Wednesday, Jul 26, 2017, 8:37 PM CST – China

Economy

Belt and Road

A Grand Chorus

China needs to work in harmony with a global chorus of stakeholders. Its Belt and Road initiative will prove to be a precipitous learning curve

Chinese and Spanish officials watch a train depart from Madrid, Spain, bound for Yiwu, Zhejiang Province, loaded with wine, olive oil and other Spanish products, May 18, 2015 Photo by ic

The first freight train from Yiwu, Zhejiang, arrives in Madrid on the world’s longest direct rail journey of 13,052 kilometers, December 9, 2014 Photo by Xinhua

The unloading of cargo at Lianyungang Port, Jiangsu Province, a terminal linking China with East Asia and Central Asia, March 14, 2015 Photo by cns

A chorus of diverse voices, such as that promised by China’s grand global Belt and Road trade initiative, only works when every part comes together in harmony. Comparing future programs to “a real chorus comprising all countries along the routes, not a solo for China itself, ” Chinese President Xi Jinping declared his commitment to the openness and inclusiveness of the One Belt, One Road initiative in his keynote speech at the Boao Forum for Asia on March 28, 2015.

As more than 60 countries and international organizations have shown interest in joining the scheme, an almost universal consensus has emerged among Chinese analysts that wringing an angelic chorus out of such a vast and diverse choir will be massively challenging.

In the government action plan released on the same day that Xi delivered his speech, core principles have been outlined on how best to achieve this. Proposed programs will be required to fit well into host countries’ own development agendas, in pursuit of the much-vaunted “win-win” that is a key policy point for China’s economic architects. The entire endeavor, analysts say, will be a steep learning curve for Chinese institutions unused to working with such a diversified range of stakeholders; a curve that will test China’s commitment to further opening up to the limit.

Alone No More

The One Belt, One Road initiative will commence with infrastructure construction, an area in which Chinese contractors have established a robust presence in developing countries. These firms are known for getting the job done alone, and at rock-bottom prices. This strategy, however, is now believed to have had its day, thanks both to changes in the market and the advent of the Belt and Road initiative.

Ben Simpfendorfer, managing director of Silk Road Associates Limited, a Hong Kong-based consultancy, told NewsChina that Chinese companies have used a low price strategy to grab market share in the past decade. However, he explained, these same companies no longer need to, or indeed are unable to, continue to adhere to this strategy.

There have been cases, he continued, in which Chinese contractors have had to increase their prices to a similar level of that offered by European and American bidders simply in order to match the quality demanded by tendering companies. Simpfendorfer cited Saudi Arabia as a pertinent recent example. Middle income economies along the Belt and Road, he added, have higher quality requirements than ever before.

Dr Li Kaimeng, director general of the research center of the China International Engineering Consulting Corporation, told NewsChina that Chinese companies have also been required by Chinese regulators to improve the quality of their overseas construction projects for the sake of China’s international reputation. Nowadays, he said, host countries do not complain much about quality, but often raise issues relating to environmental protection and labor.

In 2013, the Ministry of Commerce and the Ministry of Environmental Protection issued a guideline urging Chinese companies to improve environmental and labor practices in accordance with the rules set by host countries and the international community. The combination of internal and external pressure, Dr Li added, means that more investment in quality and social responsibility standards will in turn further narrow the price gap separating Chinese companies from their Western competitors.

Given this state of affairs, both Dr Li and Mr Simpfendorfer believe the trend will be for Chinese companies and those from other areas, such as Europe, the US, India and Turkey, to tender together as consortia. This is also one of the ways for China to prove that its Belt and Road initiative will be founded on open, fair and transparent market principles.

Both experts also agree that this would create complementary, well-matched partnerships. For example, Chinese engineers, with rich experience in developing markets, are more flexible in designing solutions balancing both budgets and technical requirements, while their European and US colleagues may be able to offer more sophisticated technologies also needed in such joint schemes.

Wider Partnership

China’s private sector, including both its companies and NGOs, may find that their diverse areas of interests will find even more potential partners along the Belt and Road than those equipped to work with SOEs.

Jointly sponsored industrial parks are highlighted in the government’s action plan as an important platform of cooperation along the international supply chain. On May 16, 2015, China’s State Council issued a guideline on promoting Chinese investment in a number of sectors mainly in developing countries. These included steel, chemicals, textiles, automotive, telecommunications and civil engineering. China’s midwestern region is also being encouraged to link its regional economies with the Belt and Road markets to the west through enhanced trade and investment, particularly in labor-intensive sectors.

