One Belt One Road: Insights for Finland

Team Finland Future Watch Report

January 2016

Prepared for Tekes by Enright, Scott & Associates

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The One Belt is planned to connect China to Europe, the Mid-dle East, Central Asia, and South Asia and will involve existing and new rail lines, highways, and pipelines. The “One Road” refers to the “21st Century Maritime Silk Road” (also called the “Maritime Silk Road”). The One Road is planned to connect China with Southeast Asia, South Asia, Africa, the Middle East, and Europe (see Exhibit 3). The main routes of the One Belt One Road (OBOR) initiative are designed to link up with other corridors already planned or under construction (see Exhibits 4 and 5).

The Silk Road Economic Belt (One Belt) concept was introduced by China’s President Xi Jinping in an ad-dress at Nazarbayev University in Astana, Kazakhstan in September 2013. President Xi introduced the concept of the 21st Century Maritime Silk Road (One Road) in an address in Indonesia in which he also proposed the establishment of the Asian Infrastructure Investment Bank (AIIB) to fund some of the infrastructure required. The two concepts were adopted at the Third Plenum of the 18th Chinese Communist Party Congress in No-vember 2013 and in the Government Work Report of the Chinese Government adopted in March 2014. Plans for OBOR were further developed in 2014 and 2015 and international cooperation was sought for several initia-tives. Several implementing and cooperation arrange-ments are already being put into place (see Exhibit 6). In addition, several Chinese state agencies (such as the General Customs Administration; the Administration of Quality Supervision, Inspection and Quarantine; the Ministry of Commerce; and the Ministry of Transport) have already released implementation plans, as have several Chinese provinces.

A related initiative that has not received nearly the attention as the “One Belt” and “One Road” is the “Digital Silk Road” (DSR) proposed by China in 2015. Introduced by China’s Cyberspace Administration’s director Lu Wei, the DSR seeks cooperation in 5G, cloud computing, the Internet of Things, big data, e-commerce, digital investment, smart cities, and smart energy. The DSR was the subject of a high-level meeting in Brussels in July 2015 at which Chinese and European officials and representatives of leading digital hardware, software,

and platform companies from both Europe and China held discussions about cooperation in cyberspace1. Research is currently underway mapping out the digi-tal capabilities, companies, and regulations in several of the OBOR countries in support of the DSR.

What are the goals of the OBOR initiative?

According to Chinese sources, the major goals of the OBOR initiative are to achieve policy co-ordination across OBOR nations, to build the infrastructure to enhance connectivity among OBOR nations, increase trade and investment flows, promote financial integration, and foster better relations among the peoples of th e OBOR nations2. Policy co-ordi-nation will be required in order to develop and then oper-ate the infrastructure planned as part of the OBOR initiative. China plans to try to negotiate free trade agreements with many if not all of the OBOR countries, as well as agreements to streamline customs, inspection, and approvals. By the end of 2014, 77 out of China’s 118 bilateral or trilateral free trade agreements were with nations covered by the OBOR initia-tive3. Enhancing connectivity will focus initially on removing bottlenecks and providing missing links in existing transpor-tation routes, building port facilities, and improving inter-modal operation. Eventually the goal is to have high quali-ty rail, highway, air, telecommunications, oil and natural gas pipeline, and port networks throughout the OBOR regions, with a goal of fostering much closer economic integration across Asia and between Asia and Europe.

In order to facilitate unimpeded trade and invest-ment, steps will be taken to reduce trade and invest-ment barriers, lower trade and investment costs, and promote regional economic integration. Financial inte-gration will be promoted by trying to improve coordi-

1 Liu Jia and Gao Shuang, “China, EU to promote digital Silk Road, China Daily, July 7, 2015.

2 National Development and Reform Commission, Ministry of Foreign Affairs, and Ministry of Commerce of the People’s Republic of China, Vision and Actions on Jointly Building the Silk Road Economic Belt and the 21st Century Maritime Silk Road, March 28, 2015.

3 “China Economic and Trade Cooperation Zones Overseas Have Reached 118 ‘Underway’ in Addition to 77 Others” [in Chinese], People, December 31, 2014.

The One Belt One Road Initiative: What is it?“One Belt One Road” is a Chinese initiative to connect more than 60 countries (64 at present) with physical, commercial, cultural, and other links (see Exhibit 1 for a list of the countries and Exhibit 2 for a map of the countries). These countries have a combined population on the order of 4.4 billion. The “One Belt” refers to the “Silk Road Economic Belt,” a recreation of the old land-based Silk Road trade routes from China through Central Asia and on to the Middle East and Europe. This is also called the “Modern Silk Road.”

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nation in monetary policy, expand the use of local cur-rencies (i.e. not the US dollar) for trade and investment among OBOR nations, deepen financial cooperation, create regional financial institutions focused on devel-opment, strengthen cooperation on risk monitoring and management, and develop regional mechanisms to manage financial risks. People-to-people bonds are to be enhanced through cultural exchanges and dialogues, fostering more interactions among people in the OBOR nations, and heightening mutual under-standing.

One specific goal of the OBOR initiative is to fos-ter greater economic cooperation and integration between China and Europe. In a 2014 visit to Europe, President Xi Jinping indicated that one goal of OBOR was to cooperate to integrate European and Asian mar-kets and to make China and the EU the twin engines for global economic growth. In this regard, the OBOR initiative could be viewed as a much larger counter-part and potential partner for the EU’s own investment program, which hopes to mobilize public and private investment of at least €315 billion from 2015-2017. We will have more to say about China-Europe interaction below.

While we do not dispute the stated objectives of the OBOR initiative, there are many other unstated (or even denied) objectives we view as equally or even more important to China. These include enhancing China’s energy security, expanding markets for Chinese industries (including those with domestic overcapac-ity), increasing the competitiveness of Chinese compa-nies, enhancing China’s hard and soft power, extending China’s economic and geopolitical influence, shifting the balance of power within Asia, enhancing China’s status as a great power, recycling some of China’s in-ternational reserves, and enhancing the development of China’s peripheral regions. As we will explain below, we see the OBOR initiative as an attempt to re-assert the notion of the Middle Kingdom in which all roads (railways, shipping lines, and air traffic as well) lead to Beijing.

How is the OBOR initiative being organized?

Major OBOR pronouncements have been made directly by China’s President and Communist Party Chairman Xi Jinping. This indicates the OBOR initiative is one of the highest priori-ties of the Chinese leadership. The initiative is being managed by a small working group under Vice-Premier Zhang Gaoli, who holds the day-to-day economic portfolio in the Chinese Government and is also one of the seven members of the Standing Committee of the Politburo of the Chinese Commu-

nist Party. The national OBOR plans that do exist have been developed and issued jointly by the National Development and Reform Commission, the Ministry of Foreign Affairs, and the Ministry of Commerce, with the authorization of the State Council, the highest echelon of the Chinese Government4. Other agencies and ministries will participate as appropriate. The Digital Silk Road initiative, for example, is spearheaded by the Cyberspace Administration of China.

Geographically, there are several focal points within China. Xinjiang has been designated as the “Core Area” for the “One Belt” due to its geographic location in the extreme west of China, and Fujian has been designated the “Core Area” for the “One Road” due to its historical position as the home of the ports for the original Mari-time Silk Road. Xinjiang, Qinghai, Gansu, Ningxia, and Shaanxi are supposed to focus on connections and links with Central Asia along the One Belt. Sichuan, Chongqing, and Yunnan are supposed to focus on links with Central, South, and Southeast Asia along the One Belt. Fujian, Jiangsu, Zhejiang, Guangdong, and Hainan are supposed to focus on links with Southeast Asia, South Asia, the Middle East, and Africa through the One Road (see Exhibit 7).

What is the background of the OBOR initiative?

OBOR represents the extension, enhancement, combination, and in some ways culmination of several important Chinese initiatives. It has national security, geostrategic, international relations, economic, and business facets. Thus the OBOR ini-tiative should be viewed as having an extensive set of back-ground features that need to be understood in order to un-derstand the OBOR initiative.

The first is the need for infrastructure in Asia. PWC estimates that the OBOR countries need USD 5 trillion in infrastructure from 2016 to 2020. The Asian Devel-opment Bank estimated that Asia would need USD 8 trillion in infrastructure investment from 2010 to 2020, and nowhere near that amount has been invested. One of the reasons for this underinvestment is that most of the countries covered under the OBOR initiative are developing countries with modest resources. Several of the countries also have weak systems and institutions. China sees this lack of investment as holding back the development of the region, and in some senses hold-ing back China’s own development. It also sees infra-structure as an area in which it can make substantial contributions given its own experience with rapid infrastructure development in recent years.

