At the summit in Germany in late June, the heads of government of G7 countries announced the launch of a USD600 billion infrastructure programme – now called the Partnership for Global Infrastructure (PGII) – to boost investment in developing countries. Although this is undoubtedly a positive signal, its framing as a ‘competing offer’ to China’s Belt and Road Initiative (BRI) highlights the misunderstanding which – nearly a decade after its inception in 2013 – still plagues Western governments’ thinking about China’s engagement with third countries. 

According to the White House communique, PGII aims to mobilise USD600 billion in infrastructure investment from G7 countries by 2027, including USD200 billion from the United States alone. The programme wants to “deliver quality, sustainable infrastructure that makes a difference in people’s lives around the world, strengthens and diversifies our supply chains, creates new opportunities for American workers and businesses, and advances our national security.” 

Beijing’s reaction was rather positive. As Zhao Lijian, the spokesperson of the Chinese Ministry of Foreign Affairs, noted at a press conference, “China always welcomes initiatives that promote global infrastructure.” Zhao, of course, pointed out that PGII and BRI can be complementary and should not exclude each other based on geopolitical considerations. 

China’s response should come as no surprise to those familiar with BRI projects and developments. What’s more, a proper analysis of the strengths and shortcomings of China’s experience in overseas infrastructure projects is essential if PGII is to become a successful tool to help developing countries and Western businesses operating in them.

Understanding the drivers of BRI 

Ever since Chinese President Xi Jinping presented his idea of the ‘One Road, One Belt’ initiative at a speech in Kazakhstan in 2013, the BRI has captured the imaginations of foreign analysts. While some were fascinated by the idea of a modern ‘Silk Road,’ others saw it as a master plan for Chinese world domination. 

Seasoned China watchers were more cautious, pointing out that the new BRI label (or OBOR as it was first called) was indiscriminately attached to nearly all Chinese outbound investment and aid projects, no matter how far in advance they preceded Xi’s speech. There are, however, several factors which have pushed BRI beyond China’s traditional ‘foreign aid’ policies: 

• Overcapacity: The large stimulus following the financial crisis in 2008 created a massive surplus capacity in infrastructure and related sectors. Outbound investment and foreign construction projects thus offered an outlet for these industries.
• Commodities: China’s economic rise increased the dependency on foreign raw materials, triggering a frenzy of Chinese investments in oil fields and mines around the world.
• Regional Development: One of the major reasons for the ‘ New Silk Road’ plan was to improve the connectivity between China’s poor inland provinces to major export markets in Europe, especially via rail.
• Global ambitions: with growing affluence came growing ambitions. Using outbound investment to shore up support for China’s clout in the UN and other international bodies. 

Given that domestic overcapacity was a key driver of BRI, it is of little surprise that most BRI projects were in these sectors. According to a 2019 report by the data provider Refinitiv, the vast majority of Chinese investment — some USD500 billion — went into transport (road and rail), power plants and real estate, accounting for a staggering 85% of the total. 

But even within these three categories, there are variations. As a report on Chinese overseas port investment by the Grandview Institution – a Chinese think tank – noted, there is a vast gap between China’s port presence in Djibouti – a purely military project – and Chinese investment in ports in Piraeus or Darwin, which are purely commercial. According to Refinitiv data, only 63% of surveyed BRI projects were financed directly by the Chinese government, with 31% managed by private entities and another 5% run by public listed companies.

BRI projects by industry (left); BRI projects by main source of financing (right). Source: Refinitiv

The debt-trap myth 

Despite the large variety of BRI projects, most of the West’s thinking about BRI is still shaped by the perception of Chinese financial aid as some sort of debt trap. The idea goes back to a polemical essay by Indian professor Brahma Chellaney for whom Chinese investment – especially in Sri Lanka – was nothing short of a hideous masterplan for world domination. Despite experts such as Deborah Bräutigam of Johns Hopkins University and Lee Jones and Shahar Hameiri of Chatham House thoroughly debunking the ‘debt trap diplomacy’ myth, it seems that Western politicians were eager to embrace the framing to suit their own political agendas. 

Yet this misunderstanding by Western governments not only ignores the agency of recipient countries, but it also increases the risk for PGII to make the same painful mistakes of some of the more controversial BRI projects. As Jones and Hameiri pointed out in their lengthy report on the initiative, most loans aren’t imposed by Chinese investors on hapless developing countries, but are, instead, defined by these countries themselves.

This is, for example, the case with the controversial Hambantota Port in Sri Lanka, which was an idea of the now ousted Premier Mahinda Rajapaksa. That such a hands-off approach by Chinese investors can lead to massive misallocation and corruption, is something that the Chinese government itself had to find out the hard way. 