A localized labor force, suppliers and distributors are all essential components of this task. For example, domestic smartphone heavyweight Xiaomi now sells its products through the India-based online electronics retailer Flipkart. Oppo, another Chinese cell phone manufacturer, is also courting the South Asian market by inviting Bollywood stars to advertise its products.

According to Wu Sike, China’s Special Envoy to the Middle East from 2009 until September 2014 and now with the Chongyang Institute for Financial Studies at Renmin University of China, oil-rich Gulf states are stepping up their efforts to diversify their economies while they can, and seek to work with Chinese companies as part of the Belt and Road initiative in order to expand their international business ventures to include ports, airports, tourism and finance. Several countries in the region have expressed interest in financial products managed by Chinese financiers in accordance with Sharia law. Wu told NewsChina that Arabs and Persians, historically representing the most active mercantile cultures along the ancient Silk Road, remain important partners for Chinese companies exploring the Belt and Road markets, a prospect that is made clear by the presence of thousands of Arab traders in Yiwu, Zhejiang Province.

As private Chinese companies are also strong players in the consumer goods market, Simpfendorfer believes that partnership should be sought with enterprises in other major countries along the Belt and Road, like Turkey, Indonesia and Malaysia.

Loletta Chow, Global Leader of the China Overseas Investment Network at Ernst & Young, argues that foreign banks, either those in Belt and Road economies or international giants, can help provide much-needed funding for the overseas expansion of private Chinese companies, as they are generally less vulnerable to shifting exchange rates. She also advocates for Chinese companies to look beyond the developing world to economies with both strong innovation markets and visible desire for cooperation with Chinese companies, such as Israel.

For Chinese NGOs, meanwhile, a lack of overseas experience makes finding the right international partner particularly important. In his Study on Strategy and Route of China’s NGO Internationalization, director of the China Association for NGO Cooperation Huang Haoming stated that choice typically recommended by experts is for Chinese interests to cooperate with NGOs operating in host countries on projects sponsored by China’s official aid agencies.

The second best option, according to Huang, is to act as an accredited consultative agency to UN organizations. So far, only about 20 of more than 4,000 such agencies operating internationally are from the Chinese mainland, yet these strategies are already widely used by NGOs from developed countries, and have been for decades.

Some also claim that international companies and NGOs already operating in China are the best advisors for their Chinese partners when embarking on Belt and Road projects.

Bonds

While entering an official, international partnership is always optional, it is hard for any enterprise to survive abroad without understanding the land and its people. Interpreters are available in today’s globalized world, but linguistic barriers are merely one obstacle that Chinese companies need to overcome. Learning from a litany of bitter lessons over the years, Chinese companies are more aware than ever of the importance of observing laws and bringing jobs to local communities in host countries. This kind of on-the-ground understanding, however, is not simply a case of hiring an interpreter or a local law firm.

“It’s the idea behind the language,” Loletta Chow told NewsChina, citing an example where one of her Ernst & Young clients, a potential Chinese buyer, had problems understanding a representative of a French company negotiating an acquisition case. While both men spoke excellent English, an evident cultural gap was a barrier to effective communication.

People with a foot in both cultures, therefore, provide the best bridge in such situations. These could be Chinese with a deep and ingrained understanding of an area and its customs, possibly overseas Chinese, or a local with experience of living and working in China. European and US multinationals regularly employ a lot of European- or American-educated local talent in both joint ventures or wholly-owned subsidiaries in host countries. The number of foreign students in China, however, remains small, and Chinese companies are relative newcomers to developing markets, with their staff often lacking essential knowledge of specific local cultures.

This issue does not have to become a major problem for Chinese companies so long as they remain open-minded on cultural matters, according to Joerg Wuttke, president of the European Chamber of Commerce in China. Wuttke argues that dealing with local cultures and local communities is always a difficult challenge for multinationals emerging from developed countries, and the most successful examples quickly learn the value of humility. “It’s a mindset. You go there. You are open. You are curious. You accept local culture,” he said.

Different understandings of what constitutes happiness and development are a good example of potential cultural misunderstandings. While most countries’ preferred growth models are largely the result of economic globalization, like anywhere else in the world, many ordinary people in Southeast Asian economies, for example, have traditionally eschewed the high-intensity work ethic of their northern peers, regardless of potential financial rewards.