4 For example, National Development and Reform Commission, Ministry of Foreign Affairs, and Ministry of Commerce of the People’s Republic of China, Vision and Actions on Jointly Building the Silk Road Economic Belt and the 21st Century Maritime Silk Road, March 28, 2015.

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A second is that China is seeking to take on a more prominent role globally. China does not believe that it has been accord-ed the respect and position in international forums that it de-serves. It also sees initiatives like the US-backed Trans-Pacific Partnership (TPP) that explicitly exclude it. OBOR is a way to deftly counter TPP, and from China’s standpoint make TPP ob-solete, without confronting it directly. OBOR is one manifes-tation of a China much more engaged and assertive in inter-national affairs. China has built up substantial economic and political relationships around the world. Most relevant to the OBOR initiative are the relationships with Southeast Asia, Cen-tral Asia, South Asia, Africa, and Central and Eastern Europe. Chinese officials have promoted the OBOR initiative in sev-eral international forums involving these regions, including the Asia–Europe Meeting (ASEM), the Shanghai Cooperation Organization (SCO), ASEAN+1, the China–Arab States Coop-eration Forum (22 members of the Arab League plus China), the Forum on China–African Cooperation (50 African coun-tries plus China), and China–CEE 16+1 (the sixteen Central and Eastern European Countries plus China).

Southeast Asia is an important region for the OBOR initiative for several reasons. Southeast Asia is close to China and its countries are already well-linked to China by trade, financial, and business ties. Southeast Asia is a key part of the “One Road” portion of OBOR. There are excellent ports in Singapore and Malaysia, but else-where in the region port infrastructure is lacking and the countries do not necessarily have the resources to improve the situation. Historically, the Asian Develop-ment Bank has been active trying to build economic corridors in the Greater Mekong Sub region with limited success. Southeast Asia is also a key target for Chinese investments to improve land links. Southeast Asia is also the home of a number of countries friendly to the United States and several members of the Trans-Pacific Partnership. Southeast Asia is a region in which China on the one hand, and Japan and the US on the other, are contending for influence. Southeast Asia is also the home of countries, such as Vietnam and the Philip-pines, with which China has territorial disputes. ASEAN has signed a number of cooperative agreements with China. The ASEAN-China Free Trade Agreement, for ex-ample, came into force in 2010.

Central Asia is also crucial to the OBOR initiative. The Shanghai Cooperation Organization (SCO), which includes China, Kazakhstan, Kyrgyzstan, Russia, Tajik-istan, and Uzbekistan was founded in 2001 to promote cooperation and to limit Western influence in the re-gion. It was a formalization of the pre-existing (since 1996) “Shanghai Five” (which did not include Uzbeki-stan). The Shanghai Five initially focused on reducing tensions and military forces along their mutual borders. Subsequently, the SCO has focused on security, mili-

tary, economic, cultural, and financial affairs, and has sponsored transportation, energy, and communica-tions infrastructure projects. Afghanistan, Belarus, India, Iran, Mongolia, and Pakistan have observer status at the SCO. For these countries, OBOR is a way for China to cement political and economic relationships. It is interesting that the “Silk Road Economic Belt” was first announced during President Xi’s tours of four Central Asian countries in 2013.

In South Asia, China has had a close relationship with Pakistan for decades, initially due to their rivalries with India, and subsequently evolving into diplomatic, nuclear, and economic relations. Chinese investments in the port of Gwadar, along with related pipeline and land transport investments, are designed to provide a mostly land route for Middle East oil to China. Myanmar was actually the first nation to recognize the People’s Republic of China in 1949. Support from China helped Myanmar survive international sanctions in the 1980s and 1990s and helped the State Law and Order Restora-tion Council (SLORC) solidify its control of the country in that period. More recently, China has invested substan-tial amounts in ports, oil and gas pipelines, dams, and other infrastructure in the country. From 1988 to 2013, China accounted for 42% of the foreign investment into Myanmar. While China’s relations with India have long been strained, largely due to unresolved border issues and the memory of war in the 1960s, more recently there are signs that the two countries have been seek-ing a rapprochement. Visits by Prime Minister Modi to China and President Xi to India were supposed to set China-India relations on a new path but new border in-cidents and mutual suspicion may make that different.

China has long cultivated economic and political ties with Africa. China is Africa’s largest trading partner and external investor. More than one million Chinese citizens are said to live in Sub-Saharan Africa. Much of China’s attention on Africa is focused on resource-rich countries. China interacts with African nations on a bilateral basis and also through the Forum on China-Af-rica Cooperation (FOCAC), which was founded in 2000. More than half of China’s investment in Africa has been in oil resources, and 90% of this by state-owned com-panies. In a given year, China sources between 20% and 25% of its oil imports from African nations, notably An-gola, Equatorial Guinea, Nigeria, the Republic of Congo, and Sudan. China has funded resource development and infrastructure projects in Africa largely through the China Development Bank and the China Export-Import Bank. Generally the loans are tied to the use of Chinese contractors (who tend to import Chinese workers) and equipment suppliers and in many cases are to be paid back with long-term supplies of resources. Chinese

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interests have also set up economic development cooperation zones in Nigeria, Ethiopia, and Zambia. While these investments have added considerably to growth potential in the African nations, there has been some pushback due to labor practices, environmental issues, legal problems, and the use of Chinese workers and inputs. In any case, OBOR activities are likely to add substantially to China’s already substantial interests in Africa.

China’s relations with the Middle East have also been growing. In 2013, China passed the European Un-ion to become the Middle East’s largest trading partner. China’s main interest in the Middle East also involves energy. China sources nearly half of its oil imports from the Middle East. China has made substantial invest-ments in the region, for example, China is the largest foreign investor in Iraq. Qatar, in turn, has invested in natural gas facilities in China. China’s reliance on Middle Eastern oil, and requests from some Middle Eastern na-tions for China to become more involved in the region as a potential counterweight to the US, have drawn it more and more into Middle Eastern affairs. Even so, the Middle East is a region in which it has far less influence than the United States. The uprisings of the Arab Spring proved particularly unsettling to China’s leaders, as has the emerging tensions between Saudi Arabia and Iran. In addition to sourcing oil from the Middle East, Chinese companies are also active in ports and related land-based infrastructure in the Middle East, including rail and port development in Israel, and participation in the port at Suez. China has also made a number of overtures to countries in the region for cooperation on infrastructure and trade5.

Central and Eastern Europe represent the point of entry for land routes from China to Europe. In recent years, China has been working in what is called the CEE16+1 arrangement which was first launched in 2011, had its first heads of state meeting in 2012, and has proceeded with annual leader meetings and nu-merous working level meetings ever since. Much of the focus has been on infrastructure development, with Chinese-funded initiatives to improve infrastructure in the CEE region, including the construction of a China-funded railroad between Belgrade and Budapest. Chinese officials have described the CEE countries as a bridge connecting Asia to Europe, the Mediterranean, and the Baltic.

Another important piece of background concerns China’s resource security. OBOR also builds off of ear-lier initiatives to ensure China’s energy and resource supplies. China is short of natural resources, with the

5 Jon B. Alterman, “China in the Middle East,” CSIS, June 6, 2013.

exception of coal and rare earths. China’s experience in resource negotiations have its leadership convinced that China cannot trust markets to provide the quantity of resources that China needs at what it considers a rea-sonable price. Central Asia, the Middle East, Africa, and Southeast Asia are important sources and / or transit points for resources bound for China. This is one reason that much of China’s external investment has been in the resource sector.

China is now the world’s largest importer of oil6. Chinese entities reportedly spent over USD 70 billion from 2001 to 2013 to buy oil and gas assets around the world, and indication that China’s leaders do not trust markets to provide China with the energy resources it needs at prices it thinks appropriate. China’s reli-ance on foreign oil, particularly from the Middle East, its geographic position, and the relative weakness of China’s navy compared to that of the US leave China extremely vulnerable to the interdiction of oil tankers going through the Straits of Malacca7. China imports approximately 60% of its oil, most of which comes from the Middle East. China has taken several steps over the years to try to obtain energy resources and create routes for energy transport that do not have to go through the Straits of Malacca. These include energy deals with Russia, the construction of a pipeline from Kazakhstan, port and pipeline construction in Pakistan and Myanmar, and efforts to build up a blue water navy. All of these started before, but neatly fall into, the OBOR initiative.

