- The Belt and Road Initiative would appear to be creating favorable conditions for Chinese companies while fueling neighboring countries' dependency on economic ties with China.
- Beijing is using the BRI not only for economic, but also political and ideological goals, one of them being an export of its ‘digital authoritarianism’ model. However, its geopolitical ambitions are facing several obstacles.
- The Asian Infrastructure Investment Bank cannot offer a sustainable alternative to global institutions, but will still be able to turn into an influential regional lender.
Sino-American relations at present could hardly be called ‘friendly.’ Though Donald Trump and Xi Jinping shared a ‘beautiful chocolate cake’ and developed ‘great chemistry’ during their summit at Mar-a-Lago in early 2017, since then, Beijing and Washington have been sliding toward confrontation. Their tensions started with disputes over technology and trade but quickly moved beyond economic issues to show their geopolitical lining.
Leaving the issues of politically inspired trade wars, questions of Hong Kong, Taiwan, and the South China Sea aside, let’s have a look at the M&A statistics. The number of completed M&A deals with the participation of companies from mainland China peaked in 2016 and has been steadily declining since then. Surely then, the outbound M&A market must be heavily influenced by geopolitical processes and uncertainties. Though Beijing is being careful with international politics, in an economic scene it is actively investing in its regional super-project, namely the ‘Belt and Road’ Initiative (BRI). Following this, Chinese companies are increasing their investment in Southeast Asia, the Middle East, as well as Europe, Africa, and South America.
Will China find ways to increase its influence on global markets? Is the BRI going to be successful or will it meet with the opposition of regional actors? The M&A Community touched these issues during the ‘Geopolitics: How the Rise of China Changes the M&A Game’ webinar. Though the level of uncertainty remains high, there are several key trends to follow.
One Belt and Road to Rule them all
The Belt and Road Initiative (BRI) is the multi-billion-dollar flagship project of Chinese President Xi Jinping who aims at reshaping regional (and after that, global) trade networks, transport connections, as well as political ties. Since its launch, the BRI has remained surrounded by controversies and discussions. Now, it is facing major challenges, including the Covid-19 pandemic.
‘As China boomed, it didn’t boom equally at the same time. Certain regions, specifically in the East of China, developed more rapidly than those in the West of China. This could have impacted not only the income gap and the wealth gap but also educational opportunities, healthcare, transportation, etc. The Belt and Road Initiative, in one sense, is an attempt to make China’s western regions more integrated into global supply chains,’ explains Klisman Murati, founder and CEO of the Pangaea Wire Group.
Though supporters usually point out to the BRI’s capacities to link countries for mutual gain, critics typically underscore, implicitly or explicitly, that Beijing has too high a degree of control over the initiative. There are also several things impacting the non-Chinese M&A community, adds Murati, namely the ‘procurement fog.’ ‘The actual procurement strategy and its tender cycles aren’t very transparent to the wider investment community,’ our panelist says.
For instance, according to CSIS data, more than 60% of Chinese-funded projects have been awarded to Chinese firms, compared to only 30% in BRI projects funded by non-Chinese financial institutions. Moreover, Klisman stresses, future development projects are less likely to materialize due to the inflated debt to GDP ratio incurred by nations due to unsustainable borrowing for BRI projects. Ultimately, this would slow down national growth and opportunities for non-Chinese firms to win tenders.
Digital Authoritarianism for Export
The BRI also pursues China’s national security goals, says Reva Goujon, Managing Director for Intelligence at Martin+Crumpton Group (MCG). ‘As China has expanded economically, its supply roots have extended further out to serve big export markets.’
Hence, she adds, Beijing will try to leverage the BRI to build redundancy into supply routes, spread the use of the yuan, and to use economic enticements to temper territorial disputes with its neighbors. However, Goujon points out, China is already learning the limits of this strategy — with countries like India, Vietnam, and the Philippines.
There is also a big political, social, and ideological component to the BRI. As exogenous pressure is rising on China, it becomes Beijing’s imperative to lock down its periphery. Here, it is not only about developments in Hong Kong, Shenzhen, and Tibet where the central government is tightening its control.
‘China’s tech prowess and political ideology of centralized control offer a model of digital authoritarianism to other countries who are tired of hearing Western human rights lectures.’ Despite the reputational risks and rising geopolitical tensions, she says, investors are still showing a great appetite for Chinese projects.
AIIB: Beijing’s allies are welcomed
Another Chinese initiative proposing an alternative to Western-dominated business structures is the Asian Infrastructure Investment Bank (AIIB). Created in 2015, it promised a quick approval process, a step back from loan conditionality as well as more control for growing economies often unheard of in global credit organizations like the World Bank. Washington’s criticism that the AIIB would become a tool of Beijing’s foreign policy didn’t stop a number of traditional U.S. allies from joining the bank, including Australia, South Korea, the UK, and Germany.
However, the AIIB will hardly become an alternative to global financial institutions like the World Bank, believes Shehzad Qazi, Managing Director at China Beige Book International. ‘Perhaps, it is a vehicle to provide loans to various projects under the Belt and Road Initiative, and to other countries allied with China. But that’s its limit. There is no global buying into it,’ he stresses.
Currently, on the background of the Covid-19 pandemic, the AIIB has plenty of opportunities to prove itself as a vital regional lender, CSIS analysts point out. ‘It has acquired several new borrowers, expanded its lending instruments, and has already lent several billion dollars in emergency funding. However, for the institution to establish itself as a major player in the crowded field of multilateral lending, it also needs to ensure this new lending does not increase the credit risk of its portfolio as debt distress heightens in the wake of the pandemic,’ as the researchers from the CSIS’ Reconnecting Asia project put it.
The experts also believe that the AIIB needs to guarantee that its new crediting activities would match its capacities. Not to mention the fact that skepticism is still growing about the possibility of the ties between the AIIB and Beijing being too close.