However, relying on local authorities to define investment priorities can also be beneficial. As a Carnegie report on BRI investment in Argentina shows, Chinese investment can, indeed, play a crucial role in helping third countries meet their own development goals. 

In deciding on projects, Chinese investors have long sought help from outside consultants and have also teamed up with Western institutions to improve the quality and risk management of BRI activities. For example, China collaborates with the European Bank for Reconstruction and Development (EBRD) to support green development projects in Central Asia. China has also signed so-called third-party market cooperation agreements — including with France, the Netherlands, Belgium, Spain, Austria, Japan, Singapore and Australia — to allow for foreign participation in BRI projects and to ensure that projects meet international standards. 

What can PGII contribute? 

So, given that China is already collaborating with external investors and stakeholders to make BRI projects greener and more sustainable, what exactly can PGII contribute? Pradumna B. Rana of Nanyang University, Singapore, thinks that Western infrastructure programmes can help in three particular areas:

• ‘Soft’ vs ‘hard’ infrastructure: with Chinese investment often focusing on bricks-and-mortar infrastructure projects, Western investors could concentrate more on ‘soft’ infrastructure, such as education, healthcare and gender equality projects.
• Private capital: attracting private capital has been notoriously difficult for BRI investments. PGII could alleviate this shortcoming and help ‘crowd in’ funds from private businesses
• Resource additionality: According to UN estimates, countries would have to invest USD2.6 trillion (£2.3 trillion) annually until 2030 to meet the United Nations’ Sustainable Development Goals. So, additional investment from developed countries could complement, rather replace Chinese funding.

BRI, PGII and the Global Infrastructure Gap (BRI value as of 2021, PGII value as stated by the US government)
Source: White House; World Bank

Japan’s own attempt at setting up a BRI alternative – the Quality Infrastructure Investment (QII) initiative – offers another important lesson on how PGII and BRI could create synergy rather than geopolitical friction. Initially set up within Japan’s strategic framework of the Free and Open IndoPacific (FIOP) and to promote sustainable and high-quality infrastructure investment, Japanese investors ended up cooperating rather than competing with China’s own BRI projects. As Alisher Umirdinov of Nagoya University points out, the high investment amounts required for large-scale infrastructure projects combined with the risk management imperative of diversifying funding sources made it ultimately more reasonable for both countries to pool resources and know-how rather than launching separate construction projects. 

The CBBC View

It seems that the current framing of the G7’s Partnership for Global Infrastructure (PGII) might be based on a misunderstanding of China’s BRI and ignores the participation of many Western (and Japanese) development agencies in its projects. 

What’s more, a PGII driven by geopolitical rather than practical considerations would expose investment decisions to the same risks as some of the more controversial BRI projects (e.g. those in Sri Lanka and Venezuela), namely the funding of economically unviable projects supported by ‘friendly’ but politically unstable governments.

Instead, the convergence of due diligence requirements for Chinese and Western investors increases the likelihood that PGII might follow the tracks of Japan’s own BRI competitor, QII. This would mean an increase in collaboration, more diverse funding, and higher standards for international infrastructure projects – a result that’s not only more optimistic but also more realistic.

Call +44 (0)20 7802 2000 or email enquiries@cbbc.org now to find out how CBBC’s market research services can help you build knowledge and understanding of the Chinese market prior to investment.

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A global contest is brewing. China, the US, and the EU are all vying for influence along routes that Beijing first turned its attention to in 2013 when President Xi announced his Belt and Road Initiative (BRI), that would bring the ancient Silk Road into the present day. It hasn’t always been this way. In the years preceding the outbreak of Covid-19, cooperation was the name of the game when it came to the BRI. In 2019, while attending the BRI Forum in Beijing, Britain’s then Chancellor of the Exchequer, Phillip Hammond, came close to signing a Memorandum of Understanding that would have given Beijing Britain’s backing. Fast forward to the present day, and the US is spearheading the creation of the Build Back Better World (B3W) initiative within the G7, while the EU has unveiled plans to launch a “Global Gateway” scheme.

So how does Britain fit in? And why is a country that once called the BRI “an extraordinarily ambitious vision” now debating whether it would be better throwing its lot in with Brussels and Washington?

Background

The BRI, also known as One Belt, One Road (OBOR), is one of the main load-bearing pillars of the Xi administration’s foreign policy. A diverse portfolio of overseas investment and construction projects rolled into a new, China-led model for interactions between countries, combined with a channel through which to transfer Chinese overcapacity, the BRI certainly is, as Phillip Hammond once noted, “a project of truly epic ambition.”