One good example is China’s investments in Gwa-dar, Pakistan, a port city just outside of the Straits of Hor-muz (through which on the order of 20% of the world’s oil flows). A port, airport, pipeline, railway, and highway are all part of plans for China to invest USD 46 billion to develop infrastructure, energy, and transportation pro-jects according to the China-Pakistan Economic Corri-dor scheme agreement signed in April 2015. Shipping oil through Gwadar is expected to reduce the transit time by 85% compared to shipping through the Straits of Malacca8. In November 2015, state-owned Chinese Overseas Ports started a 43-year lease to operate the free-trade zone at the port of Gwadar in Pakistan.

China is also seeking to extend its position in trade and to secure its trade routes. China is already the world’s leading trading nation, and is home of seven of the world’s ten busiest container ports. The creation of new trade routes would reduce the risk of disrup-tions to China’s foreign trade and increase options for

6 Tom Morgan, “China Now the World’s Largest Oil Importer; Effect on Global Market,” Forbes, June 8, 2015.

7 Keith Johnson, “China Tops U.S. as Biggest Oil Importer,” Foreign Policy, May 11, 2015.8 Keith Johnson, “China Tops U.S. as Biggest Oil Importer,” Foreign Policy, May 11, 2015.

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China’s trade, potentially increasing China’s influence and reducing that of others that sit astride individual trade routes. China also shows signs of wanting to in-crease its influence over shipping and port operations throughout the OBOR regions. A 2014 State Council report called for an increase in the competitiveness of China’s shipping industry and an extension of its control of ports. China rejected the planned shipping alliance between Maersk (Denmark), MSC (Switzer-land), and CMA (France)9, while promoting a merger between COSCO and China Shipping Group10, moves widely seen as attempts to limit the competitiveness of the foreign players while propping up the position of Chinese-owned shipping. So too was the blocking of Vale’s largest ships for transporting iron ore from Chinese ports, even though most were built in China, until several of the ships were transferred to Chinese state-owned enterprise control11.

Chinese interests have invested in ports in Greece, the Netherlands, Sri Lanka, Myanmar, Pakistan, Singa-pore, Israel, Australia, Tanzania, Kenya, Togo, and Dji-bouti. COSCO has been operating a container terminal at the port in Piraeus, Greece since 2009. From 2008 (the year before COSCO’s involvement) to 2014, throughput increased nine fold to 3.7 million TEUs. In 2013, COSCO agreed to invest €230 million to raise capacity to 6.2 million TEUs. By the end of 2015, COSCO had emerged as the only bidder for the 67.7% of the equity of the port that Greece planned to privatize. COSCO’s operations had changed shipping in Europe. Taking advantage of its position as the closest major European port to the Suez Canal and links to Chinese shipping companies, Piraeus has attracted China-EU traffic as well as distri-bution centers for companies like HP, Huawei, ZTE, and Sony. Chinese interests are also involved in investments in railways from Piraeus to Central Europe and the Bal-kans. This mirrors investments in Africa, where Chinese interests have built land infrastructure to connect the ports to their hinterlands.

The OBOR initiative will add to existing land routes connecting China to its neighbors. A train has been running between Chongqing and Duisburg, Germany since 2011. This train crosses Western China, Kazakhstan, Russia, Belarus, and Poland before reach-ing Germany. Subsequent connections have included Wuhan to Pardubice (Czech Republic, 2012), Chengdu to Lodz (2013), Zhengzhou to Hamburg (2013), Suzhou to Warsaw (2013), Yiwu to Madrid (2014), and Wuhan

9 Richard Milne, “China Blocks Proposed Three-way Shipping Alliance,” Financial Times, June 17, 2014.

10 Costas Paris, “Cosco, China Shipping Group in Advanced Merger Talks,” the Wall Street Journal, October 15, 2015.

11 Cecilia Jasmine, “Valemax Finally Allowed at Chinese Port,” Mining.com, October 10, 2014.

to Hamburg (2015). These routes can be extended through the existing rail system in Europe, and they can cut two to three weeks off of the time it would take by sea. One OBOR project is expected to be a train that offers an alternate route from China to Western Europe that bypasses Russia, instead going from China through Kazakhstan, Uzbekistan, Turkmenistan, Iran, Turkey, Bul-garia, Romania, Hungary, Austria, Germany, Belgium, and France before reaching the UK. This would be a USD 150 billion project, to be finished between 2020 and 2025. Other projects could potentially expand China’s high-speed rail network to most of Asia.

The OBOR initiative also builds off the decade old “Go Global” initiative that was first announced in 1999 that has sought to help internationalize Chinese enter-prises. “Going Global” is supposed to help Chinese com-panies become more competitive at home and abroad and to project China’s soft power and build economic and diplomatic relationships around the world. China’s outbound foreign direct investment went from USD 12 billion in 2005 to USD 108 billion in 2013 and to more than USD 120 billion in 2014, making China one of the world’s leading foreign investors. China views the inter-nationalization and international competitiveness of Chinese firms as a matter of high priority. In addition to state support for the internationalization process, many analysts believe that China has been using market re-strictions, its legal system, and its control of the press to hinder foreign companies and to favor Chinese com-panies. It is clear that the OBOR initiative will be used to further the “Go Global” process.

The OBOR initiative also builds off China’s “Go West” strategy launched in 2001. Since then, China has been using infrastructure investment, foreign investment promotion programs, and preferential policies to sup-port development of its western and southwestern provinces. While the “Go West” strategy has had some success, the economic disparities between the coastal and western provinces remain large. It is the western and southwestern provinces that are precisely the ar-eas that are likely to benefit the most from the One Belt portion of the OBOR initiative.

What institutions are related to OBOR?

The highest profile institutions related to OBOR are the new financial institutions that have been set up to further OBOR and OBOR-related objectives, most notably the Asian Infra-structure Investment Bank (AIIB), the New Development Bank (formerly “BRICS” Development Bank), and the Silk Road Fund.

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The Asian Infrastructure Investment Bank (AIIB) was proposed by China to help fund the infrastructure investment that Asia needs in October 2014. The creation of the AIIB was seen as an effort to fill a gap not filled by existing multilateral agen-cies and also to compensate for China’s lack of voice in ex-isting multilateral institutions such as the World Bank, IMF, and Asian Development Bank. The AIIB was launched with 57 members, actually more than China expected (see Exhibit 8). The initial capitalization of the AIIB was set at USD 100 bil-lion with USD 50 billion coming from China. Voting rights are to be proportional with capital contributions. China claims that the AIIB will be run on a commercial basis and that it will not be used as an instrument of Chinese policy. The AIIB formally opened its doors in January 2016. The AIIB will have extensive needs for project management / contract manage-ment / project monitoring systems for projects that are dis-persed around Asia. These will require a combination of lo-cal and global communications flows, information needs, and systems that cut across borders and can be integrated. China cannot afford for the AIIB to be less than world-class and less than multilateral. Thus the AIIB will need world-class systems involving international cooperation. Having leading Europe-an countries onboard is particularly important for the global credibility of the AIIB.

The New Development Bank (formerly the “BRICS” Development Bank) was founded by Brazil, Russia, In-dia, China, and South Africa, countries that account for more than 40% of global population and 25% of global GDP, in July 2014. The headquarters is in Shanghai, the president from India, the chairman of the board of di-rectors from Brazil, and the chairman of the board of governors from Russia. Non-BRICS countries can join, but the BRICS countries will retain at least 55% of the shares. Authorized lending is to be USD 34 billion start-ing in 2016 and the contingent reserve arrangement is for USD 100 billion, USD 41 billion of which will come from China.

The Silk Road Fund was set up by China Invest-ment Corporation, the Export-Import Bank of China, and the China Development Bank in November 2014 with an initial capitalization of USD 40 billion. The Silk Road Fund is a medium to long-term investor focused on railways, roads, and pipelines, as well as resource development and industrial development.

In addition, to these institutions, China has set up the China–ASEAN Investment Cooperation Fund (for South-East Asia), the China–CEE Investment Coop-eration Fund (for Central and Eastern Europe). There are also plans for a Shanghai Cooperation Organization De-velopment Bank to focus on China, Russia, Kazakhstan, Kyrgyzstan, Tajikistan, and Uzbekistan.

It will be very interesting to see how the new financial institu-tions will work. The AIIB, with 57 initial members, is the most international and multilateral. The New Development Bank, as indicated, will have 55% of the shares reserved for the BRICS countries. The Silk Road Fund is to be purely administered by Chinese banks. We also have to remember that the China De-velopment Bank, which has made loans in some 140 coun-tries, is by far the world’s largest development bank lender, with an international loan portfolio nearly twice that of the World Bank, three times that of the Asian Development Bank, and about as much as the initial target capitalization of the AIIB, the New Development Bank, and the Silk Road Fund combined.

While the AIIB, the New Development Bank, and the Silk Road Fund will finance some One Belt One Road infrastructure projects, they will never be able to fund all the potential demand. Thus there will be a need for co-financing from the private sector for the OBOR initiative to succeed.

