Greening golden fruits in a Golden Era 2.0

How London is driving the sustainability of the Belt and Road through pathways and pathfinders to Shanghai 2018

Shanghai 2018

In November, China will host its first ever China International Import Exposition (CIIE) in Shanghai. Under the dazzling lights of the Pudong Bay new Area, aside Shanghai Hongqiao International Airport, 150,000 domestic and foreign purchasers from over 100 countries and regions, will gather to entice the interests of China’s domestic market and a burgeoning middle class which by 2022 is forecast to hold over 550 million people — that is the current population of the US, UK, Germany and France combined.

Much has certainly been written and discussed of the significance of the CIIE. As Wang Dongtang — the deputy director of China’s Ministry of Commerce’s Foreign Trade department is quoted in The Diplomat:

‘In the coming five years, China will import products and services with a value of over 10 trillion U.S. dollars. It is our sincere hope that, through CIIE, we can advance economic globalization and build an open world economy so as to generate favourable conditions to build a community of shared future for mankind.’

The Shanghai Import Expo does also however hold a number of strategic opportunities for China in a significant window of its structural transformation. As Romi Jain writes, ‘China is keen to lock-in the destinies of foreign economies into the Chinese support base. The event will also enable the Chinese government to take stock of the export priorities and expectations, and possibly strategies, of foreign countries vis-à-vis China which in turn will facilitate China’s appraisal of import policy through a realistic perspective.’

For Jain, the Import Expo in this sense is significant as it ‘emanates from China’s ambition to emerge as the arbiter of the global economy in a process which intimately intersects with the Belt and Road Initiative (BRI).’ If Shanghai 2018 as we imagine it is therefore the focal point of the coming year for global business looking in on China, we can expect the BRI’s stock to rise in lock-step as the pathways for these future consumer cash flows.

 CIIE 2018 (Source:  FTI Matching )

CIIE 2018 (Source: FTI Matching)

An Overhanging Moon

Yet as equally as the dazzling lights of Shanghai draw moths to light, history might also temper expectations for the future of China’s middle class consumer base. As Howard W. French writes, relaying a conversation with a German economist at Bretton Woods Institution in Washington:

‘There appears to be a correlation between efforts by rising powers to create ambitious new global or regional economic and political institutional arrangements as a way of ‘locking in their power and influence’ and the rough peaking of those powers’ economic strength in relation to the rest of the world. The United States led in the creation of the World Bank in 1944, for example, when its share of global GDP peaked at 36 percent. Japan created the Asian Development Bank in 1966 and Germany created the European Bank for Reconstruction and Development in 1991, following unification, each country close to or at its relative peak. In scale of ambition Xi’s two biggest foreign policy initiatives, One Belt, One Road and the associated Asian Infrastructure Investment Bank, certainly warrant comparison with these predecessors. No causation is being suggested here, but if this pattern holds, even loosely, China, which accounts for nearly 17 percent of the global economy, may also be approaching a plateau in terms of relative size at best.’

The sense of an important window and Beijing’s present haste for ‘locking-in the destinities of foreign economies into the Chinese support base’ furthermore finds weight once we observe China’s demographics more closely:

‘China has embarked on a process of aging (by 2050 the median age in China will be forty-nine) that is due to proceed with almost unprecedented speed, soon placing the country in a situation unparalleled in world history: that of a newly and still unevenly modernised country that must build a social welfare system on the backs of a rapidly declining workforce. In journalistic shorthand, China’s new dilemma is known as the paradox of growing old before growing rich.’

Certainly, such factors help to explain why President Xi has made his dramatic break with Deng Xiaoping’s strategy of ‘hide your brightness, bide your time’ (韬光养晦). Xi has decided that China must seize whatever advantages it can now before its window of opportunity slams shut within the next ten or, at best, twenty years. Shanghai 2018 still glows in this sense bright on the world stage yet there is also a large overhanging moon pulling the tide rapidly forward.

