, most local enterprises intend to adopt the “going out” development strategy, as well as “bringing in” the advantages of foreign partners in order to develop both their domestic and overseas markets. In order to facilitate this, mainland enterprises need the support of wide-ranging professional services.
  • It is worth noting that more than half of the enterprises surveyed express a keen interest in using Hong Kong to find the services they need or to help identify suitable overseas partners. Indeed, some 65 % of the surveyed enterprises in the PRD, 56 % in the YRD and 60 % in the Bohai Rim rate Hong Kong as the preferred service platform for “going out”. As the mainland accelerates its pace of “going out” and “bringing in” and advances its Belt and Road initiative, more business opportunities will inevitably become available to service practitioners in Hong Kong.

www.hktdc.com 

 

China’s 13th Five-Year Plan: Likely Aims and Implications

At the fifth plenary session of the 18th Central Committee of the Communist Party of China, held on 29 October 2015, the Suggestions of the Central Committee of the Communist Party of China on the 13th Five-Year Plan for National Economic and Social Development (Suggestions) were passed. It was later stated at a State Council Executive Meeting that the 13th Five-Year Plan (2016-2020) will be formulated according to the Suggestions

China 13th economic plan

President Xi Jinping and Premier Li Keqiang also remarked that the core goals of the 13th Five-Year Plan are to build a “moderately well-off society” and to overcome such challenges as the “medium-income trap”. While efforts will be made to optimise the economic structure, improve the environment, and enhance the quality and benefit of development, steps will be taken to achieve economic growth. Specific goals include:

  • Maintaining economic growth at a medium to high speed, with average annual growth over 6.5%
  • Raising per-capita GDP to USD 12000 (up from around USD 7600 in 2014)
  • Accelerating industrial upgrade and propelling the economy to develop at medium to high level
  • Balancing urban and rural development and ecological construction
  • Strengthening social fairness and justice and balanced development

Where Hong Kong is concerned, the Suggestions mention that efforts will be made to deepen the joint development of the mainland and Hong Kong (as well as Macau and Taiwan). This will be including giving support to Hong Kong to strengthen its position as an international financial, shipping and trading centre; participate in China’s two-way opening-up and Belt and Road Initiative; consolidate its position as a global hub for offshore renminbi business; and deepen Guangdong-Hong Kong-Macau cooperation.

From the Suggestions and the statements made by the leaders, it can be gathered that the 13th Five-Year Plan to be launched next year is likely to cover the following development directions, which can bring about new opportunities for Hong Kong players.

Encourage Innovation and Enhance Quality of Economic Development

According to the Suggestions, the 13th Five-Year Plan will place emphasis on advancing mass entrepreneurship, encouraging technological innovation, and promoting the development of new industries, in a bid to inject new vigour into the economy. It will focus on developing high technology and high value-added industries, while strengthening supporting infrastructure, revamping related financial systems, and improving the business environment to promote further growth of related industries. The target industries and development sectors will include:

Developing emerging industries

This includes developing such emerging industries as energy saving and environmental protection, biotechnology, information technology, smart manufacturing, high-end equipment, and new energy, as well as giving support to traditional industries to undergo upgrade.

China 13th economic plan 2

Bolstering infrastructure construction and encouraging innovation

This includes building high-speed and safe next-generation information infrastructure, as well as quickening the pace of implementing the “Internet +” action plans, developing IoT (Internet of Things) and big data technology and application, and formulating plans to develop the next generation of Internet and related technology.

Encouraging corporate innovation

Efforts will be made to encourage R&D, strengthen technology integration capability, and import technology from abroad, targeting advanced technologies including next-generation information communication, new energy, new materials, aviation and space, biomedicine, and smart manufacturing. Action will also be taken to improve tax concession policies for corporate R&D expenses, and expand preferential treatment for accelerated depreciation of fixed assets to encourage enterprises to replace their equipment and apply new technology.

“Made in China 2025

Steps will be taken to encourage mainland industries to develop from “Made in China” to “Created in China”, and to achieve the task of industrial upgrade moving “from big to strong”. This includes raising the level of product technology, technical equipment, energy efficiency and environmental protection across the board, as well as liberalising market access for modern services in a bid to promote development of the specialised high-value producer service industry, and assist the manufacturing industry in increasing value-added.

Developing new systems

Action will be taken to simplify the industry and commerce administration systems, accelerate the pace of financial system reform, raise the efficiency of the financial sector in serving the real economy, and further develop the capital market in a bid to lower the financing costs of medium, small and micro enterprises.

Based on the above development directions, it can be expected that implementation of the 13th Five-Year Plan will boost the mainland’s demand for various types of new and high technology. However, in certain high-tech industries such as IoT applications and development of the next-generation Internet, as China is currently still short of total and standard solutions and lacks user experience in certain areas, related R&D and technology application is somewhat constrained. Hong Kong’s technical personnel, who are well-versed in advanced foreign technology and excel in using technologies developed by international standards/frameworks to provide technological and management system solutions, can assist in the commercialisation of related projects in the mainland and meet the technological demands listed in the 13th Five-Year Plan.

Meanwhile, the mainland hopes to make use of innovation to facilitate industrial upgrades. For instance, the policy paper “Made in China 2025” stated that enterprises will be encouraged to strengthen their product design capability and brand building so that more enterprises will shift from OEM to ODM, as well as develop their own branded business. This should provide opportunities for Hong Kong’s design and branding service suppliers. A recent survey conducted by the Hong Kong Trade Development Council found that mainland enterprises wish to obtain service support from Hong Kong or foreign countries in the following areas:  product development and design; brand design and promotional strategy; and marketing strategy.