What are some of the early indications?

Some of the most striking early indications of the robust-ness of the OBOR initiative have involved the international re-sponse to the initiative. While the US and Japan have been skeptical, most other responses have been positive, even though there are fears in some countries in Southeast Asia, South Asia, Central Asia, and Africa that China may use the initiative in an attempt to obtain and exercise undue influ-ence over other nations. One manifestation of the response is the fact that 57 countries have signed up to be members of the AIIB. Another is the vast amount of attention the initiative is receiving around the world. A Google search on “One Belt One Road” in January 2016 generated 352,000 “hits.”

In terms of actual investments, Chinese state-owned enterprises reportedly invested USD 12 billion in OBOR-related projects in the first nine months of 2015, including projects in Singapore, Indonesia, Russia, Thailand, and Laos12. By October 2015, analysts were estimating that Chinese investments in the OBOR initia-tive would reach USD 200 billion by 201813.

There have been several individual announce-ments of projects related to the OBOR initiative. At the China–ASEAN summit, in 2014, Premier Li Keqiang an-nounced that China would provide loans worth USD 20 billion to ASEAN countries for infrastructure devel-opment. In May 2015, agreements for projects cost-ing USD 25 billion were made between China, Russia,

12 “China’s SOEs flock to “One Belt, One Road” projects,” Asia Asset Management, October 15, 2015 and Wataru Kodaka, “One Belt, One Road: Chinese businesses investing heavily in Southeast Asia,” Nikkei Asian Review, January 2, 2016.

13 Summer Zhen. “China’s ‘One Belt One Road’ investment to reach US$200 billion in three years,” South China Morning Post, October 28, 2015.

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Kazakhstan, and Belarus for rail, energy infrastructure, industrial parks, and financial service projects. In the same month, China signed investment agreements totaling USD 22 billion with India (essentially Chinese investments into India), though much of this was not explicitly OBOR-related. In April 2015, China signed agreements worth USD 46 billion to develop energy, infrastructure, and transportation projects along the China-Pakistan Corridor. In January 2015, China signed a series of MOUs to contribute to the development of roads, railways, and airports to improve connectivity within African and between Africa and the rest of the world. In 2014, Premier Li signed announced USD 10 billion in additional loans to Africa and an increase of USD 2 billion in the China-Africa Development Fund. Overall estimates are that China will provide on the order of USD 1 trillion in financing to African nations by 2025, most of it targeted on infrastructure14. In June 2014, President Xi announced the “1+2+3” China-Arab Cooperation program focused on technology trans-fers and cooperation in space, aviation, and nuclear energy15. Several Middle Eastern countries, notably Egypt, Iran, and Saudi Arabia, have signed up to the AIIB, promising further interaction in infrastructure. The China Development Bank reportedly had lent out USD 126 billion on 400 projects in OBOR regions by the end of 2014 and had plans to fund 900 projects with USD 800 billion in investment16.

There have also been announcements of sub-stantial OBOR-related investments within China itself. Chongqing, which has greatly benefited from existing east-west links17, for example, is reportedly planning to spend on the order of RMB 1.2 trillion (USD 170 billion) in infrastructure projects related to OBOR in the 2014 to 2020 period, including high-speed rail lines, airports, and industrial parks18.

With respect to the Digital Silk Road, several initia-tives are under discussion between Chinese and Euro-pean counterparts. Deutsche Telecom and Nokia are just two of the European companies involved. In No-vember 2015, Inmarsat reached an agreement with the China Transport, Telecommunications, and Information Center (CTTIC) to provide satellite communications for One Belt One Road.

14 Larry Hanauer and Lyle J. Morris, Chinese Engagement in Africa: Drivers, Reactions, and Implications for U.S. Policy, The Rand Corporation, 2014 and Christopher Alessi, and Beina Xu, China in Africa, Council for Foreign Relations, April 27, 2015.

15 Chaoling Feng, Embracing Interdependence: The Dynamics of China and the Middle East, The Brookings Institution, 2015.

16 Eric Ng, “‘One Belt’ infrastructure investments seen as helping to use up some industrial over-capacity,” South China Morning Post, November 2, 2015.

17 Chongqing went from nowhere in the computer industry in 2008 to assembling on the order of a third of the world’s personal computers in 2015. Much of this output is shipped by rail to Europe.

18 The Hong Kong Trade Development Council, “One Belt One Road: Yuxinou Railway Development,” August 11, 2015.

What are some of the wider implications of the OBOR initiative?

The OBOR initiative provides an overarching vision that com-bines several of China’s key initiatives in a way that it believes is not threatening to other nations. As such, we expect that OBOR will become an even wider initiative over time, as well as a framework that will heavily influence Chinese policy, for-eign relations, economic strategy, and investments over the next two decades.

The OBOR initiative will undoubtedly bring the various parts of Asia closer together through physical, psychological, economic, cultural, and political link-ages. It will improve infrastructure in places that need it and promote economic development along the way. It will also connect East Asia more closely with Europe. In fact, some of the major economic flows are likely to be between China and Western Europe simply because those are the biggest markets along the “Belt” and the “Road.”

The OBOR initiative will also substantially expand China’s influence in Southeast Asia, Central Asia, South Asia, Africa, and Europe. The main land links between Southwest China and Southeast Asia will create north-south connections in a region where the Asian Devel-opment Bank and others have been trying to build east-west connections with limited success for more than two decades. The key reason for the lack of suc-cess of these prior efforts has been that the attempt has been to build corridors from nowhere to nowhere (at least in economic terms). The north-south connections that start in Kunming and will go through Vietnam, Laos, and Myanmar, respectively and eventually meet up near Bangkok before heading down the Malay Pen-insula to Singapore. These connections will connect China to the larger Southeast Asian centers of Bangkok, Kuala Lumpur, and Singapore. China will be the crucial source and destination for goods going through these three corridors, which will greatly extend China’s influ-ence in the region. Is it not that farfetched to project that Kunming will eventually become the economic capital of Southeast Asia.

The economies of Central Asia are so small com-pared to China’s economy that the result of the OBOR initiative is likely to be China dominating Central Asia economically. China will become an even more domi-nant customer for the resources and agricultural out-put of Central Asia and a more dominant supplier of manufactured goods to Central Asia. It would not at all be surprising for Urumqi and Kashgar to become eco-nomic capitals for Central Asia due to trade and invest-ment flows precipitated by the OBOR initiative. Urumqi

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has already been designated by China as a center for RMB trade settlement, lending, and investment for Central Asia. The countries of South Asia will have in-teresting choices to make. Myanmar has been pushing back against what has been considered China’s heavy-handed approach to the nation. Pakistan seems firmly onboard as a Chinese ally and dependent. India can choose to participate in OBOR efforts or not. If it partici-pates, there is some danger of becoming too depend-ent on China. If it does not, it runs the risk of missing out on the potential benefits of OBOR and becoming isolated within Asia.

Another implication is that while the OBOR initia-tive includes maritime linkages, most of those linkages are present already. OBOR is likely to enhance these ex-isting connections. Since there is now more container ship capacity going through the Suez Canal to North America than through the Panama Canal (due to the limited size of ships that can go through the Panama Canal), improved ports and shipping, as well as inter-modal services, should enhance China’s trade with places as far away as the East Coast of the United States.

The main new linkages under the OBOR initiative, however, will be the land linkages. The likely outcome is that there will be something of a shift in the relative importance of trade involving sea transportation and land transportation. This is true for links between China and Europe, as well as between China and Southeast Asia and South Asia. In economic terms, this means that land transport hubs may become more important than they have been in the past. This does not mean a fall in volumes carried by sea per se, but rather an increase in the percentage of China’s trade that is transported by land. Since China is the world’s largest trading na-tion and is home to seven of the world’s ten busiest container ports, any modal shift will be felt in global transportation markets. In geopolitical terms, it means that China’s main trade links will increasingly be land links that will not be subject to interruption of sea trade. To be direct about it, the increased importance of land transport compared to sea transport will increase the relative power and influence of China in Southeast and South Asia compared to the US.