Stretching from China into Europe and traversing the continents of Central Asia, Africa, and the Arctic, China uses the investments its state-owned banks and companies makes along the route of the BRI to deepen its access and influence on the world stage, particularly in the Global South. Chinese banks and corporations have made over $2 trillion in foreign direct investments since 2005. The Trump administration worked hard to brand these investments as part of a “predatory lending programme” or a “debt trap,” but this claim has been widely refuted.

The prevailing view among scholars studying the BRI and how it fits into China’s new globalism is that there is no such “debt trap,” nor is China doing anything untoward to exploit the countries once its firms have invested. Research shows that China has never actually seized an asset from any country owing funds and that Chinese banks are willing to restructure the terms of existing loans. As such, the prevailing motivation behind the West’s increasing desire to provide an alternative is to halt the spread of the ‘China option.’

If that is the case, then the clock is ticking, and China has a clear first-mover advantage. Chinese companies have become more professional in their dealings overseas. Meanwhile, the governments of the countries within which Chinese entities focus their investments seem to find the alternative financial and legal institutions that are being set up in parallel to the Bretton Woods system, to handle BRI disputes, to be very appealing. Distinguishable by their informality, ad hoc design, and preference for soft law over systematic formal rules, whether China plans to align its terms and conditions with international (read: Americanised) best practices remains unclear.

What are the Western alternatives to the BRI?

It might be too little too late to halt China’s emergence in the Global South. It could be that there is just too much Chinese capital flowing through these emergent economies already, rendering the West’s efforts to dissuade BRI countries from subscribing to China’s offer of an “Asian model” of economic development a futile endeavour.

That said, the US-led, G7 B3W initiative plans to narrow the “$40 trillion in infrastructure investment that developing countries will need by 2035”; $2 trillion has already been committed by the US, with other G7 members currently considering their contributions. Compared to the infrastructure focus of the BRI, the B3W initiative targets areas such as climate health, digital technology, gender equity, and health security, and is heavily private sector-led.

Brussels, meanwhile, has announced the Global Gateway (GG), a spending plan that will see $300 billion directed at countering China’s economic influence, predominantly across the African continent. Like B3W, GG is private sector-led and the text of the initiative specifies that it is about “rule of law, human rights, and international values.”

Where does the UK fit in?

The UK is a member of the G7, so presumably will transition its tacit support for the BRI to the US-led initiative, B3W. Foreign Secretary Elizabeth Truss has already indicated that she plans to align her department with the initiative’s objectives. What this means for UK-China relations depends on how closely the Johnson cabinet seeks to align its departments with their counterparts in the Biden administration. Were the UK government to pursue a policy of exclusive alignment with B3W, that could create complications with China because the Department for International Trade and the National Development & Reform Commission still have a Memorandum of Understanding in place from the 2019 Economic & Financial Dialogue focussed on third market cooperation (Read: BRI).

While the British government has kept its cards close to its chest concerning B3W – which remains scant on detail – and has not revealed its formal intentions vis-à-vis aligning with America’s vision, the UK and China reportedly plan to hold an economic and financial dialogue (EFD) in 2022, which could put pressure on the Johnson government to choose sides. Given that the UK and China have successfully delivered on almost all the outcomes agreed at the previous meeting, it is hard to see a palatable diplomatic exit ramp – for want of a better expression – for DIT to use should it want to extricate itself from further UK-China collaboration along the BRI. Ms. Truss has been far more hawkish towards China, however, so it will be up to the Prime Minister to bring the Foreign, Commonwealth & Development Office into alignment with DIT on further cooperation with China along the route. DIT, rather than the FCDO, currently coordinates the bulk of UK cooperation with China relating to the BRI.

The CBBC View

The BRI could become awkward for Britain as it tries to juggle asserting itself as a prominent, global trading nation and being a determined defender of multilateralism and the rules-based order. British firms have done well through partnering with Chinese state-owned enterprises along the route, particularly in the built environment and financial and professional services sectors – as a result, the British and Chinese governments have managed to tick off all the policy outcomes relating to the BRI from the last EFD. The BRI differs substantially from the US and Europe’s new offerings; it does not share their values-based approach for a start. Underlying the initiative is the idea that China is just as capable as the US in global leadership and governance – could cooperation along the route become the next area where the UK comes under pressure from the US and China to choose a side?

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Geoffrey F. Gresh’s ‘To Rule Eurasia’s Waves: The New Great Power Competition at Sea’ (Yale University Press) is a sweeping study of the situation concerning the vital sea lanes running from Asia to North America, Europe and the UK. The book considers the rise of Russia, India and China as major shipping nations, transporting containerised goods crucial to our trade relationship, as well as the ways in which they have become increasingly involved in protecting those international sea lanes.

