Borderless win-win cooperation in building the Belt and Road ——EY releases the third issue of Navigator

Beijing, 16 April, 2019 – EY today releases the third issue of Navigator: Borderless win-win cooperation in building the Belt and Road. This report focuses on the development and prospect of “third-party market cooperation” under the Belt and Road Initiative (BRI). With the challenges of the current imbalanced global economic development, rising unilateralism and protectionism as well as the increasingly complicated geopolitical situation, China is promoting “third-party market cooperation” as an important move to boost Belt and Road (B&R) construction. It plays an active role in strengthening international cooperation and adheres to the principle of achieving shared growth through discussion and collaboration under the BRI.

In 2018, Chinese enterprises deepened economic and trade cooperation in B&R countries: China’s non-financial outward direct investment (ODI) reached US$ 15.6 billion, up 8.9% YOY; completed EPC contracts turnover hit US$ 89.3 billion, up 4.4% YOY; trade value totaled US$ 1.3 trillion, up 16.3% YOY. Loletta Chow, Global Leader of EY China Overseas Investment Network and B&R Task Force Leader, says, “In the past five years, the BRI has not only received positive feedback and worldwide participation, landed many large projects, but also demonstrated China’s commitment and determination to enhance international cooperation. ‘Third-party market cooperation’ connects China’s competitive production capacity and developed countries’ advanced technology with developing countries’ vast development demand. As a result, achieving ‘win-win’.”

The joint multinational B&R construction opens a new journey for achieving the “five major goals”

Policy coordination — The BRI not only enhances interconnectivity between China and developing countries, but also attracts many developed countries to participate. By the end of 2018, China had signed 170 cooperation agreements with 122 countries and 29 international organizations. In March 2019, Italy just became the first G7 member to sign a memorandum of understanding with China on the BRI. Other developed countries including Portugal, Greece, Hungary and New Zealand have also signed B&R cooperation agreements with China. Meanwhile, the innovative “third-party market cooperation” model has engaged more developed countries to involve in B&R construction. China has officially signed third-party market cooperation agreement with countries such as Japan, France, Canada, Singapore, Spain, the Netherlands, Belgium, Italy and Australia.

Facilities connectivity — The framework of “six corridors and six channels serving multiple countries and ports” has been implemented steadily. Major construction projects are being planned and built in multiple regions. A compound infrastructure network is taking shape. Priority was given to projects related to local wellbeing and economic development, such as transportation, energy and electricity, which laid a solid foundation for subsequent BRI development. By 2018, China-Europe freight trains made over 12,000 journeys reaching 15 countries and 49 cities in Europe, bringing significant impetus for trade exchanges between China and Europe. Meanwhile, Chinese enterprises participated in the construction and operation of 42 ports in 34 B&R countries, which have been pivotal in the BRI development.

Financial integration — With the BRI advancing further, financial support becomes particularly important. In recent years, as Chinese enterprises have sped up their pace of “going global”, Chinese-funded banks have also been opening branches and engaging in overseas mergers and acquisitions (M&As) to expand their global network rapidly. So far, 11 Chinese-funded banks had set up 71 branches in 27 countries along the B&R, basically covering the countries and regions that have close economic and trade exchanges with China. In addition, the interconnectivity of securities market further expands the two-way opening up of China’s capital market: the Shanghai-London stock connect program between China and the UK is expected to launch in 2019.

Unimpeded trade — As China is deepening the economic and trade cooperation with B&R countries, remarkable progress has been made in free trade negotiation, customs clearance facilitation and overseas economic and trade zones. In 2018, China’s trade with B&R countries reached US$1.3 trillion, up 16.3% YOY, which was 3.7 percentage point higher than the overall growth rate. This indicates that B&R trade starts becoming a new driving force for China's trade development. Loletta points out that, “The General Administration of Customs of China is actively carrying out the Authorized Economic Operator (AEO)   negotiations with B&R countries, aiming to complete mutual recognition with all B&R countries that are willing to cooperate with China in the AEO certification program before 2020. According to statistics, when China’s AEO enterprises export goods to the countries and regions that have already implemented mutual recognition, the inspection rate can be reduced by 60%-80%, and customs clearance time and costs can be reduced by more than 50%.”

People-to-people bond — Greater cooperation between China and B&R countries in education, culture and tourism was made. According to the Ministry of Education of China, as of 2018, 144 Confucius Institutes and 134 Confucius Classrooms were established in primary or secondary schools in 53 countries along the B&R. Meanwhile, China has already become the most popular destination in Asia for foreign students. In 2017, there were nearly 320,000 international students from B&R countries studying in China, accounting for 65% of the total. Loletta adds,” These could help strengthen the understanding and cultural exchange between China and B&R countries, and lay a solid foundation for future economic and trade cooperation.” In addition, the Chinese government has been promoting visa exemption or landing visa arrangement with B&R countries to enhance business activities and tourism.