For Europe, there are several implications of the OBOR initiative. One is the potential for significant eco-nomic development in areas of importance to Western Europe, such as Africa, the Middle East, Eastern Europe, and Central Asia. A second is that trade routes involv-ing East Asia, Central Asia, Africa, the Middle East, and Europe may be shifted. For a variety of reasons, includ-ing colonial ties and infrastructure, Western Europe has played a central role in trade routes involving Africa,

the Middle East, and Eastern Europe. New transporta-tion infrastructure could weaken Western Europe’s traditional transportation roles along with its position in supply chains. A third implication is the potential for enhanced trade between the economies of Western Europe and China, which dwarf the other economies in between (see Exhibit 9 for a pictoral representation). Our view is that the connections will tend to favor the more competitive manufacturers, wherever they may be along the OBOR routes. This may favor China, which exported €302 billion to the EU in 2014 while importing €165 billion of goods from the EU19. Another is that OBOR will be used as a rubric under which to substan-tially increase Chinese investment and influence in Europe, with an eye for mutual economic benefit, but also with an eye towards the EU designating China as a market economy for purposes of trade actions and for China trying to split European nations away from the US on a range of issues.

If we look at the bigger picture, as we have stated, in our view, the OBOR initiative is nothing less than an attempt to re-establish the notion of China as the Middle Kingdom with all roads (as well as railways, ship-ping lines, and air traffic) leading to China. Others have reached similar conclusions. According to the Financial Times, “If the sum total of China’s commitments are taken at face value, the new Silk Road is set to become the largest programme of economic diplomacy since the US-led Marshall Plan for postwar reconstruction in Europe, covering dozens of countries with a total popu-lation of over 3bn people.20” In our view, once the land routes are in place, the sheer size of China’s economy will lead to it dominating Central and Southeast Asia, and dramatically increasing its influence in South Asia. As indicated above, we could see a future in which the economic capitals of Southeast Asia are Kunming and Nanning and the economic capitals of Central Asia are Urumqi and Kashgar. In addition, the OBOR initiative is likely to extend China’s influence in Africa, Eastern Europe, and Western Europe significantly. In the fu-ture, it might be very difficult for countries that have benefited from OBOR projects, and are tied ever more closely to China economically, to resist pressure from China on other issues. The result could be a much more integrated economy across Asia, Africa, and Europe, but with Chinese state-owned companies, Chinese-led funding organizations, and Chinese initiatives at the least strongly influential and at the most dominant across the regions.

19 European Commission, European Union, Trade with China, October 10, 2015.20 Charles Clover and Lucy Hornby, “China’s Great Game: Road to a new empire,” Financial

Times, October 12, 2015.

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Will the OBOR initiative come to anything in terms of actual projects and investments, or will it be business as usual, particularly with regard to infrastructure projects along the One Belt and One Road?

There is nothing particularly new about the recognition of the potential value of building infrastructure that will better con-nect China to Southeast Asia, South Asian, Central Asia, Af-rica, the Middle East, and Europe. In fact, existing multilateral agencies and private sector companies have been working on such projects for decades. In many cases, it is not the de-mand for infrastructure or the finance that create problems, but rather the fact that the countries involved can be diffi-cult to deal with, are not necessarily known to follow through on commitments, and lack the legal systems to deal with dis-putes in an even-handed manner. In other cases, generating the revenue (or getting the commitments necessary to do so) to pay back investors is problematic.

China’s OBOR initiate is likely to affect these chal-lenges in a number of ways. The first is that for China the OBOR initiative is clearly as much (if not more) polit-ical and geostrategic as it is economic. This means that some projects are likely to be funded by China even if they do not meet traditional financial return hurdles. The second, related way is that the OBOR initiative is about as high in profile as is possible in the Chinese context. Failure is not an option and success will be measured in investments made, projects completed, friendships and alliances strengthened, and geostrate-gic position improved, not necessarily financial returns. The third is that we believe that some governments are likely to act very different when it comes to meet-ing their obligations and commitments if the projects are part of a Chinese initiative rather than one involv-ing private sector entities, other donors, or traditional multilaterals. Should the OBOR initiative fund projects with lower financial returns, and / or if the OBOR initia-tive reduces political and expropriation risks, then we would expect many projects will go forward than has been the case in the past.

What are some of the challenges associated with OBOR?

One of the major challenges of the OBOR program is the sheer size and scale of the undertaking. If one major goal is to help Asia meet the shortfall in infrastructure funding, then it is not clear that all of the commitments to date will make a dent in the problem. It will be necessary to mobile huge amounts of private sector funding to make many of the projects work.

Half-built corridors are not very useful in the scheme of things. This is particularly important given the fact that Chi-na is facing an economic slowdown, an increase in bad debt, and challenges in local government finance. The result is that China will not nearly be able to fund the OBOR initiative on its own. If it is not able to attract additional financial partners, then it will have to scale down its ambitions.

OBOR-related infrastructure development will be complicated by the lack of development of most of the OBOR countries. According to IMF standards, only seven of the 64 countries covered under the initiative to date are advanced economies (the Czech Republic, Estonia, Israel, Latvia, Singapore, Slovakia, and Slovenia) and these are either at the lower end of the “advanced range,” are very small, or both. Presumably if all the countries covered by the OBOR initiative were devel-oped, they would already have much better infrastruc-ture, and would not require the initiative in the first place. However, the low level of development of many OBOR countries indicates a lack of support structures and soft infrastructure than might be necessary to ab-sorb investments in hard infrastructure, or to maintain the infrastructure once it is in place.

Another challenge is related to geography and topography. Western China and Central Asia have vast distances and few people, which make it extremely expensive in terms of potential revenues per kilometer of transportation infrastructure. Some of the links to Southeast Asia go through dense rain forest. Some of the links to South Asia must bypass some of the world’s highest mountains. The physical construction of some of the land routes will be extremely challenging.

There are also political and geopolitical challenges. The China-Pakistan Corridor, for example, starts in an area known for unrest over which the Pakistan Govern-ment has not always been able to effectively exert. It is planned to go through Pakistan-controlled Kashmir, which is opposed by the Indian Government. Russia is under sanctions over its disputes with the Ukraine. Iran is in the process of coming out of sanctions. There are civil wars in Syria, Afghanistan, and Iraq. Other countries that the OBOR initiative is supposed to connect have been subject to political instability, international sanc-tions, or both. Routes through such countries may be very risky from a financial, political, and security stand-point. Risk of expropriation, inefficiencies, and corrup-tion is also likely to be high in several OBOR countries. Each of these can affect the success of OBOR projects.

It is possible that there will be a political opposi-tion, suspicion, and even backlash to a China-led scheme. China is already getting pushback on infra-

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structure investments in Myanmar, Laos, Vietnam, and some African countries due to the perception of Chinese interests operating with too heavy a hand, or due to territorial disputes, such as those in the South China Sea. While many of Chinese port investments are purely commercial in nature, others may have military features. Some have commented that the Maritime Silk Road will increase China’s desire to control or at least have a military presence astride the sea lanes of importance to China. India is particularly concerned about the potential presence of the Chinese navy in the Indian Ocean operating from bases in surround-ing countries21, though some analysts project that it is more likely that it would be easier for China to build up a presence in East Africa22. This or any other reason that leads to a failure for OBOR countries to coordinate poli-cies could result in severe difficulties for the initiative. We note that this is less of an issue for the One Road (Maritime Silk Road) part of the initiative because pre-sumably countries that did not wish to cooperate could be bypassed unless they occupy particularly important strategic locations.

Finally, for Western countries and companies there are potential reputational risks should OBOR projects be used to spread China’s influence, prop up discred-ited governments, result in corruption, or cut off other companies from international markets.

Will contracts associated with OBOR only go to Chinese companies?

There is a question about whether contacts related to the One Belt One Road program will be limited to Chinese com-panies. It is clear that one of the motivations for the program is to help Chinese industries and companies utilize excess ca-pacity and another is to help Chinese companies internation-alize. Thus we expect that the bulk of the contracts related to OBOR will go to Chinese companies. However, this will prob-ably depend on the location of the project and the funding vehicle used for the particular project. Projects funded direct-ly by Chinese sources, such as the China Development Bank or China’s Silk Road Fund, will probably use Chinese compa-nies exclusively, or almost exclusively. The exceptions are like-ly to be if the technical demands or political sensitivities of the project (projects outside of China will probably include some companies from the country in which the project is built) re-quire the use of non-Chinese companies.

21 Shannon Tiezzi, “The Maritime Silk Road Vs. The String of Pearls,” The Diplomat, February 13, 2014.

22 Morgan Clemens, “The Maritime Silk Road and the PLA,” A paper for China as a Maritime Power Conference, July 28-29, 2015.

On the other hand, projects funded through the AIIB are like-ly to be more open to non-Chinese companies. The AIIB is a multilateral organization and it would be extremely embar-rassing to China to have countries that have signed on to the AIIB withdraw. This implies that the AIIB will have to operate on a more neutral basis with international standards in or-der to keep other countries (particularly European countries whose presence gives the AIIB much more legitimacy than it would have otherwise) onboard. Presumably, China will also wish to reward countries that have agreed to become mem-bers, in some cases over the opposition of the US and oth-ers. Thus we would expect that projects funded through the AIIB will be much more open to non-Chinese companies than projects funded directly by China. The New (“BRICS”) Develop-ment Bank will probably be somewhere in between, with the vast majority of contracts given to companies from China or other BRICS countries, but with companies from other coun-tries that eventually become members (membership is not limited to the BRICS countries, though the majority of shares will be held by BRICS countries). In addition, some OBOR-related projects might be funded by European sources and might favor European companies.

