China’s Belt and Road initiative (also known as the “One Belt One Road Initiative”) was first introduced by President Xi Jinping in September and October 2013. As the initiative has developed over the last 4 years, we have published an annual series of articles summarizing the initiative and reviewing the status and successes achieved in its implementation.
With the Year of the Rooster shortly coming to an end and the Year of the Dog about to commence, it is once again appropriate to both look back on the 2017 events that shaped and influenced the Belt and Road Initiative (shortened to “BRI”) and also to look forward at the market developments expected in 2018.
Belt and Road Forum for International Co-operation: All Roads Lead to Beijing
The flagship BRI event of 2017 was, without doubt, the Belt and Road Forum for International Co-operation (“Belt and Road Forum”). This major international forum held in Beijing in May was attended by heads of state and government of 29 countries and representatives of more than 70 international organizations and, in total, 130 countries. This event was the highest-level meeting of its kind since the BRI was proposed in 2013. The high profile attendees (including the President/Prime Ministers of countries as diverse as Spain, Italy, Chile, Argentina, Russia and 7 of the 10 ASEAN nations) underscored the extent to which BRI is now a permanent and important fixture of the global landscape leading some commentators to declare “All Roads Lead to Beijing”.
The event celebrated the continuing success of the initiative with the BRI strategy and framework remaining focused on connectivity and cooperation among participating countries. 2017 has seen a diverse range of projects being developed along the route such as: commencement of the construction of Pokhara International Airport in Nepal which is being developed with the Chinese assistance and funded through China Exim Bank; China's Sinopec Engineering Company developing and upgrading Iran's Abadan Oil Refinery; and significant continuing cross border M&A activity (as detailed further below). Reflecting this focus, the Guiding Principles on Financing the Development of the Belt and Road (“Financing Principles”), agreed to by the Financing Ministers participating in the Belt and Road Forum, specifically “reaffirmed the important role of infrastructure in sustainable economic and social development.”
Further supporting international involvement in financing of BRI infrastructure projects, Hong Kong's Securities and Future Commission (“SFC”) released a Statement in April 2017 seeking to ease Hong Kong listing conditions for infrastructure project companies, including firms linked to BRI projects. In releasing the Statement, the SFC noted that “Development banks and others have pointed to the need to mobilise large pools of savings, including those in Asia, to close a significant infrastructure financing gap. Hong Kong is uniquely positioned to facilitate infrastructure investment initiatives, such as Belt and Road, through its capital markets.”
Emerging focus on a Green Belt and Road
A key emerging theme of the BRI initiative is a focus on creating a “Green Belt and Road”. Earlier in 2017 four Chinese Ministries (the Ministry of Environmental Protection; Ministry of Foreign Affairs; National Development and Reform Commission and the Ministry of Commerce) - jointly released a document titled ‘Guidance to Promote the Construction of a Green Belt and Road’ (“Environmental Guidance”). In releasing the Environmental Guidance, the Ministry of Environmental Protection's experts noted that it “demonstrates that China highly values environmental protection when it comes to Belt and Road projects and that China intends to avoid a repetition of the environmental damage done during its own industrialization and urbanization”. The Main Objectives of the Environmental Guidance include the “formulat[ion] and execut[ion] of a series of eco-environment risk prevention policies and measures and [to] lay a solid foundation for green ‘Belt and Road’ Initiative within 3 to 5 years.” Supporting this green focus are a number of green projects related to the Belt and Road which are already taking shape, such as a number of renewable or energy efficiency projects in Pakistan, Bangladesh and Indonesia.
Booming China-American investments
Traditionally the BRI has been portrayed via two main routes emanating from China: the land-based ‘Silk road economic belt’ and the oceangoing ‘Maritime silk road’ each of which run through the continents of Asia, Europe and Africa, connecting vibrant East Asian economies at one end and developed Western European economies at the other, encompassing more than 65 countries along the route.
However, increasingly unbounded by strict geographical limits, the BRI initiative has also (to an extent) stretched to the Americas (North and South), with President Trump sending a USA delegation to participate in the Belt and Road Forum and (as noted above) Presidents of Chile and Argentina directly participating.
More generally, 2017 has continued to see China's meteoric rise in investment in Latin America continue. In little over a decade, China has jumped from being one of Latin America’s smallest trading and investment partners to one of its largest. President Xi Jinping has set ambitious goals for the future of the relationship, aiming in the years ahead for annual China-Latin America bilateral trade to reach US$500 billion and Chinese direct investment in Latin America to reach US$250 billion.
With ever-growing opportunities awaiting investors and businesses arising from this bourgeoning relationship, DLA Piper - together with a number of Latin American Government Investment Agencies, China Fortune Media Group and the Cohen Group - co-sponsored the China-Latin America Business and Investment Forum held in Beijing in August 2017. The event attracted over 100 key business, commercial and legal leaders from over 50 companies and organizations to discuss the bourgeoning business and investment opportunities available to Chinese investors and businesses in Latin America. Presenters identified key business opportunities currently available to foreign investors, in particular Chinese investors, in key Latin American jurisdictions and advised investors on key matters to consider when undertaking investments in these jurisdictions, addressing critical questions such as foreign investment restrictions or national security reviews which apply in certain sectors and Latin American jurisdictions.