Actively develop third-party market cooperation to optimize the efficiency of global resources allocation

Chinese enterprises and their peers in developed countries complement each other with broad prospect for cooperation in infrastructure, energy, environmental protection, finance and other sectors. Alex Zhu, Investment and M&A Services Leader of EY B&R Task Force, Power & Utilities Market Segment Leader of Greater China, EY points out that, “Third-party market cooperation under the BRI should be based on commercial principles and develop on the premise of win-win cooperation – respecting market rules, maintaining a fair competitive environment, and also adhering to the principle of sustainable economic development. We expect that third-party market cooperation under the BRI will become a new driving force for deepening the economic and trade relations between China and developed countries.”

  • China-Japan: from competition to cooperation, from rivals to partners

Sino-Japan relations have warmed up since 2018 and the two countries have been strengthening communication and cooperation in various aspects. Most B&R countries are still in their early stage of industrialization. They urgently need to develop infrastructure but facing challenges and lacking technology and capital. Sino-Japan third-party market cooperation is conducive to speeding up the social and economic development of these countries. China has strong government support, financial strength and production capacity advantages. Japan, on the other hand, has rich overseas experience, developed technology and mature risk management mechanism. After a relatively short period of development, the third-party market cooperation between China and Japan has successfully established mechanisms such as the Sino-Japan Third-Party Cooperation Forum, which set a great example for the cooperation and development of third-party markets between China and other countries. Alex says, “China and Japan could take this chance to leverage their advantages. Not only can they avoid vicious competition, but also optimize project efficiency and income, and further deepen bilateral economic and trade ties. Cooperation in infrastructure and technology sectors, especially in advanced manufacturing, artificial intelligence and healthcare sees the highest potentials. Sino-Japan third-party market cooperation can help accelerate interconnection among B&R countries, and benefit the countries along the route with the latest scientific and technological achievements.” In addition, huge financing needs for infrastructure construction in Asia provide China and Japan broad cooperation opportunities in the financial services sector.

  • China-France: building a benchmark for cooperation with a focus on Asia and Africa

France is the first country to explore third-party market cooperation with China. As early as June 2015, China and France officially issued the Joint Statement on China-France Cooperation on Third-Party Markets, which for the first time proposed the concept of “third-party market cooperation”. After years of development, the parallel model has been initially established — enterprises exploring markets with guidance from the government. The National Development and Reform Commission of China and the French Treasury established a steering committee and set up the demonstration project list mechanism to identify cooperation credentials. France has deep roots, rich experience and long ties in Africa, especially in the French-speaking African countries. In the energy sector, France has been traditionally strong in nuclear power and the French government has recently begun to vigorously promote renewable energy. On the other hand, China is also seeking to transit from fossil to renewable energy, which helped to lay the foundation for the two countries to cooperate in nuclear energy and renewable energy sectors. Meanwhile, African countries have rich natural advantages in renewable energy resources, which creates great potential for the Sino-French third-party market cooperation in this area. In the transport and logistics sector, French companies still have the first-mover advantages in high-speed rail technologies, but Chinese companies have been catching up quickly in recent years and gaining competitive advantages in construction period and cost. It is of great potential for the two parties to strengthen cooperation and jointly develop transport infrastructures in third-party markets. In addition, China’s location advantage in Asia, combined with France’s technological advantages in areas mentioned above, the two sides can better expand the Asian market together. In March 2019, French President Emmanuel Macron and President Xi Jinping witnessed the exchange of cooperation documents in third-party markets in Paris, and agreed to boost cooperation between the two countries in multiple fields and enhance the docking between EU's connectivity strategy and the BRI. Alex says, “As one of the important members of the European Union, France has a strong demonstrative effect in developing third-party market cooperation with China, which can promote the cooperation between China and other EU members in B&R construction.”

  • China-UK: breaking the barrier and complementing each other

The Chinese and British industries are highly complementary, together with their similar pursuit of open markets and free trade has created solid foundation of the two countries’ third-party market cooperation under the BRI. China and the UK may seek opportunities to become closer partners through the cooperation. In the field of infrastructure construction, the UK has advantages in engineering design, law, consulting and management, while China is strong at construction efficiency, engineering technology innovation, cost control, supply chain management and cost performance. The cooperation between the two countries can achieve a win-win outcome and meet the development needs of third-party countries. Alex says, “The UK has a long history and rich experience in international finance service. As a traditional international financial center, the UK has a well-established system and long history of cooperation with many B&R countries, which make the UK an ideal partner for China.” B&R financial cooperation between China and the UK has been at the forefront of other Western countries, and has set a number of precedents. The UK is the first applicant to join the Asian Infrastructure Investment Bank (AIIB), the first to invest in the AIIB Special Fund, and also the first to sign the Guiding Principles on Financing the Development of the Belt and Road. Meanwhile, China and the UK will jointly promote the application of green finance in B&R construction. In September 2018, the British Parliament established a cross-party Belt and Road and China-Pakistan Economic Corridor Group, which aims to help the Parliament increase its understanding of the BRI and provide a platform for the UK business community to actively participate and seek opportunities.

For the full report please click here.

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