For a country like Finland this means that its com-panies are likely to be seriously considered for contracts related to OBOR if they offer some expertise that is not available in China, the projects involved are funded by the AIIB, or the projects are funded by European source. It also means, however, that if Finland does not believe its companies are being treated fairly for AIIB-funded projects, for example, it could consider withdrawing from the AIIB. While any such decision should only be taken in the context of Finland’s overall diplomatic and economic relationship with China, we should re-member that China would be extremely embarrassed should a country like Finland withdraw from China’s first major foray at creating a multilateral organization. In a less dramatic vein, China will be anxious to avoid any criticism of the AIIB or China’s behavior within the AIIB, which could provide leverage to ensure fairness.

What opportunities does OBOR represent for non-Chinese companies?

There are likely to be OBOR opportunities in a number of ar-eas, some obvious some less obvious. These include oppor-tunities in infrastructure, financial and professional services, transportation and logistics, information and communica-tions, commerce and supply chains, energy and natural re-sources, and agriculture.

Infrastructure Development, Operation, and Maintenance

The most obvious opportunities associated with OBOR in-volve the construction of new infrastructure and facilities.

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This will involve all stages of development, including plan-ning, design, engineering, construction, materials, construc-tion equipment, utilities, project logistics and management, and related goods and services. The nations covered by the OBOR initiative will pose a wide range of challenges for the design, construction, and commissioning of relevant infra-structure projects. The geographies include deserts, high pla-teaus, mountains, and rain forests. The land-based linkages in particular will involve vast distances, technical projects such as bridges, tunnels, and airport construction, and extremely challenging project logistics and project management capa-bilities. OBOR is likely to create enormous demand for build-ing materials, construction equipment, and all of the equip-ment necessary to operate the new infrastructure, including equipment for airports, seaports, logistics hubs, multimodal and within mode interchanges (the latter for example when train gauges do not match), and industrial parks. Certainly much of this will be supplied from China, but areas involving specific technical capabilities (particularly in development, design, and engineering), projects far from China, and pro-jects funded by multilateral institutions and non-Chinese in-vestors should be open to non-Chinese companies.

In addition, the infrastructure will be useless if it is not managed and maintained. OBOR could create substantial opportunities for third party operators and managers in countries that lack the requisite skills, skills that are also in relatively short supply in China. Manage-ment of the infrastructure post-construction is another area in which non-Chinese firms may see substantial opportunities, as well as in maintenance of infrastruc-ture outside of China’s borders.

Financial and Professional Services

There will also be substantial opportunities in the financial services sector related to the OBOR initiative. New multilateral institutions, like the AIIB and the New Development Bank, will not nearly be able to fund all of the infrastructure that could be built under the OBOR initiative. There will be large poten-tial opportunities for other sources of funds, and related fun-draising opportunities through organizing bond issues, loan syndication, IPOs, setting up public-private-partnerships, cre-ating special purpose vehicles, and other means for funding the projects. As many of the countries covered by the OBOR initiative are Islamic, many OBOR financial arrangements are likely to have Islamic finance requirements. Putting togeth-er the financing, contractual, and monitoring arrangements associated with OBOR undertakings should create a large amount of business for the financial sector as well as for re-lated legal and accounting services. In many cases, contracts will have to be written and executed in countries with legal and regulatory systems very different from those found in China.

Increased trade flows resulting from OBOR projects will also result in increases in trade finance, trade settlement, com-modities trading, and commodities future transactions. Ma-rine and aviation financing and insurance and ship and air-craft leasing services will also be required. Even the payments and treasury arrangements for OBOR projects will create sub-stantial business. While Chinese financial institutions or Chi-na-backed institutions may have pole position for much of this business, there will have to be counterparties all through the OBOR countries, and a significant amount of fund raising will have to be done from non-Chinese investors with whom Chinese institutions may have limited access.

Transportation and Logistics

The infrastructure likely to be built under the OBOR initiative will be useless if it is not used by transportation and logistics companies. At its simplest, this will create substantial business opportunities in all of the countries connected by OBOR ini-tiatives in terms of trucking, rail services, port activities, pipe-lines, and related operations. This in turn, will require trucks (especially long-haul trucks), railway stock, ships, airplanes, and all of the parts, maintenance, fuel, and servicing needed to keep them all operating. On a larger scale, transportation, logistics, and logistics management for large flows of goods across vast distances, numerous developing countries (all with their own customs, inspection, and legal requirements), difficult terrain, and some nations not known historically for ease of business operation will represent enormous challeng-es. It will take a high level of skill, extensive international net-works, and a huge amount of experience to tackle the chal-lenges of operating and managing transport and logistics across the OBOR routes. Chinese companies do not at pre-sent have the capabilities to operate and manage such inter-national networks, or the on-the-ground capabilities in many OBOR countries needed to do so. Of course, Chinese com-panies may use the OBOR initiatives to build such networks, which is something that existing international transportation and logistics companies should watch carefully.

Specifically regarding maritime transportation, we expect that under the OBOR initiative Chinese companies such as COSCO, China Shipping Group, China Merchants Holding Company, China Harbor En-gineering Company, China Overseas Port Holdings, and Shanghai International Port Group will become much more active internationally. We expect to see these and perhaps other Chinese companies obtain a large share of the port construction, port operation, and shipping business generated by the OBOR initiative. We expect that these and perhaps other friendly companies such as Hong Kong-based Hutchison Port Holdings will come to dominate many of the ports along the One Road and that as China’s shipping companies become stronger they will favor ports controlled by Chinese interests, such as Piraeus in Greece. Port and shipping

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managers that we have interviewed do not expect that the OBOR port construction will change the types of ships used. Instead, they indicate that lower volume ports might be served with smaller existing ships and the largest ships might be concentrated even more on trunk routes between leading ports. The managers also do not believe that port construction on its own will generate more trade, but combined with land trans-portation investments and investments in industrial parks near the ports could result in significant trade creation. So the upshot seems to be more of the same, and the immediate focus more on trying to grow trade to reduce overcapacity in the shipping industry rather than OBOR resulting in the introduction of new types of ships.

Information and Communication Systems

The OBOR initiative is likely to generate substantial demand for information and communication systems. The first sys-tems that are likely to be required are actually those to sup-port the new multilateral organizations that China is develop-ing, most notably the AIIB and the New Development Bank. These organizations will need information systems for their own internal use. They will also need systems for contracting, for payments, for accounting, for oversight, and for all of the functions associated with major financial multilaterals. They are likely to have information system needs that are similar to existing multilaterals, such as the Asian Development, the World Bank, the Inter-American Development Bank, and oth-ers. Other information and communication systems will be needed on a project by project basis. Communications will require ICT hardware and software, network operations, ca-bles, microwave equipment, satellites, and related products and services.

We also expect that there will be opportunities in creating and managing systems to monitor and control traffic across the land and sea-based OBOR networks. There will also be a need for information and com-munication systems that allow for integrated manage-ment of flows of cargo across the “One Belt” and the “One Road.” There should be a specific opportunity to create a container-by-container management system for road and rail traffic including a range of satellite and ground-based technology solutions. Chinese sources are already talking about integrating information sys-tems across the OBOR ports in order to optimize sched-uling and improve efficiency. There are likely to be op-portunities for non-Chinese companies here in areas in which Chinese companies might not have the relevant expertise, in countries in which Chinese companies have little operational experience, and in countries in which a large Chinese presence might be particularly sensitive. Examples of the latter might include Russia,

India, Vietnam, and some European countries. Again, Chinese companies are likely to use OBOR projects to extend their international reach and foreign companies need to monitor this carefully.

The Digital Silk Road initiative hopes to extend cooperation in 5G, cloud computing, the Internet of Things, big data, e-commerce, digital investment, smart cities, and smart energy. While these areas are not necessarily linked to the infrastructure projects described above, they represent areas in which coop-eration, particularly EU-China cooperation, may result in substantial funding for collaboration, pilot projects, and other business opportunities. Again, we should note that China’s purpose is clearly to absorb advanced technology from abroad and to promote the interest of Chinese firms in these areas.