Hong Kong, as an international financial centre in the region, can provide mainland enterprises with the necessary loan and financing services, such as providing cost-effective capital for relevant technology and industrial projects, helping mainland enterprises to lower financial cost. In addition, as Hong Kong is one of the largest venture capital management centres in Asia, a large number of top-notch international fund managers wishing to grasp business opportunities in China have already established a foothold in Hong Kong, which can offer more financing channels for mainland enterprises. It can be expected that during the 13th Five-Year Plan period the mainland will further open up its financial services market, this should bring about more opportunities for Hong Kong financial service suppliers to enter the mainland market.

Balanced Regional Development

The Suggestions also stress that during the 13th Five-Year Plan period efforts will be made to strengthen the balanced development of various regions, including placing equal emphasis on urban and rural development, as well as synchronising the pace of development of the more developed eastern coastal region with that of the central and western regions. The emphasis of the plan is expected to include:

Advancing coordinated regional development

This includes deepening the Go West initiative and promoting development of the central region. Emphasis will be placed on encouraging the coordinated development of certain regions, such as advancing the coordinated development of the Beijing-Tianjin-Hebei region and the Yangtze River Economic Belt. Regional development will be achieved by way of optimising urban development planning, encouraging regional transportation integration, and improving regional environmental planning.

Advancing new urbanisation construction

Steps will be taken to advance a people-centred new urbanisation plan; enhance the level of urban planning, construction and management; deepen household registration system reform; and assist rural migrants capable of working steadily in urban areas in obtaining urban resident status.

The importance attached by the Suggestions to the strategy of balanced development of the eastern and western regions and urban and rural areas aims to tackle problems brought about by disparities in regional development in the past and by the rapid pace of urbanisation of some localities. These problems include:

  • Insufficient transport facilities, environmental resources and supporting municipal facilities in certain city clusters
  • The polarised development of the urban and rural areas has quickened the pace of people flow into cities, increasing the pressure on urban development
  • As the pressure on the transportation and communication systems continues to grow, the efficiency of logistics services is in dire need of improvement
  • Water and air pollution problems are increasingly serious, creating a strong demand for environmental services, such as energy saving and emission reduction

New-style urbanisation in full swing

The rate of urbanisation in the mainland rose rapidly from 36 % in 2000 to 55 % in 2014. The pace is particularly fast in more developed regions, for instance, the urbanisation rate in some of the YRD (Yangtze River Delta) provinces exceeds 65%, which has created the problems mentioned above. [4] In view of this, the 13th Five-Year Plan is likely to take a further step in making “new” urbanisation a development direction, devoting great efforts to enriching the content of urban and rural development and making the enhancement of urban quality a development objective, instead of simply seeking urban construction or expanding the boundary of cities.

Against this backdrop, the 13th Five-Year Plan will not only bring about the upgraded development of coastal cities, but will also stimulate the construction and economic activities of urban and rural areas in the central and western regions, as well as the old industrial regions in the northeast. For instance, where building new city clusters is concerned, efforts will be made to strengthen the construction of daily-life supporting facilities in the relevant urban and rural areas, and to upgrade infrastructure, such as cross-regional intercity and trans-regional transport systems.

Hong Kong is not only an international financial centre, but also an important commercial services platform in the Asia-Pacific region. With a pool of local and foreign infrastructure construction service suppliers in extensive fields, Hong Kong has rich experience in different modes of urban development and management. Meanwhile, in the mainland, as the scope of urban construction continues to expand, infrastructure enterprises with comprehensive service abilities are needed to satisfy market demand for infrastructure and overall planning services. Also, as mainlanders’ income level continues to rise, they are becoming more demanding where the quality of urbanisation is concerned. Hence, when government departments in charge of planning and developers set out to advance urbanisation, priority is given to development quality over speed and quantity. This will create opportunities for qualified service suppliers wishing to tap the China market.

On the other hand, regional development and urbanisation are bound to change the urban landscape rapidly in different regions. The emergence of new commercial districts will prompt the distribution and retail sector to shift toward modern business modes, as well as bolster development of the consumer market in small coastal cities and in the central and western regions. However, Hong Kong companies wishing to enter these “emerging markets” must assess local purchasing power, pay attention to the consumption pattern of different cities, and avoid intense price competition from online businesses.

Moreover, under the 13th Five-Year Plan, the mainland may quicken its pace of building smart city clusters and apply next-generation information technology to raise the efficiency of city management. This should directly boost the demand for the application of IoT (Internet of Things) technology in a number of areas, such as transport, environmental monitoring and municipal management, generating opportunities for relevant service suppliers to enter the market.

As development of the transport logistics network in the mainland becomes increasingly mature, it will promote the further development of logistics services and e-commerce. For instance, as the mainland’s demand for cold chain logistics is rising rapidly, it is in urgent need of importing advanced cold chain solutions in order to raise overall operation efficiency and quality. Moreover, while domestic online shopping is growing in leaps and bounds in the mainland, cross-border e-commerce and related logistics services have yet to develop. In comparison, Hong Kong not only has rich experience in cold chain logistics management but also a sound e-commerce and logistics platform. Hong Kong is therefore well positioned to capture additional opportunities created by the 13th Five-Year Plan.

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