 Belt and Road: Project of the Century (Source: Author)

Belt and Road: Project of the Century (Source: Author)

A Golden Era 2.0

From dazzling future Pudong to the vermillion ballroom of the QEII Centre. Last week I attended the 6th Annual CBBC China Business Conference hosted by the China-Britain Business Council. Bringing together key UK and China business and political figures, the lights of Shanghai 2018 and the Belt and Road Initiative shimmered at the fore. As Ambassador Liu Xiaoming, Chinese ambassador to the UK, stated in his foreword to the programme:

‘In China, 2018 is the opening year for the implementation of the blueprint outlined at the 19th National Congress of the CPC. This is also the 40th anniversary year of China’s reform and opening up, and the fifth anniversary of the Belt and Road Initiative. It is also a year for China and the UK to shift to a higher gear building our “Golden Era”.

The bilateral trade between our two countries reached $79 billion this year, with British export to China growing by nearly 20%. Our cooperation on the Belt and Road Initiative produced fruitful results, one of which is the signing of the Guiding Principles on Financing the Development of the Belt and Road. China Railway Express ran its first freight between China’s Yiwu and London, offering a new, on-land option for the transportation of goods between China and Britain. The Hinkley Point C nuclear power plant has entered into construction phase, and Hualong One technology has moved to the second stage of the generic design assessment. Shanghai Pudong Development Bank and the Agricultural Bank of China got the official go-ahead to set up branches in London, adding a new highlight to China-UK financial cooperation.

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An Open Door

‘China in the new era will open its door wider to the world and build an open world economy. The UK amid critical Brexit negotiations is committed to building a “global Britain” which entails a more open attitude towards expanding cooperation with global partners. Our two countries face historic opportunities to join hands to expand, elevate and deepen mutually-beneficial cooperation to strenghten a “strategic, practical, global and inclusive” relationship and to contribute more “golden fruits” to the China-UK “Golden Era” (Ambassador Liu)’

Such positive messaging was certainly reciprocated by Lord Sassoon, Chairman of the CBBC, in his opening address relaying the importance of the Economic and Financial Dialogue, private sector roundtable and UK-China financial services summit in December which placed collectively a renewed focus on the golden fruits of the golden era and the ways in which the UK, and specifically London as a global financial centre, can partner on the Belt and Road Initiative. This year for instance, a City Expert Board with Douglas Flint as Chair will be established to bring together infrastructure financing, professional and emerging market expertise. As the HM Treasury further notes:

In support of this Standard Chartered Bank [has] also announced its support for the BRI by committing to facilitate financing to the value of at least $20 billion by 2020. UK Export Finance affirmed up to £25 billion capacity to support new business in BRI countries in Asia [and] the UK and China also agreed to identify specific BRI projects to act as pathfinders for UK and Chinese collaboration, and to conduct research on mechanisms to support private sector financing of infrastructure development across the BRI for which China recognises the UK’s world leading reputation.

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Hide your brightness, bide your time’ (韬光养晦)

Certainly this productive relation between pathways, pathfinders and a structured approach to project design mirrors the blueprint of the CIIE as a means for UK government and business ‘to take stock of the export priorities, expectations, and strategies, for professional, financial and legal engagement in the BRI. In Douglas Flint’s keynote of the Belt and Road: Project of the Century session, he reiterated this need for a growing body of evidence of proof of concept and benchmark projects, facilitated by government-to-government discussion and translated into private business capital and expertise crowding-in.

All this of course re-applies pressure to the fact that the UK government, like France, did not sign a more binding Memorandum of Understanding with Beijing during Theresa May’s recent visit. As one Chinese official was quoted in the FT prior to the CBBC Conference in January: ‘we say we have a golden era in relations with the UK, so if the UK does not sign an endorsement it will make us wonder.’ The reasons, posited by the same FT article, for such hesitation among Western governments include:

‘a growing perception that the the contracts to build BRI infrastructure projects are overwhelmingly being awarded to Chinese companies, in contradiction to Beijing’s pledge that the BRI would be open, inclusive and of benefit to all countries that participate. In addition, there are concerns over debt sustainability in recipient countries and questions over the social and environmental impact of Chinese-led infrastructure projects.’