Zhang Hongfu, a senior research manager with SynTao, a Beijing-based consultancy on CSR and responsible investment, told NewsChina that Chinese companies, inclined to jump to the conclusion that local workers lack drive or are simply lazy, need to accept this as a reflection of the values central to predominantly Buddhist cultures.

Reaching Out

There is a lot to be done, however, to turn an open mindset into action. At the macro level, Dr Huo Jianguo, former president of the Chinese Academy of International Trade and Economic Cooperation, a think tank under the Ministry of Commerce, thinks China’s opening up process is one of the cornerstones of the Belt and Road initiative.

For example, industrial links between China’s midwest and the Belt and Road markets can only be possible, Dr Huo told NewsChina, when China’s industrialized east coast shifts focus towards advanced service and manufacturing sectors, thus incentivizing lower-end enterprises to move out west. The government has tried to promote these two processes for several years, but progress remains slow. Dr Huo stressed that currently highly restricted areas of the service sectors – specifically finance, law, accounting and healthcare services – need to be more open to both Chinese and foreign private investors.

In addition, the existing China-Europe railway network, an important feature of infrastructure along the Belt and Road, is running on subsidies due to too little freight traveling to China from Europe. Wuttke hopes that the Chinese market will, in the future, be more open to European goods. While demand is proven by the popularity of imported and foreign-owned brands in China, as well as the shopping sprees popular with Chinese tourists, the country’s domestic market remains tough to tap for all but the biggest brand names. Moreover, Wuttke argues, foreign companies in China should be treated the same as Chinese companies when acting as equipment suppliers in projects funded by China whether within or beyond its borders.

At the micro level, Zhang Hongfu of SynTao stressed the importance of field research to match NGO projects to local need. For example, he said, offering rice to northern Laotian communities, most of which rely on glutinous rice, would be poor strategy for poverty alleviation.

The same is true when it comes to Chinese contractors, says Li Kaimeng. While these companies are eager to promote Chinese technical standards on the overseas market through the Belt and Road initiative, compatibility with existing standards and conditions in local markets, whether installing a lightbulb jack or determining the thickness of a hydroelectric dam, must be taken into consideration.

Two recently issued surveys, one by the Extractive Industries Transparency Initiative (EITI) and the other by the Global Economic Governance Initiative (GEGI) at Boston University, found that Chinese companies do not lag behind foreign companies in terms of information disclosure or corporate social responsibility (CSR) in their overseas operations. However, as the EITI report says, there is often an assumption of less transparency when it comes to Chinese investors than their foreign counterparts. Now, Chinese academics are urging businesses to divest themselves of a “do more, say less” image. Nearly all the Belt and Road analysis carried out in the Chinese media has called for more communication between enterprises and local communities, particularly through NGOs, rather than relying on government contacts.

More professionalized communication, as well as more communication in general, is likely to be a crucial factor in improving the operations of Chinese enterprises abroad. Damien Fruchart, a senior analyst with Ethix SRI Advisors, a Swedish consultancy on sustainable and responsible investment for institutional investors worldwide, suggested, for example, that it may not be a good idea just to put hundreds of pages of environmental assessment reports in English up on a website, particularly when the local language is not English, or in areas with limited Internet access.

Reaching out to all stakeholders and consulting independent parties like academics or professional organizations, rather than blaming NGOs for being reactionary or waiting to be approached, he added, will help companies, no matter their origin, to meet their critics in the spirit of cooperation.

No Nanny

The Belt and Road initiative is, therefore, dependent on relations between Chinese stakeholders themselves, the government, companies and social organizations. It is widely agreed that it is the government’s responsibility to protect overseas investment at the intergovernmental level.

Dr Shen Yiyang, a senior advisor with the China International Chamber of Commerce for the Private Sector, told NewsChina that the expectation of better protection through diplomacy is one of the important reasons underlying the strong interest shown by Chinese private companies in the Belt and Road venture.

There are cases in which Chinese companies did not face legal barriers, but instead were confronted with public protests in countries with a weak legal framework. Shen hopes that the Chinese government will demand improved environment and labor standards from projects launched overseas as part of the Belt and Road initiative. These new standards, Shen argues, should be based on widely accepted international precedents and be tailored to the individual circumstances of each host country. This, he explained to NewsChina, will serve as a “safeguard” for Chinese investors, and help answer recent calls in China for a more watertight and enforceable overseas investment law incorporating clear CSR standards.

