Expansion has its challenges: Realizing the risks of China’s Belt and Road Initiative

aerial view of intersecting roads at night with red lights

The cornerstone of Chinese foreign policy provides domestic businesses with an opportunity to expand into new territories and develop new products and services. But there are dangers lurking within the possibilities.

It’s a maxim in the insurance industry that with opportunity comes risk. And that certainly holds true for China’s “Belt and Road Initiative,” or BRI. The cornerstone of Chinese foreign policy, the BRI calls for a new phase of globalization emanating from China, where the countries to the west are bound together by ties of trade.

Its mainspring will be huge infrastructure investment in roads, bridges, railways and ports that will create a “belt” of overland corridors from China, through Turkey and into Europe, and a maritime “road” of shipping lanes that will run through southeast Asia, past India to the east coast of Africa and up into the Mediterranean through the Red Sea.

Current estimates for turning this project into a reality vary from $900 billion to several trillion, with most of the financial burden, and the work, being taken on by state-owned enterprises (SOEs). However, the private sector is expected to pitch in and the Asian Infrastructure Investment Bank (AIIB) will also help support the project.

Small and medium enterprises (SMEs) are also expected to play a role in the BRI— helping SOEs expand trading routes and transport goods in the short term, and acting as ambassadors for trade and development in the longer term. A week-long expo in Yunnan, the province in southwest China that acts as a gateway to southeast Asian countries that could benefit from BRI, drew 3,825 companies, 40% of which came from overseas to stake their claims to a place in the vanguard.

Steady steps on the risky path of the BRI

While the BRI has the potential to accelerate the rate of economic integration and development, as trade costs decline, a project this ambitious isn’t without risk. What will businesses need to think about — and protect against — along the way?

We’ve identified four key areas of risk: political, terrorism, economic and financial. While there’s significant overlap between each risk, when considered alone, they can provide a way for companies to focus their thinking.

1. Political risk

While the BRI has been promoted with considerable confidence in the media, it can be difficult to translate theory into practice, especially while the geopolitical environment is rapidly changing. Talk of a trade war between China and the U.S., and now opening sallies, means that any SME exporting goods could find itself under pressure, given margins are traditionally small. If relations between the two countries continue to be challenged, workforce redundancies could follow, leading companies to shift their emphasis to the BRI countries.

The degree of risk exposure will depend on the nature of the investment. Trading is safer and more flexible, offering the possibility of responding quickly to changing circumstances, while direct investment is potentially more lucrative, but significantly more exposed. Setting up factories and developing real estate leaves businesses at the mercy of changing circumstances.

For example, in Malaysia, the pro-BRI government of Najib Razak has since been replaced by that of Mahathir Mohamad, who’s significantly less enthusiastic and has made references to neocolonialism. The wisdom of investing in a Malaysian manufacturing park has been thrown into doubt, so while the companies that have staked a financial interest retain access, they may be less likely to move ahead.

This is an argument for Chinese SMEs to develop a clear understanding of the political terrain before investing and, if necessary, to bring in outside expertise. One of the first things that any company will want to consider is its exit strategy. It’s dangerous to assume that your operations will continue forever, so it behoves those who design contracts, project or capital structures to think how assets would be protected in the event of a withdrawal.

2. Terrorism risk

The BRI has expanded China’s global economic presence into countries where security risks are high, including Pakistan, where terrorist networks already exist and could become new focuses of the Islamic State. This means that the terrorist threat is coming even closer to China, and core BRI projects such as the China-Pakistan Economic Corridor.

Within a year’s time, there have been several attacks in the southwestern province of Balochistan, with the most recent being a raid on the Chinese Consulate in Karachi. That incident, as well as others, including a suicide bombing that targeted Chinese engineers traveling to a mining venture in the province, have been tied to the Balochistan Liberation Army, an ethnic insurgent group that opposes the BRI and wants autonomy for the province.

What’s clear is that companies involved with the BRI will need to take measures to protect their workforces and infrastructure. While SOEs can afford protection, and may receive it from the army and other state-run security forces, it may be necessary for SMEs to group together. Some insurance programs may cover them in an emergency and provide speedy escalation in case of incidents or attack.

3. Economic risk

The BRI is not intended to be funded solely by the Chinese government. While the exact monetary value of the project isn’t known and perhaps cannot be reduced to a single figure, it will almost certainly run into the trillions. This makes it imperative that multiple sources of investment are secured, which can mean international markets, multinational organizations, the AIIB or any other central bank that finds the prospect appealing.

Where the economic risk lies for SMEs is in finding sufficient funds to ensure their ambitions are in line with their ability to realize them. At the moment, BRI is the biggest vehicle for foreign direct investment in the world. Foreign firms are already reciprocating by providing materials and equipment to BRI projects and the suggestion is they would provide financial support if the Chinese government were to provide assurances about the risks they were taking on.

4. Financial risk

Every expansion into new markets creates financial risks, so conducting a careful risk assessment will be key. For large Chinese corporates, risk assessments will inevitably be more sophisticated and thorough, but even smaller companies can look at forms of credit insurance to give them some basic level of protection.

Conclusion

For Chinese companies to realize the potential gains of BRI and avoid being eclipsed by experienced rivals from overseas, they will need skill and a sophisticated view of risk management. SMEs that are accustomed to trading inside Chinese borders or with a few, trusted overseas partners must navigate foreign politics, exposure to terrorism, lobby for foreign investment and conduct wide-ranging credit risk assessments. Whether they use external consultants or in-house expertise, the message of BRI is best summed up by one, anonymous Chinese broker: “it’s an adventure, and adventures are risky.”


 

Wise Xu head shotWise Xu is the head of Willis Insurance Brokers, China, at Willis Towers Watson.

Categories: Environmental Liability, Featured Post, Global Risks, Insurance and Risk Management, Political Risk, Risk Culture, Terrorism | Tags: , , , , , ,

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