 $3.6 billion  Myitsone Dam  in Myanmar: suspended in 2011 due to social/environmental concerns

$3.6 billion Myitsone Dam in Myanmar: suspended in 2011 due to social/environmental concerns

Transfer and Diffusion

In Thomas Piketty’s Capital in the Twenty First Century, he writes,

If we look at the historical record, it does not appear that capital mobility has been the primary factor promoting convergence of rich and poor nations. None of the Asian countries that have moved closer to the developed countries of the West in recent years have benefited from large foreign investments, whether it be Japan, South Korea, Taiwan and more recently China. In essence, all of these countries themselves financed the necessary investments in physical capital and, even more, in human capital, which the latest research holds to be the key to long-term growth […] To sum up, historical experience suggests that the principal mechanism for convergence at the international as well as the domestic level is the diffusion of knowledge. The poor catch up with the rich to the extent that they achieve the same level of technological know-how, skill, and education, not by becoming the property of the wealthy. The diffusion of knowledge is not like manna from heaven: it is often hastended by international openness and trade (autarky does not encourage technological transfer). Above all, knowledge diffusion depends on a country’s ability to mobilise financing as well as institutions that encourage large-scale investment in education and training of the population while guaranteeing a stable legal framework that various economic actors can reliably count on. It is therefore closely associated with the achievement of legitimate and efficient government.

Piketty’s writing as a French economist might of course have informed President Macron’s decision to withhold on signing an MoU with Beijing under the pretence that a greater focus must first be established on the social and environmental impacts of BRI-led infrastructure projects. Indeed this subtext of caution and counter western biding one’s time over the BRI was also exhibited at the CBBC Conference, with a number of UK business leaders expressing the need for greater transparency on the social and environmental elements of each project and their building-in to the underlying financial and legal arrangements on a bespoke project-by-project basis. Douglas Flint’s call for a growing body of evidence of proof of concept and benchmark projects certainly reverberates. The productive collaboration required between UK and Chinese government and business in this regard is however already being explored on several practical fronts.

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Greening Golden Fruits in a Golden Era 2.0

This Monday 19 March at SEB, One Carter Lane, London, the 2nd Meeting of China-UK Green Finance Taskforce, co-hosted by the City of London Corporation Green Finance Initiative and Green Finance Committee of China Society for Finance and Banking met to discuss the greening of the Belt and Road and collaborative avenues for UK-China business in this space. The agenda concerned the following, for which agreed joint work programmes and deliverables were set for the 10th UK China Economic Dialogue, expected to take place in London in late 2018 following the lights of Shanghai:

1) conducting analysis on measures to promote green asset securitisation in China and the UK; 2) discussing and drafting a set of voluntary guidelines on greening the Belt and Road investment for Chinese and UK investors; 3) conducting analysis to demonstrate a positive correlation between ESG and financial performance and 4) conducting pilot projects on climate risk and environmental information disclosure consistent with the FSB Task Force on Climate-related Financial Disclosures (TCFD) recommendations by Chinese and UK financial firms.

Indeed, as the Green Finance Initiative’s lead report on the Belt and Road states, the significance of such collaboration between UK and China government and business is underpinned by the

Institute of Economic Affairs (IEA) estimates that $89tn in infrastructure investment is required by 2030 along with $4.1tn in incremental investment for transitioning to a low-carbon economy. Despite the creation of some new players backed with c$200bn of public funds so far, such as AIIB ($100bn), China’s Silk Road Fund ($40bn), New Development Bank (previous BRIC bank –$50bn from a $100bn goal), UN Green Climate Fund and the UK’s GIB (c £3.4bn committed), given the scale and ambition of the BRI, it is impossible to rely only on public finance to meet global needs. Private capital must be ‘crowded in’ to projects and align with other sources of financing including government finance, guarantees, multilateral development banks (MDBs) and policy banks. This ‘crowding in’ not only increases the amount of capital available for funding the BRI, but it also results in greater efficiency of capital.