The need for Chinese exports to be delivered around the globe in a seamless logistical chain, as well as vital imports of energy into China to keep the economy humming, mean that Beijing is keen to see the country becoming dominant both in shipbuilding (as it now is) as well as fleet operation. These aspirations are encapsulated in China’s Maritime Silk Road, a series of policies that have ramifications for Britain, too. Gresh is professor of international relations at the National Defence University in Washington, and as such, the views expressed here are those of the interviewee alone and do not represent official policy or his employer.

Forty percent of China’s economy relies on trade and a dependency on energy imports. In the book you say that China will leverage its investment in the region’s ports for its own geo-strategic and geoeconomics interests – where will we see this play out in the coming years?

The 2017 establishment of a Chinese military base in Djibouti signalled just how important China viewed the Horn of Africa and the Middle East. Moreover, Djibouti serves multiple purposes for the Chinese: It is an important anchor on the far western edges of the Indian Ocean; it is an essential entryway into Africa’s largely untapped markets and China’s other critical investments; and it is an increasingly critical perch and catapult into the Red Sea, Mediterranean, and the broader Middle East. Certainly, Djibouti is just one connection among many that the Chinese are developing. Further to the north and east of Djibouti near the opening of the Strait of Hormuz and the Persian Gulf, for example, China is developing Gwadar in Pakistan. Gwadar’s development has experienced significant developmental and security obstacles of late, but Gwadar could one day offer another vital maritime logistics hub and potential base for easier access to the Gulf, as well as a starting point along the China-Pakistan Economic Corridor.

China’s investment in its domestic port facilities and infrastructure has been massive right along its coast. This was partly based on projections of around 5% per annum growth in containerized trade out of China. But with trade disputes, a decoupling from China in some areas and the traumatic shock of Covid-19, is it possible China has over-invested in the MSR?

At some level, I agree that we will see certain shifts in trading patterns between China and other countries, especially in a post-Covid world. But that said, at present, more than 90% of the world’s goods transit the sea, bringing into relief the continued importance of the stability and security of the global commons.

Due to Eurasia’s growing and developing population, India and China in particular will likely still need to reach outward in their hunt for more natural resources, for example, to fuel their growing economies. As a result, I believe that maritime trade will remain an important element in any country’s orientation, especially that of China, and that it will necessitate the continued need for more investment in projects such as the Maritime Silk Road. China has indeed experienced significant difficulties in the expansion and current management of its Belt and Road Initiative (BRI), but the development of a maritime trade and logistics network via the MSR is already well underway with certain proven successes across the sea lanes of southern Eurasia.

Can China successfully find a way to protect its shipping lanes without antagonising other regional nations and superpowers? And can China, as well as being the top shipbuilder, become the biggest fleet owner too?

One of the open criticisms of the MSR and BRI is that it lacks transparency, standard rules and procedures. Growing concerns persist that many of the port projects are meant as dual-use infrastructure projects that could be used easily by the PLA or PLAN in the future, especially with the accompanying multi-decade port leases. Beijing is aware of the criticism and that is why it is readapting and readjusting the public face of its global initiative.

During the April 2019 BRI summit hosted in Beijing for example, the government tried to convey the message that it was prepared to change some of its prior practices and policies that were often criticised internationally. In a statement, Xi Jinping declared that, “Everything should be done in a transparent way and we should have zero tolerance for corruption.” In addition to transparency, there needs to be more trust-building efforts between China and other countries. As to building the biggest shipping fleet, I believe that anything is possible. China was quickly able to surpass South Korea and Japan to become the world’s top ship builder.  I believe that it could similarly be headed toward developing one of the world’s largest shipping fleets.

China was quickly able to surpass South Korea and Japan to become the world’s top ship builder.  I believe that it could similarly be headed toward developing one of the world’s largest shipping fleets.

Overseas port infrastructure projects and leases provide access that, some say, could also provide long range bases for China’s newly enhanced Blue Water Navy. The Chinese claim they are enhancing transparency – what indicators would you look for to reassure us this is happening?