United States of America
Making global headlines around the world during President Trump's November 2017 visit to China, China Energy Investment Corporation (the largest energy company in the world, being the recent creation of a merger between China’s Shenhua Group and Guodian Group) signed a Memorandum of Understanding with the US state of West Virginia for the development of shale gases into petro chemical industries within West Virginia with the projects focusing on power generation, chemical manufacturing and underground storage of natural gas liquids and derivatives. The projects will total US$83 billion over the next 20 years.
Whilst this investment has not been specifically linked as a BRI project, the strategic and economic importance of the investment is significant and ties in with themes common throughout the BRI.
Resilience of Chinese M&A activity in the face of increased regulatory restrictions
In our BRI update alert last year, we noted that questions were being raised over the future direction of Chinese outbound investments following more restrictive regulatory requirements introduced in late 2016-early 2017 which may have affected Chinese outbound investments and the export of funds for such investments. New requirements were introduced by each of China's National Development and Reform Commission (“NDRC”), China's State Administration of Foreign Exchange (“SAFE”) and China's State-owned Assets Supervision and Administration Commission (“SASAC”). At the time we had noted that:
“a key focus of the renewed supervisory review process is expected to result in companies eyeing non-core business acquisitions overseas meeting bigger obstacles and greater scrutiny in their approval procedures, whilst investments consistent with acquiring enterprises' existing corporate expertise and sound investment objectives are unlikely to be significantly affected. … In this context, there are good reasons to believe that, whilst these new requirements may add an additional layer of supervision, they will largely not affect the vast bulk of investment proposals which will already have undergone rigorous commercial analysis by Chinese investors' internal commercial teams.”
Our experiences in the market since writing the above re-affirm our view and are further supported by recent data released by Thomson Reuters on the continuing strength of Chinese outbound M&A throughout 2017. The data indicates that the total deal value of China outbound acquisitions across BRI countries saw a significant increase (136%) in value compared to 2016 deals. According to the data, 39% of Chinese entities' total global investments were made in BRI countries, with top target countries including Singapore, Mongolia, UAE, Russia and South Korea.
Bringing to life the above statistics are the actual deals that have made up the above data. In 2017, the largest Chinese investment in a BRI country was a Chinese private equity consortium’s US$11.6 billion buyout of the Singapore-based Global Logistics Properties. Other top deals announced during 2017 include the US$1.8 billion purchase of an 8 percent ownership interest in Abu Dhabi National Oil Co by CNPC; Sinopec's proposed acquisition of Chevron's interests in the Cape Town refinery and South African and Botswana petrol retail businesses; and HNA Group’s US$1 billion acquisition of logistics company, CWT Ltd.
Opportunities for International Companies to benefit
A large portion of China’s foreign investment and trade going forward are expected to take place in BRI countries. However, the BRI is not only outward looking from China - it is a two-way street. Nearly 3 years ago, in the March 2015, China’s NDRC, Ministry of Foreign Affairs and Ministry of
Commerce jointly issued the Visions and Actions on Jointly Building Silk Road Economic Belt and 21st Century Maritime Silk Road (“Visions and Actions Plan”), which laid out the broad strategy of the BRI initiative and remains a key guiding framework document for the initiative. The Visions and Actions Plan specifically welcomes companies from all countries to invest in China whilst also encouraging Chinese companies to participate in infrastructure construction and undertake other investments in other countries along the route. In 2017, President Xi has reiterated this approach noting in his keynote speech at the Belt and Road Forum that: “we are ready to share practices of development with other countries … what we hope to achieve is a new model of win-win cooperation.”
Importantly, whilst China has, and continues to, allocate significant capital and resources towards implementing the BRI, China cannot implement the BRI alone. Success of this initiative requires co-operation between Chinese enterprises and foreign counterparties in a raft of sectors and regions, covering everything from small scale trade and investment, to the delivery of large scale multi-jurisdictional game-changing infrastructure... and consequently the BRI initiative offers countless opportunities for foreign companies to partner with Chinese companies, enterprises and financial institutions.
International equipment vendors including General Electric, Caterpillar and Honeywell, logistics and shipping companies and DHL and Maersk Group have all readily embraced the initiative. For example, earlier this year in a New York Times article, General Electric cited an increase in their orders from Chinese construction companies from US$400 million worth of equipment in 2014 to US$2.3 billion in 2016, with plans for further orders in the pipeline - General Electric China's CEO stated they “have a laser focus on winning [an additional US$7 billion in orders for natural-gas turbines and other power equipment in roughly the next 18 months]”. An August 2017 article in The Economist (titled: “Western firms are coining it along China’s One Belt, One Road”) commenting on the successful involvement of international companies partnering with Chinese companies in BRI projects noted that some Chinese groups undertaking BRI activities have limited experience abroad and thereby partnering with international counterparties may “offer a technological edge and thorough knowledge of local conditions across the BRI region, from Tajikistan to Thailand.”
BRI outlook for 2018
With the 2nd Belt and Road Forum scheduled to be held in 2019, the year ahead will not have a repeat of the major multilateral 2017 event. However, 2018 is sure to continue to see ever continuing momentum build behind BRI. 4 years since the initiative was first launched, many projects across the BRI routes are now bearing fruit, with a pipeline of many more continuing to build. This trend is likely to only increase with the initiative now a permanent and important fixture of the global landscape.