All In

By Li Jia

The private sector, including businesses and non-profit organisations, is expected to set the tone of One Belt, One Road

On May 10, 2015, International Mother’s Day, China’s central bank declared its fifth move in six months to ease monetary policy, proving itself, in the words of some observers, to be the “loving mother” to market liquidity.

More of such love is anticipated in the coming months, as the Chinese government is worried about the potential risk of undershooting its 7 percent growth target for 2015. Despite sluggish growth and increasing unease, one group of investors are celebrating. Tens of millions of new accounts have been opened by Chinese stock investors excited by record price rises in the second half of 2014. With an augmented money supply from the central bank, grandiose national strategies such as SOE reform, the rise and rise of Internet-based startups and a developing new energy sector are thought to have buoyed up share prices. Among these initiatives is the One Belt, One Road policy, a scheme with a more ambitious scope and broader range of stakeholders than any other.

This Belt and Road is expected to run all the way from Asia to Europe by linking all the economies in between through trade and investment. By the end of April 2015, the One Belt and One Road Index, jointly launched by China Securities Index and Shenyin Wanguo Securities, had soared 69 percent from the beginning of the year. Institutional investors, including foreign funds, have poured money into companies listed in the Index, according to a report by the Securities Daily newspaper on May 11, 2015. Most companies included in the Index are State-owned giants focussing on infrastructure, companies which are supposed to be the first to benefit from the initiative.

The stock market is not the only way that China’s private sector can join the Belt and Road initiative. Private companies are also eager to explore the markets that the scheme aims to link up. Many Chinese NGOs believe it is time for them to go international. Though discussions about the potential participation of China’s private sector have received far fewer headlines in the Chinese media so far, some analysts have stressed that the private sector is not only welcome, but crucial for the success of the whole initiative.

Private Interests

The business map of Peidi, a pet food manufacturer in Wenzhou, Zhejiang Province, illustrates what the Belt and Road could mean for Chinese private companies. Peidi imports leather goods from Uzbekistan to turn into dog chews in China before shipping the finished products as far as Europe and the US. Peidi plan to invest about US$10 million building plants in Vietnam and Cambodia to take advantage of a much cheaper labour force than is found in today’s China while also avoiding possible trade restrictions imposed by European countries on Chinese goods and exploiting the market potential of Southeast Asia.

Tang Zhaobo, one of Peidi’s managers, told ChinaReport that he expects the implementation of the Belt and Road initiative to streamline customs declaration and quarantine procedures both in Uzbekistan and China. The company is also considering the possibility of using existing rail networks linking several Chinese and European cities.

Those involved in more heavy-duty manufacturing will also find their way onto the Belt and Road. Zhou Juezhong, director of the Economic and Trade Promotion Centre in central China’s Hunan Province, told ChinaReport that infrastructure projects included in the initiative, most of which will be contracted to Chinese SOEs, could bring opportunities for big Hunanese private enterprises involved in heavy equipment, steel and cement manufacture. These businesses in turn would need a greater supply of goods and services from smaller private companies. Zhou has recently been busy leading Hunanese business delegations on visits to Vietnam, Thailand and Pakistan to seek trade and investment opportunities in these developing markets.

Financiers are also on the move. China Minsheng Investment, founded in May 2014 by 59 leading Chinese private enterprises representing various industrial sectors, hosted a Belt and Road reception for all Association of Southeast Asian Nations (ASEAN) ambassadors to Beijing in February 2015. The following month, a US$5 billion agreement to build an industrial park in Indonesia became the initiative’s first project, with hopes that investment will increase to more than tens of billions of dollars in the near future. Also in early March 2015, six big Chinese private enterprises launched the country’s first private equity fund focussing on green tech, such as solar power, also part of the Belt and Road initiative.

Business Flows

While the private sector regards the Belt and Road initiative as a source of new business possibilities, private participation is regarded as indispensable to the success of the initiative itself. There is little doubt among Chinese and international analysts and business leaders that better transportation and communication services are urgently needed for the development of the Belt and Road economies, and will in turn boost world trade and investment as a whole. However, there is widespread concern about the investment returns of such an expensive and complicated cross-border infrastructure project.

Infrastructure itself does not automatically generate returns. “Infrastructure is only useful if people use it,” said Ben Simpfendorfer, managing director of Silk Road Associates, a Hong Kong-based consultancy. This issue has been made crystal clear, he explained to ChinaReport, by China’s own economic takeoff in the past decades, which is not just built on infrastructure improvement, but also on improved flow of goods, services, information and people. “If the private sector doesn’t follow, then ultimately the whole project will fail,” he noted.

Another reason for more private sector participation cited by analysts is political, or more precisely, apolitical. Governments are typically much more sensitive towards investment from foreign SOEs than foreign private companies. A recent report issued by Ernst & Young, an international accounting firm and consultancy, predicted an outbound boom for Chinese companies starting this year driven by the Belt and Road initiative and new policies relaxing approval reviews for overseas investment.