Commerce, Manufacturing, and Supply Chains

The expansion of trade routes should, not surprisingly, re-sult in an expansion of trade. The land or One Belt portion of the OBOR initiative has a particularly important potential to expand trade between China and Western Europe. Exist-ing railways that connect China and Europe have already cut transit times by between two and three weeks (to around 15 days) compared to sea transport. Rail freight is quicker than sea freight and far less expensive (about 80% cheaper) than airfreight. However, use of the existing rail connections is ex-tremely limited and it complicated by gauge changes, slow speeds in some sections, and cumbersome connections. Im-provements that reduce the time and cost of the land links should enhance trade between China and Western Europe. This means that manufacturers in both China and Europe should have quicker and cheaper access to each other’s mar-kets.

The improved connectivity should have additional impacts on trade through its impact on manufactur-ing and supply chains. When transportation links are improved, there is a tendency for the more competitive manufacturing locations to be favored and for speciali-zation to be increased. Given the huge trade surplus that China already runs with the EU, better connectiv-ity could increase the surplus even more. One also has to take into account the fact that the OBOR initiative will also connect other economies that might have a difficult time producing a complete product or system ready to sell in international markets, but could provide components, subassemblies, and supporting products if they have better physical connections to the major manufacturing centers. Thus OBOR opens up the po-tential for the economies of Central Asia and South Asia to become part of regional production systems in a way that East Asia also has extensive production

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systems, and for some Southeast Asian economies to become more important in existing production sys-tems. There are plans to create numerous industrial parks along OBOR routes in order to take advantage of these possibilities. New locations will be able to extend their positions in international production systems, or in some cases join such production systems for the first time. In the process, there may be both gains and losses in individual countries due to expanded trade potential due to the OBOR initiative.

Better physical links could also extend e-Com-merce potential. Much of e-Commerce is either na-tional in scope, or in Europe regional in scope. To the extent that the OBOR initiative brings nations closer together, it could result in the international expansion of e-Commerce and e-Commerce companies in OBOR countries, particularly from China. Certainly companies like Alibaba are looking to further e-Commerce oppor-tunities in OBOR countries.

Energy, Natural Resources, and Agriculture

The OBOR initiative should have a substantial impact on the energy, natural resource, and agricultural sectors. The most obvious impact on the energy sector would be China’s ability to access energy from the Africa, the Middle East, South Asia, and Central Asia while reducing the potential for supply dis-ruptions in the shipping lanes of East Asia. This is of national strategic importance, not just economic importance, so pro-jects that achieve this goal may well be funded regardless of their economic return. While energy is the primary focus of several of these investments, once the corridors are in place, they will be used for natural resources and other goods as well.

In addition to the transportation of energy and nat-ural resources, the OBOR initiative, by making a number of resource-rich economies more accessible and bet-ter connected, could result in increased investments in exploration and resource development. This could increase demand for equipment and services related to oil exploration, oil production, mining, drilling, oil field operation, mine operation, and related activities.

The OBOR initiative could also have a significant impact on agriculture within OBOR-linked nations. Cen-tral Asia, particularly Kazakhstan, has a small population and underutilized agricultural resources. The OBOR initiative could make both China and Europe much more accessible to Central Asian agricultural producers. In Southeast Asia, OBOR-related land routes could be much more efficient in getting produce from agricul-tural areas to markets in China and elsewhere. In Africa, better port infrastructure and land transport from farm

regions to the ports could enhance agricultural export opportunities. Expanded agricultural potential could also result in increased agricultural investment in sev-eral countries covered by the OBOR initiative. China has already signed agricultural MOUs with ten OBOR countries and has agreements to cooperate to stream-line inspection and customs procedures for agricultural products with 20 countries.

Are there any other ideas that might be leveraged by Finland concerning OBOR?

While Finland is peripheral geographically to much of the ex-isting OBOR scheme, it would not be peripheral to a “One Belt Two Roads” (OBTR) strategy in which the second “Road” is an Arctic shipping route. Recent climate changes have made the prospects of a northern shipping route from China to Europe far more interesting than ever before. Finland, or more like-ly Finland in conjunction with other Scandinavian countries, could be far more central to a OBTR strategy. COSCO is already planning regular services on an Artic route to Europe23. In addition to assessing how to leverage the logistics opportu-nities afforded by this route, Finland and Finnish companies should also assess the manufacturing and service opportu-nities. This route will require new ships and services, and will present numerous technical challenges of the sort that the Scandinavian countries have been dealing with for decades. It could also present opportunities for potentially very cheap backhaul of goods from Europe to China, providing potential advantages to Nordic manufactures. We assume that the po-tential of this route is under active investigation by Finland and Finnish companies now. If not, it certainly should be, as it may create as many if not more distinctive opportunities for Finnish companies than much of the OBOR initiative.

So what can Finland and Finnish companies do?

There are a number of things that Finland and Finnish compa-nies can do to address the opportunities and challenges asso-ciated with the OBOR initiative. These include being outward-ly supportive but inwardly analytical and opportunistic, de-veloping or finding projects that can be put under the OBOR rubric, finding areas in which Finnish companies have distinc-tive capabilities to contribute to OBOR projects, seeking op-portunities in which Finland and Finnish companies might be favored, looking beyond the initial stages of the OBOR initia-tive, redirecting or re-branding existing efforts to fit the OBOR rubric, exploring where consortia involving Finnish compa-nies may contribute, seeking out the right Chinese partners,

23 Costas Paris and Joanne Chiu, “Chinese Shipping Group Cosco Planning Regular Trans-Arctic Sailings,” The Wall Street Journal, October 27, 2015.

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exploring the indirect implications of OBOR (including market developments, shifting economic geography, changing com-petitive positions, development of new supply chains), seek-ing guidance where appropriate, and avoiding being passive in addressing OBOR opportunities.

Be outwardly supportive and enthusiastic about OBOR, while being analytical and opportunistic about OBOR-related op-portunities. Like many “Big Idea” Chinese initiatives, there is a significant amount of hype involved in OBOR. Everyone un-derstands that, but no one talks about it, at least no one that wishes to benefit from the initiative talks about it. Having said that, non-Chinese countries and companies can benefit if they make a hardnosed assessment of participation in OBOR-related projects and are opportunistic in identifying where their expertise, capabilities, products, and services can con-tribute to the OBOR initiative.

Finland and Finnish companies could develop, find, or sug-gest projects that can be placed under the OBOR rubric. China, and Chinese officials at all levels, will be looking to make OB-OR a success. Xi Jinping has a great deal riding on this person-ally so no one will wish to disappoint. Foreign companies and governments should not assume that the details of OBOR have been worked out. It is a concept that is still being formu-lated and it is likely that China will welcome suggestions for projects that can help China reach its goals. The key point is that Finland and Finnish companies should not wait for China to define OBOR in its entirety. If Finland and Finnish compa-nies wait, this increases the likelihood that Finland and Finn-ish companies will be bypassed. What do we think the chanc-es are that China will approach Finland or Finnish companies with OBOR-related projects? In some cases, like agreements to seek cooperation on the Digital Silk Road, it could happen, but we think there will be few such instances. This means it will fall to Finland and Finnish companies to be proactive.

Analyze the areas in which Finland and Finnish companies can offer specific skills, capabilities, products, and / or services that can further OBOR objectives. Although the most obvious areas in which there will be opportunities for non-Chinese firms are in construction-related activities and equipment, financial activities, transportation equipment and activities, and communication and information products and services, the range of OBOR-related activities is so large that assessing areas in which Finland and Finnish companies have distinc-tive expertise, capabilities, products, and services and screen-ing them for possible OBOR-related business could turn up several additional prospects.

Seek opportunities in which Finland and Finnish companies might be favored. A goal should also be to identify geogra-phies in which where Finland and Finnish companies oper-ate that China and Chinese companies do not or places that are sensitive to Chinese involvement. In addition, there will

be portions of OBOR projects that are funded from Europe in which European companies are likely to be favored over Chi-nese and other companies.

Look beyond the obvious initial stages of the OBOR initia-tive. The most obvious manifestations of the OBOR initiative involve large-scale infrastructure investments, but there will be large opportunities that support the initiative through the design, supply, operation, management, and use of the infra-structure developed through OBOR projects. Over the long-run, these will generate opportunities at least as large as the initial investments themselves.

See if existing initiatives or activities can be enhanced by redi-recting or even re-branding then as OBOR-related initiatives or activities. A huge number of companies inside and outside of China are already doing this and they do it whenever China announces a major new initiative. Projects that have failed to obtain Chinese support in the past have been supported if they can be shown to contribute to “Big Idea” initiatives such as OBOR. While this may seem artificial, it may be the best way to obtain OBOR-related business. To give an example, China’s Silk Road Fund justified taking a stake in the special purpose vehicle that acquired the Pirelli tire company on the basis that since the acquisition involved advanced technology, that it was compatible with OBOR because it would improve China’s competitiveness, and that was a fundamental goal of OBOR. We expect to see similar examples of “stretching” the OBOR rubric in the future.

