China’s foreign exchange reserves, which are heading towards the $3.8 trillion mark, are itching to be invested. China’s $62bn Silk Road Infrastructure Fund is one vehicle set up to invest those reserves. The fund’s strategy is to open up infrastructure links with foreign markets along a newly mapped Silk Road and Maritime Road. To date, the $62bn is earmarked for three of China’s state-owned policy banks to support its domestic ($16bn) and international ($40bn to $50bn) New Silk Road project.
The People’s Bank of China will direct $32bn to China Development Bank and $30bn to Export-Import Bank of China, according to a report by Caixin. According to the report, the third bank to receive a yet-to-be-determined amount of cash from China’s Ministry of Finance will be the Agricultural Development Bank of China, a state-owned bank that supports the farming sector.
HSBC economist John Zhu reports: “The economic belt has three elements – transport links to Asia and Europe, natural gas pipelines connecting central Asia and China, plus international highway projects. The total investment could reach RMB700bn – more than $100bn. The plan aims to build on China’s expertise in infrastructure development to boost trade with economies near and far. Global trade should benefit almost immediately as construction increases demand for capital goods such as fuel, machinery and metals.”
After the announcement of the New Silk Road initiatives, China proposed an Asian Infrastructure Investment Bank. The nation provided half of the $100bn registered capital when the bank was formally established in 2014 with 56 countries participating.
News came out in April that India was a likely candidate for the Bank’s vice-presidency. According to India’s NDTV, India has already been designated to head the Brics, (Brazil, Russia, India, China and South Africa) Development Bank, which will be headquartered in Shanghai.
Corporate adventures
In the context of corporate venturing, this ambitious new Silk Road venture opens up an Aladdin’s cave of investment opportunities. Why? Because the Silk Road and the 21st-Century Maritime Silk Road are both being remapped to get more of China’s products and services to the rest of Asia, the Middle East, Africa and Europe, and in record time frames.
That is where innovation comes in from target sectors, ranging from energy, transport, natural resources, construction, manufacturing, telecommunications, IT, textiles and agriculture industries. Those corporate venturing funds already engaged in these sectors and in Silk Road countries will have an advantage as they will already be familiar with the business culture and tax systems.
Some may see this multinational infrastructure agenda as reverse colonialism as the Chinese bring in the big bucks, control a high degree of the supply chain across three continents and own the assets, even including energy assets. Many of the labourers for these infrastructure projects will be Chinese. The supply chains will largely be Chinese.
But, arguably, if China is going to provide a good chunk of the funding, it will want to have a majority say. Any other nation in that position would.
First stop: Pakistan
The Silk Road Infrastructure Fund’s first stop has been made in Pakistan. The fund’s first deal will make it a shareholder in China Three Gorges South Asia Investment, which will build the 720MW Karot dam in Rawalpindi, near the capital Islamabad. An investment of $1.65bn has been committed to the project.
According to China officials, construction on the hydropower project “is to start by the end of this year and go into operation in 2020”. The station will be operated by the Chinese side for 30 years and then transferred to the government of Pakistan. The World Bank’s International Finance Corp is investing $124m in China Three Gorges South Asia Investment, according to Bloomberg and StarBiz.
Energy sector a target sector
But perhaps more interesting is the $5.5bn plan by parent power developer China Three Gorges Corp to build 2GW in renewable energy projects in Pakistan, including hydro, wind and solar power. This will make the company the largest renewable energy player in Pakistan.
While it is plausible to assume that many of the wind turbines and solar equipment used in these projects will bear the “Made in China” sticker – seeing that China continues to drive global renewable energy growth – exploration and developer technology, as well as the operational and maintenance side of the coin, could come from other expertise markets, such as the US and Europe.
These projects are in addition to other gas and oil exploration and pipeline deals in central and eastern Asia.
Bumps in the road expected
Equally an optimist and a cautious person, I see the New Silk Road project as both a road to prosperity and to cultural conflict. For example, the Xinjiang Uyghur autonomous region has emerged as a major trouble spot domestically for China following violent riots and terrorist attacks within Xinjiang and as far away as Kunming and Beijing. The government sees the promotion of economic development as a way to address ethnic tensions.
While easier said than done, economic development, if reasonably spread to local citizens along the routes, could ease or even mend ethnic or religious tensions in other conflict areas. Money talks and feeds bellies, and when bellies are full, people tend not to want to kill each other. That said, China will have to be commercially diplomatic towards not just the governments with which it signs agreements, but also local partners and the people to ensure they too experience the long-term financial benefits.
It is undeniable that Chinese cultural influence will prevail in new towns and projects. Those who can speak Mandarin have an immediate advantage.
“We have seen more Chinese companies opening up offices in Almaty, and translators who are fluent in Russian and Chinese are in high demand,” said Ella Mazhebitskay, a student in the International Relations and World Languages programme at Kazakh State Ablai Khan University in Almaty.
Another conflict to overcome is what some are calling an unfair financial advantage for Chinese policy banks over Chinese commercial banks. For example, the policy banks will lend on central government orders. They reportedly receive preferential treatment, such as tax breaks.
According to Caixin, financial experts and commercial bank employees have “long complained that the distinction between policy and commercial loans is not clear, meaning that policy banks may have unfair advantages when competing with commercial lenders”.
This unlevel playing field could deter non-Chinese commercial banks and corporate investors from entering tenders.
New cities, new commerce, new venturing, new conflicts
Insightful industry-led cartography of the new silk routes is already spurring new cities and cross-border commerce. Horgos, on China’s border with Kazakhstan, is one example. Officially founded in 2014, it is transforming the border crossing into an international railway, energy and logistics hub for a “Silk Road Economic Belt”.
“Kazakh traders complain that Almaty, the nearest Kazakh city, is a bumpy five-hour drive away,” says a Wall Street Journal report.
This remoteness has a direct impact on trading, compared with the more robust industrialised Chinese side of the border city. Kazakh officials say they will start building malls and hotels and finish upgrading the road to Almaty next year. That is one of the last sections of a transcontinental highway from China’s east-coast port of Lianyungang to Russia’s St Petersburg, to be opened by 2016, according to the Wall Street Journal.
New cities, such as Horgos, will spur demand in new commerce and products not just passing through the transport hub, but also in the Silk Road towns. Corruption is also likely – think smuggling rings and dodgy customs officials – which is another challenge to be solved through multilateral government agreements and logistics tracking software.
This is where the innovation, often linked to corporate venturing, will play a major part in reshaping the prosperity of the new Silk and Maritime Roads, either through existing portfolio companies or dedicated new funds.