The question, Wuttke argues, is whether the Chinese government will facilitate, but not totally sponsor, Belt and Road ventures launched by Chinese companies. While it remains the right of Chinese companies, as is the case for multinationals, to rush to their local embassies when things go wrong, the Chinese government needs to step back slightly from its front-and-center role in the overseas operations of Chinese companies. “It has to be genuine bottom-up work by companies,” Wuttke noted, suggesting that Chinese companies improve their self-governance, mainly in the form of business associations, to gain the ability to avoid “initial mistakes” and solve their own problems, rather than relying on the government as a “nanny.” In China, the process of separating industrial associations from the centralized administrative system has yet to be achieved.

Cooperating with companies or governments is not rare for international NGOs, and can also put their independence under scrutiny. At a Tsinghua University forum on the role of NGOs in the Belt and Road initiative convened in April 2015, Professor Wang Ming, director of the Tsinghua Univeristy NGO Research Center, agreed that NGOs should represent their own missions, such as environmental protection, rather than a particular official agenda or industry. This, he said, would likely better serve the national interest.

The challenges that the Chinese government and private sector will face along the Belt and Road are neither unique nor new – many economies have been here before, though perhaps not on such a grand scale. China’s policymakers know that the best solutions to its major problems are openness and inclusiveness. Now, the world is waiting to see how these ambitions will be turned into realities.

Tags:

Editor's Picks

Sex for Snacks

In cities like Shanghai and Chongqing, a handful of high school…[More]

Worked to Death

A growing number of young Chinese white-collar employees are dying of…[More]

TROTSKY IN CHINA

How Communism’s most controversial theorist finally found an audience – in…[More]

What do Chinese People Want?

“I wish I could do what you do.”…[More]

THE HERMIT HUNTER

A student of Buddhism with a keen interest in China’s…[More]

Prize Fighter

Elevated into the State-approved pantheon of great Chinese writers thanks to…[More]

Dams in Distress

In 1975, over 60 dams collapsed after a rainstorm in Zhumadian city, Henan…[More]

Pathologically Politicized

Practitioners at all levels concur that “messy” is the word that…[More]

HIVE MINDED

China’s indigenous honey bee is under threat from both environmental…[More]

The New Class

China’s growing online education market has attracted the attention of…[More]

Exam Boot Camp

A middle school in Anhui province has earned a reputation for…[More]

From Stall to Mall

Taobao’s shift towards a business-to-consumer model has come at a…[More]

In Whose Court?

The failure of the country’s administrative litigation system has prompted…[More]

Tradition on Trial

After Confucianism made the maintenance of inequality between the sexes fundamental…[More]

Inevitable Brutality

The vicious murder of a doctor in a Zhejiang hospital shows…[More]

Progress or Pornography?

A new sex education primer aimed at elementary school-age children has…[More]

Graft Breeds Graft

The gap between the investigation and prosecution of official corruption cases…[More]

Saving Nature

The concept of animal welfare is yet to be widely acknowledged…[More]

Problem Solved?

Former Politburo member Bo Xilai’s public trial sends mixed messages…[More]

BEWILDERING

A 74-year-old man surnamed Xie from Shenyang, Liaoning Province was duped out of 420,000 yuan (US$69,342), despite bank employees’ efforts to…[More]

An Avoidable Tragedy

Poor city planning and lax safety regulations turned a minor gas…[More]

ANGRY

A policeman pulled his gun to dissuade villagers from stealing oranges…[More]

Who Cares?

A new law decrees that all Chinese citizens are now obliged…[More]

Mean Streets

The chengguan system has become the most visible symptom of a…[More]

How do Chinese people live?

So, the bottom line is that Beijing is an expensive place.…[More]

Back in Action

After stagnating for 10 years, China’s SOE reform has fired up…[More]

THE HANGING DEAD

The hanging coffins of the Bo people, a Chinese ethnic minority…[More]

AMUSING

Wang Xun, an archeologist with Peking University, arranged the bones of…[More]

Trust Trip

Embarking on a three-month car journey around China without handing over…[More]

Fading Lights

For those who grew up under the bright lights of China…[More]