This article provides a brief overview of the Belt and Road initiative (B&R) and illustrates its importance to China and it's trading partners. The article also offers concrete examples of the ways in which Finnish companies should consider B&R as a part of their international business planning.
Summary of what you should know:
What is B&R?
Initially proposed in 2013, the initiative aims to increase cooperation among the participating countries through building land and sea routes, connecting various Asian, European, and African countries.
There are a total of five routes: The three so-called “Silk Road Economic Belt” routes, consist of 1) from Northwest and Northeast of China to Europe, 2) from Northwest China to the Persian Gulf and the Mediterranean Sea, and 3) from Southwest China through the Indochina Peninsula to the Indian Ocean. The other two routes are called “The 21st Century Maritime Silk Road”, and reach 4) from Chinese ports to Indian Ocean and further to Europe, and 5) from Chinese ports to the South Pacific.
Areas of improved co-operation along B&R intend to cover the following fields: infrastructure connectivity, trade, production capacity, investment, financial, ecological & environmental protection, cultural, and social.
Why is B&R important to China and globally?
Over 50 countries signed co-operation agreements with China related to B&R in 2013, and today the initiative covers over 60 countries. An investment of $1T has been assigned to B&R by China Development Bank. The initiative is estimated to cover 65% of the world's population.
After the financial crisis, the world trade, and notably trade in Asia, has been on the decline. China has stated that a key focus of B&R is to develop particularly the western parts of China, which should help boost trade. China is also highly dependent on keeping a high level of investment, with Gross Capital Formation climbing to 45% of GDP in 2011-2015 from 33% in 1991-1995. B&R provides large opportunities for the country to channel these investments.
The fact that B&R was written down in the Communist Party of China Constitution will essentially make execution of B&R a top priority for China.
China’s M&A composition is already transforming through B&R
Chinese mainland and Hong Kong M&A transactions totaled $111B in first three quarters of 2017, which was down 35% year over year. Particularly M&A transactions with the USA have taken a hit, declining 77% to $9B. The bright spot in M&A activity was B&R, where transactions were up over 70% year over year, reaching $38B, a whopping four times that of the USA activity.
Thus, from an M&A activity viewpoint, this marked a year when B&R overshadowed the USA in economic importance for China. It now represents a meaningful chunk of the total activity, occupying a third of the country’s total M&A activity as measured in transaction value.
What’s in store for Finland?
In October 2017, the International Silk Road Academy of Science (ISRAS) was founded in Beijing. It includes science and technology organizations of two dozen countries along the B&R routes, and Finland is in the list of members. The organization aims primarily to promote innovation across the routes.
Deepening cooperation around innovation was also one of the highlights in the joint declaration between Finland and China when Xi Jinping visited Finland in April 2017. Other key areas raised in the declaration were development of elderly services, social assistance and poverty governance, forestry and forest product industry, and circular economy. Following the meeting, Ministry of Foreign Affairs of the People’s Republic of China also echoed the declaration by emphasizing strengthening cooperation between the two countries in telecommunications, intelligent manufacturing, bio-economy, environmental protection technology, energy-saving buildings, and clean energy.
A concrete initiative left the station (literally) early November 2017, when the first train from Finland participating in B&R took off from the Finnish city of Kouvola towards Xi’an in China.
There are two immediate key opportunities for Finnish multinational companies to consider: 1) logistics and 2) growing cooperation through presence:
Date posted 21.11.2017
Gross Capital formation data: World Bank