The same report stressed that, in recent years, Chinese private companies were catching up rapidly with Chinese SOEs in overseas investment, and would likely be able to do a better job due to their greater flexibility, more diversified investment and the fact that such enterprises are “less affected by possible stringent political censorship in the host countries.”

No Profit, But Heart

If the One Belt, One Road initiative will accelerate overseas investment by Chinese companies, an ongoing process throughout the last decade, then it could prove a kickstart for China’s nonprofit social organisations which have yet to develop both competence and a global vision. According to China’s Ministry of Civil Affairs, less than 0.1 percent of the country’s nonprofits are engaged in international services outside of China. Recently the discussions on their role in realising the Belt and Road vision have heated up.

At a forum at Tsinghua University on April 29, 2015, Chinese academics and government officials, as well as NGO representatives from China and the US, highlighted the importance of China’s NGOs in facilitating communication between Chinese investors and various groups in the Belt and Road countries. The panel highlighted how exchanges via NGOs were often seen as more acceptable than those conducted by businesses or officials at the community level, and that NGOs were also instrumental in promoting a green supply chain. The consensus was that NGOs are voluntary, and therefore less politicised, with their activities generally perceived as being in the public interest.

The preliminary findings of a study by SynTao, a Beijing-based consultancy on corporate social responsibility and responsible investment, conducted in partnership with Tsinghua University and sponsored by the British Department for International Development, show that some Chinese companies are seeking cooperation with Chinese NGOs when it comes to understanding local needs, communicating with local communities and carrying out social projects.

Zhang Hongfu, senior research manager with SynTao, said governments and enterprises need NGO expertise in particular areas, including the environment, poverty alleviation, education and communication. In 2012, Sinohydro and the Beijing-based NGO Global Environmental Institute jointly completed a methane project in Laos, the first overseas project jointly conducted by a Chinese company and a Chinese NGO. However, such examples are far from common. It is expected that implementing the Belt and Road initiative could provide more incentives and opportunities for Chinese companies and NGOs to work together overseas

The “people-to-people bond” to be built through such social exchanges, including those involving NGOs and think tanks, is one of the five priorities in the government’s Action Plan on the Belt and Road Initiative released on March 28, 2015. Chinese analysts are increasingly accepting that non-profit social organisations, particularly NGOs, can serve a vital purpose as a part of public diplomacy and a bridge between China and local communities in the Belt and Road economies.

Inside Solutions

Chinese private companies and non-profit social organisations, both of which remain in the formative stages of going truly global, have plenty of homework to do when it comes to preparing to embrace the opportunities presented by Belt and Road. On top of their efforts, their ultimate success will be closely related to reforms within China itself.

One of the major barriers for Chinese private companies seeking to go abroad is a lack of funding due to the high cost of loans and limited legal sources of finance. This is a problem that has dogged private enterprise in China, and is recognised as one of the leading constricting factors to ongoing problems in the private sector and, by extension, exacerbating the country’s current growth slowdown. The government has been trying to solve this  headache over the past few years by pushing forward a financial reform agenda. However, analysts believe substantial progress cannot be made until the other two major drains on funding – governments and SOEs – can be disciplined more effectively either by the law or more equitable market competition.

Dr Huo Jianguo, former president of the Chinese Academy of International Trade and Economic Cooperation, a think tank under the Ministry of Commerce, stressed that putting all enterprises, no matter their ownership, on a level playing field within the country would boost the global growth and competitiveness of Chinese companies. As he explained to ChinaReport, strong multinationals grow out of real competition at home.

There are some administrative barriers yet to be removed and financial support to be provided before Chinese social organisations can go international on a large scale. In his recent book Study on Strategy and Route of China’s NGO Internationalisation, for example, Huang Haoming, director of the China Association for NGO Cooperation, described how NGO staff members are required to go through the same complicated and lengthy administrative approval processes as civil servants when applying for visas for overseas business visits. As many NGO events are organised on short notice, unlike intergovernmental exchanges which are usually scheduled months in advance, delays in visa issuance are a major problem. In addition, Huang noted, unlike in developed countries, NGOs in China are excluded from joining in overseas official aid programmes that would allow them to receive government funding.

Distrust between the government and NGOs in China is also hard to ignore. As shown in recent research sponsored by Oxfam and conducted by the Social Resources Institute, a consultancy in Beijing, the Chinese government and its enterprises maintain “constant vigilance” against NGOs and demonstrate poor awareness of their value. In turn, the study claims, NGOs keep directing “moral criticism” at the government and enterprise but offer insufficient constructive suggestions. The government, as the strongest player in this triangle, is the side that needs to make the biggest change in attitude.

Restructuring its relations with the market and society has been defined as the core mission of China’s ongoing reform agenda. The ambitions crystallised in the Belt and Road initiative depend not only on China’s own growth prospects, but also on the country’s entire global outlook.

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