‘Releasing capital that is willing to take higher risks at the early stage of an infrastructure project allows that capital to be reinvested in a new project that requires this risk appetite. Thus an efficient engine for financing BRI projects is created. In order for this efficiency to drive forward investments in the BRI, investors must plan for the financial sustainability of a project through its lifecycle. This sustainability must not be limited to structuring financial obligations, but must also have green finance principles at their core. This will ensure that projects are defined as environmentally sustainable from the outset in a way that meets a common definition of green financing for all the investors that may be involved during a multi-decade long project. This will serve to minimise the risk of stranded assets and aborted projects, maximise financial efficiency and secure our environment’s future. This is why Greening the Belt and Road is so important.’

 Greening Golden Fruits in a Golden Era 2.0 (Source:  Green Finance Initiative )

Greening Golden Fruits in a Golden Era 2.0 (Source: Green Finance Initiative)

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The New Silk Road Project 1.0

In Ambassador Liu Xiaoming’s opening address to the CBBC Conference, after an exuberant ‘good morning’ to the room, he reiterated in strong terms China’s desire to build an open, inclusive future, one with a blue sky, green land and clear water. There is much in this sense to look forward to in Shanghai 2018 and what appears clear are the definitive objectives leading up to the CIIE for UK government (through Douglas Flint’s City Expert Board and the City of London Corporation Green finance initiative) and UK business (across the broad board of legal, professional, financial and insurance provision) — in developing stronger metrics, models and working relations on the BRI. Yet there is also definite room for more grassroots, cultural exchange in the time leading up to Shanghai 2018 and this is where we directly locate our student-led UK initiative — The New Silk Road Project.

Under the tenets of connecting perspectives from London to Yiwu, our project hopes to trace the shape and colour of the Belt and Road Initiative as it poses to alter the socio-economic livelihoods of businesses, communities and individuals along its route. We are in line very aware of the brevity with which we will be documenting these connections and are therefore strongly invested in setting up focus and discussion groups prior.

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This week for instance, we sent out the following letter to a number of individuals in Anaklia, Georgia which we will be visiting on 19 June — 21 June and whose government recently effected a Free Trade Agreement with China which means that around ’94 per cent of Georgian products (of which wine predominates) will be free from customs duty while Georgian services and commodities will enter a 1.4 billion-person market.’ The agenda we wrote would aim to focus on the following:

  • How the Anaklia Development Consortium (which is developing the Anaklia Deep Water Port and Poti Free Industrial Zone) positions itself vis-a-vis the China-Georgia Free Trade Agreement and European Deep Comprehensive Free Trade Agreement;

 

  • How Georgian SMEs position themselves vis-a-vis the FTA and DCFTA;

 

  • How local communities are engaged in these developments through environmental and labour market policies

The third point of discussion might certainly draw into the pathways and pathfinders dialogue of Douglas Flint’s City Expert Board and the City of London Corporation’s Green Finance Initiative. What is more, by engaging with projects at a grassroots, non-governmental, non-business but student-affiliated level, we believe there is ample scope for a subtly different dialogue to be established and support the agenda of generating a body of evidence for future UK trade and cultural engagement in the BRI. Of course, as students from various disciplines (Research Architecture, History, Russian with Physics, International Development and Economics), The New Silk Road Project might also lay down a blueprint for future students — whether from Tbilisi University, University of London or Chongqing University — to engage in the developments of the BRI. Our eyes in this sense are also firmly set to the dazzling skyline of Shanghai 2018. Shanghai is the last point on the curving route we hope to take across Europe, Central Asia and China. We might also therefore do well to document whether a blue sky, green land and clear water is an accurate appraisal of the BRI projects we assess and whether the right frameworks are being used for green golden fruits to grow like alchemic orchards out of its grey metallic gut.

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I would like to extend a special thanks to David Martin, Maryrose Okere and the China-Britain Business Council team. The CBBC helps British and Chinese businesses and organisations work together in China, the UK and third markets around the world and is currently writing its fourth report on the Belt and Road Initiative. The China-Britain Business Council also organises more than 500 events annually across the UK and China. For further information on the CBBC, please visit:http://www.cbbc.org/

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