See if there are OBOR-related opportunities that could be ex-plored or exploited by consortia of Finnish companies or con-sortia including Finnish and non-Finnish companies. It might well be too difficult for individual Finnish companies to take the time and effort to become engaged in OBOR-related business, or the relevant projects might be too large for them to undertake on their own. Identifying areas in which consor-tia consisting of or including Finnish companies could suc-ceed may well be a task for TEKES to manage.

Seek out the right Chinese partners. The lion’s share of projects related to OBOR initiatives are likely to go to Chinese compa-nies. This means that Finnish companies should be looking to find Chinese companies with complementary capabilities that could be potential partners. Finnish companies could try to capitalize on the insistence of Chinese leaders that the OB-OR initiative is designed to generate international coopera-tion.

There are several indirect implications of the OBOR initiative of which Finnish companies should be aware. If the initiative succeeds, it could greatly enhance the economic potential of many of the OBOR nations, which in turn could make them more attractive mar-kets. Finnish companies should assess the implications

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for their existing and potential business. The initiative may also change the competitive balance between companies. In particular, it is likely to result in a much stronger international profile for numerous Chinese companies, and to introduce Chinese companies into Southeast Asia, South Asia, Central Asia, Africa, Central and Eastern Europe, and Western Europe. Finnish com-panies should assess how their Chinese competitors, or other competitors for that matter, could use OBOR to improve their competitive positions. The initiative also has the potential to substantially improve supply chains throughout Asia, which could make Asian com-panies as a whole more competitive vis-a-vis European companies.

Seek guidance where appropriate. China’s Government and the Chinese Communist Party are relatively opaque to most foreigners. The reason is that it can be challenging to figure out what the Party and Government want, who the relevant stakeholders are (or how to approach them), and how to de-velop and present a win-win proposition that allows the for-eign government or foreign companies to achieve their goals while helping the Chinese Communist Party and the Chinese Government to achieve their goals. Foreign governments and companies often need assistance to navigate the complex-ity of the Party and Government system in China and how to identify and develop opportunities in China.

Finally, we stress once again that Finland and Finnish compa-nies should not be passive. China’s leaders have not fully de-fined the OBOR initiative or the full range of OBOR projects. Many countries and companies will wait until there is more definition before engaging. The trouble is that by the time projects are defined, they are often allocated. The best way to obtain business associated with the OBOR initiative is to help define the projects. According to Chinese officials, the OBOR initiative is supposed to be open and participative. Finland and Finnish companies should try to identify projects that they are well suited for and that are consistent with the OBOR initiative to present to Chinese counterparts.

Source: Based on Exhibit 1

Exhibit 1. Countries Covered by the OBOR Initiative

• China • Southeast Asia: Brunei, Cambodia, Indonesia, Laos,

Malaysia, Myanmar, Philippines, Singapore, Thailand, Timor-Leste, Vietnam

• South Asia: Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, Sri Lanka

• Central and Western Asia: Afghanistan, Armenia, Azerbaijan, Georgia, Iran, Kazakhstan, Kyrgyzstan, Mongolia, Tajikistan, Turkmenistan, Uzbekistan

• Middle East and Africa: Bahrain, Egypt, Iraq, Israel, Jordan, Kuwait, Lebanon, Oman, Palestine, Qatar, Saudi Arabia, Syrian Arab Republic, Turkey, United Arab Emirates, Yemen

• Central and Eastern Europe: Albania, Belarus, Bosnia & Herzegovina, Bulgaria, Croatia, Czech Republic, Estonia. Hungary, Latvia, Lithuania, Macedonia, Moldova, Montenegro, Poland, Romania, Russia, Serbia, Slovakia, Slovenia, Ukraine

Source: Hong Kong Trade Development Council based on Chinese Academy of Social Sciences

Exhibit 2. Countries Covered by the OBOR Initiative

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Exhibit 3. The Main One Belt One Road Routes

Source: Xinhua; Enright, Scott & Associates

Exhibit 4. OBOR Economic Corridors

Source: Hong Kong Trade Development Council; Enright, Scott & Associates

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Exhibit 5. The OBOR Corridors

• New Eurasian land bridge to run from Jiangsu Province to Rotterdam: China –Mongolia- Kazakhstan-Russia- Belarus- Poland- Germany-Netherlands would extend existing route to Kazakhstan freight railways

• China-Mongolia-Russia Corridor: High speed rail and road links, freight trains are already running along this route

• China-Central Asia-Western Asia Corridor: mostly for energy, China-Central Asia gas pipeline already exists (world’s longest) Turkmenistan, Uzbekistan, Kazakhstan, Xinjiang plans to link Middle East with this pipeline as well

• China-Southeast Asia Corridors: three lines Kunming through Vietnam, Laos, Myanmar also connect through Nanning to Guangdong Province

• China-Pakistan Corridor: note passes through Kashmir and Indian Government is opposed to this

• Bangladesh-China-India-Myanmar Corridor: rail construction, road construction, industrial parks

• China-Myanmar Corridor: pipelines, highways, rail

Exhibit 6. Selected Documents Regarding OBOR Implementation and Cooperation

• Joint Communique on the 14th Meeting of the Council of Heads of Governments of the Shanghai Cooperation Organisation Member States (15 Dec 2015)

• Henan’s Implementation Plan for Participating in the Building of the Silk Road Economic Belt and 21st Century Maritime Silk Road (1 Dec 2015)

• Co-operation between China and the CEE Countries: The Medium-Term Agenda and The Suzhou Guidelines (24 Nov 2015)

• Action Plan for Harmonisation of Standards Along the Belt and Road (2015-2017) (22 Oct 2015)

• NDRC Approves Infrastructure Projects Serving Belt and Road (15 Sept 2015)

• Sino-Kazakhstan Joint Declaration on a New Stage of Comprehensive Strategic Partnership (31 Aug 2015)

• Hunan’s Belt and Road Action Plan (2015-2017) (14 Aug 2015)

• Mid-term Roadmap for Development of Trilateral Co-operation between China, Russia and Mongolia (9 July 2015)

• Joint Ministerial Statement: Fostering Pragmatic Cooperation towards the Future of GMS Economic Corridors (11 June 2015)

• Guangdong’s Implementation Plan for Participating in the Building of the Belt and Road Initiative (3 June 2015)

• Joint Statement on Cooperation on the Construction of Joint Eurasian Economic Union and the Silk Road Projects (8 May, 2015)

• Joint Statement on Establishing All-weather Strategic Co-operative Partnership between the People’s Republic of China and the Islamic Republic of Pakistan (20 April 2015)

• Announcement on the Reform of the Integrated Regional Customs Clearance Along the Silk Road Economic Belt (30 March 2015)

• Vision and Actions on Jointly Building the Silk Road Economic Belt and 21st Century Maritime Silk Road (28 March 2015)

• The Belgrade Guidelines for Co-operation between China and the CEE Countries (16 Dec 2014)

• The Bucharest Guidelines for Co-operation between China and the CEE Countries (26 Nov 2013)

Source: Hong Kong Trade Development Council

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Exhibit 7. Key OBOR Provinces in China

Source: Enright, Scott & Associates

Exhibit 8. Founding Members of the Asian Infrastructure Investment Bank

Australia Italy PolandAustria Jordan PortugalAzerbaijan Kazakhstan QatarBangladesh Kuwait Republic of KoreaBrazil Kyrgyzstan RussiaBrunei Lao Saudi ArabiaCambodia Luxembourg SingaporeChina Malaysia South AfricaDenmark Maldives SpainEgypt Malta Sri LankaFinland Mongolia SwedenFrance Myanmar SwitzerlandGeorgia Nepal TajikistanGermany Netherlands ThailandIceland New Zealand TurkeyIndia Norway UAEIndonesia Oman United KingdomIran Pakistan UzbekistanIsrael Philippines Vietnam

Source: AIIB

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Exhibit 9. NASA Satellite Image of the Earth at Night

Source: NASA

Enright, Scott & Associates LimitedSuite 1102, 11/FKai Tak Commercial Building317-319 Des Voeux Road CentralSheung Wan, Hong KongPhone: +852-3101-8650Fax: +852-3103-9635Email: mail@enrightscott.com

Prepared for Tekes by

Tekes – the Finnish Funding Agency for InnovationKyllikinportti 2, Länsi-PasilaP.O.Box 69FI-00101 HelsinkiTel. +358 2950 55000www.tekes.fi/en