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Belt and Road Initiative (BRI) in China: Opportunities for Foreign Companies?

January 22, 2018

The One Belt One Road Initiative (OBOR), also called Belt and Road Initiative (BRI), is an ambitious plan from the Chinese government and predominately from Chairman Xi Jinping to increase trade between China and the rest of the world. Consequently, China has been investing in infrastructure and harmonizing legal and financial relations with the participating countries to support this plan.

 

Initiated in 2013 by Chairman Xi, the project has been hailed by the Chinese government as a game-changer for trade in the region and the rest of the world. Whereas the plan seems to be mostly designed with Chinese firms in mind and exporting more goods (and services) abroad, there are no restrictions on the usage of OBOR infrastructure for foreign firms. With careful assessment and planning, OBOR could also be helpful to foreign firms, both in China and abroad.

 

To bring the OBOR Initiative into practice, the Chinese Government has been engaging on (i) many bilateral agreements with different countries, (ii) harmonizing customs duties, and even further eliminating practices of double taxation and (iii) investing and building many infrastructure projects along various routes. According to Xinhua Finance Agency, harmonization under OBOR of the legal framework with other countries has also gained pace, along with the intellectual property rights protection.

 

However, American and European governments have been openly critical about the initiative, as they see it as a way of China to increase trade only for Chinese companies and in expense of local firms in the recipient countries. As China’s trade surplus is still a concern for several of its trade partners, mainly to the US, their ambivalence is understandable. For instance, the Economist Intelligence Unit argues that China is looking to use OBOR for its domestic overproduction in industries like steel, aluminum and cement. International Finance Corporation’s former head Jin Yong Cai said that China is leveraging its capital to help other countries develop, so that they can become customers for Chinese products, as reported by CNN.

 

Several think-tank organizations according to Xinhua put forward that this position of Western countries has slowed down the progress of harmonization of rules and regulations to foster the growth of the Belt and Road Initiative. Additionally, questions remain on how the internationally isolated countries that are part of OBOR will be incorporated. In the example of Iran, which is an OBOR member country, the way of conducting the payments is still problematic as the country remains under the embargo of the US.

 

Though OBOR seems on the outset to be a policy mostly for strengthening Chinese economy and politics abroad, an important question to ask is how exactly can foreign firms benefit from OBOR?

 

 

Infrastructure and logistics developments

 

A unique feature that OBOR offers to firms is the new logistics channel, namely the train route construction that China has both encouraged and financed. There is also the sea transportation leg of the project, 21st Century Silk Road Maritime Road spanning from China to Europe through Indian Ocean, Red Sea and the Mediterranean, which includes improvements on the security of the sea routes and enhancement of port facilities on the route. There are two routes in effect at the moment. They both arrive to Europe through Russia and Kazakhstan. Train freight is especially interesting for firms which would consider for their business that the 30 day-long sea transport is too long, and air freight to transport their goods is too expensive. Rail transport is a good middle path for such firms, as it is cheaper than air freight and faster than sea freight (approximately 15-21 days by train, depending on location). The train moves through the cold steppes of Kazakhstan and Russia, then enters to the EU through Poland. Then it goes on to its end destination on European rail infrastructure, depending on the recipient country. There is currently already a freight train working between Germany and China regularly.

 

Foreign companies may be able to optimize their supply chain and could gain further competitive advantage when using OBOR infrastructure. Industry experts from DHL stresses that sectors such as fashion, automotive and electronics could have benefits using the new logistics route, as their business has a time-sensitive nature compared to other businesses. 

 

As an example of goods transported on OBOR infrastructure, the first train going from the UK to China was loaded with baby milk and whisky. The carriage capacity of a train is significantly lower than sea transport, as seen in the example of the “East Wind” train, which was the name of the first train that made the 12,000-km’s long journey to the UK from China. East Wind has a capacity of 88 containers, whereas sea carriers have 10,000 to 20,000 containers capacity on average. This difference contributes to the difference in the prices between two modes of transport.

At this moment, the traffic of goods flows predominantly from China to overseas markets. The trains that leaves China packed with goods in most cases do not return with as many products. This presents an opportunity for firms that are in need of an alternative logistics channel into China from Europe or any other OBOR recipient country.

 

Additionally, the fact that OBOR is strongly encouraged by the Chinese government and various governments of countries along the route point out to potential other advantage for businesses of using the BRI infrastructure.

 

Regulatory Reforms

 

Under the scope of the OBOR, China has been engaging on several regulatory reforms. As explained by Xinhua News, China has both been signing new double taxation agreements (DTA), and revising the old ones under the scope of the OBOR initiative; originally to ensure that Chinese businesses remain competitive and are following global standards. Through revisions and new agreements, Xinhua explained that China has effectively eliminated 13.1 billion RMB since 2014 in double taxation.

 

Since OBOR aims to boost efficiency and speed in trading, customs clearance procedures are expected to be optimized. Further changes should be expected to happen gradually, as normally within China gradual change is the policy motto of Chinese officials. OBOR is considered to be the largest outbound project of China. It is also important to note that this initiative has become more or less an umbrella for many different international economic and business policy actions from the Chinese government. Trade liberalization, customs harmonization, infrastructure construction and many other reforms are completed under the OBOR Initiative and expected to develop further.

 

Looking ahead?

 

As discussed, The Belt and Road Initiative is just at the beginning phase, and according to Chinese policy makers, developments towards a more open and connected China are currently still at play. We have already seen the first trains working on 2 out of 5 of the routes planned for Belt and Road Initiative since 2013. We would expect more developments in legal, economic and logistic aspects in the course of years to further advance the initiative, though future will tell the outcome of these plans.

 

At Moore, we keep a keen eye on developments in China and are always happy to share our thoughts on the future directions of China. If any questions, please do not hesitate to contact us at info@msadvisory.com.

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