I won’t repeat everything that I just argued in the prior question, but would add that transparency is indeed going to be a real hurdle moving forward. Better transparency, rules and standards will go a long way to attract other businesses and countries to join forces with the PRC and its Belt and Road Initiative projects. And more multilateral cooperation will help to ease certain tensions with some countries, especially a host nation that has willingly accepted BRI money for project development. But until many of the loopholes in many of the current standard BRI operating procedures are fixed and greater transparency is infused into China’s MSR and BRI investment apparatus, China will continue to face many challenges, including risky financial loans and investments, and the bad publicity that has come with it on certain projects. China’s recent BRI summit was a step in the right direction toward promoting higher standards and “fiscal sustainability” but it still has a long way to go to overcome mistrust that has festered in some host nations where projects have either been placed on hold or cancelled altogether due to a variety of factors.

You argue the United States (and presumably its allies) should try and match China’s level of economic development funding. Where should we be targeting such funding and how to do this to genuinely benefit nations and not simply end up in competition with China?

The US Agency for International Development and State Department funding levels have struggled in recent years. Time and again, analysts and officials lament the declining power of the US State Department and its influence on operations abroad. US aid is a critical instrument of statecraft and needs to be replenished to serve the needs and interests of the United States and its allies abroad. For the 2018 fiscal year for example, a 29% cut was proposed for the State Department’s budget worth an estimated US$16.2 billion. Though the US Congress has fought back to restore much of the cuts, it still sent a resounding message on the importance of the State Department during the former administration. The current Biden administration is trying to rectify what was lost under the prior administration, but they are already in a deep hole. That said, I think a focus on the Indo-Pacific, as big as it is, will be an important focal point moving forward. Moreover, I believe there is a lot that European, Australian, Japanese, Indian, and other partners and allies can contribute to aid and development initiatives across the region as well.

The UK obviously has a long trading relationship with China and many will argue we have a crucial role to play in a joint ‘Blue Economy’ of both seaborne logistics and maintaining open and safe sea lanes. It is also possible that UK ports could participate in more formal MSR projects. What advice would you have for UK companies and policy makers?

I think a lot boils down to your prior questions: Trust and transparency. I agree that there is such great potential for investing in the Blue Economy. The World Ocean has much to provide and share with all countries. It should be leveraged in a meaningful and sustainable way.  If agreements or joint ventures with Chinese and UK firms can be struck where you have open and transparent agreements, I think it would go a long way toward ensuring greater trust-building. The global commons and the maritime trade and logistics networks are vast and bountiful. There should be a way toward common investments that are of much benefit to all.  That said, there is still much more that China must do to reassure countries of its intentions vis-à-vis its geo-economic investments.

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Last year, China signed the United Nations Convention on International Settlement Agreements Resulting from Mediation, known as the Singapore Mediation Convention. This was a momentous event in the development of the cross-border dispute resolution industry and provides China with an opportunity to develop a dispute resolution mechanism that addresses its international strategic commercial needs better than existing adjudicative forms, such as litigation and arbitration. These needs could propel China to become a primary service provider for the resolution of international commercial disputes by way of mediation – provided that China, through judicious capacity building – can fully professionalise its commercial mediation services institutions.

The United Nations Commission on International Trade Law approved the Singapore Mediation Convention (SMC) in 2018 with the UN General Assembly adopting it shortly afterwards. By the summer of 2019, 46 nations signed on to the SMC including China, India and the US. Although the UK, the EU and Japan have yet to sign on, it has broad support and further signatories are expected.

These needs could propel China to become a primary service provider for the resolution of international commercial disputes

China, for its part, has a long history of mediation. Mediation traditionally was limited to family, civil and property disputes. This preference is reflected in the Peoples’ Mediation Law of 2010, which describes mediation as a form of semi-official, non-professional neighbourhood and community mediation. In the context of a Confucian society, mediation tended to be practised with the help of elders as conciliators, whose practice of mediation was highly evaluative or didactic. Commercial mediation was practised for a long time by judges who, partly in response to high caseloads, would switch roles from judge to mediator in order to accelerate the resolution of cases.

Make sure you’re up to date on laws post virus return to business

In contemporary China, the birth of modern commercial mediation can be traced to the years immediately preceding the 2012 amendment to the Civil Procedural Law. Article 122 states that in any civil case, unless the parties refuse, an attempt must be made to come to a mediated settlement.

In the years prior to the 2012 amendment, pilot programmes had been initiated in the court system and commercial mediation rules were subsequently issued in the insurance, securities, construction, e-commerce, medical and other industries. Industry based mediation centres, as well as comprehensive commercial mediation centres such as the Shanghai Commercial Mediation Center (SCMC), (established in August 2011) were formed.

The SCMC is a Shanghai registered NGO with its own panel of mediators and is a project unit with a key role under the Diversified Dispute Resolution Mechanism Reform led by the Judicial Reform Office of the PRC Supreme People’s Court. It has formed relationships with bodies throughout the world, including entering into a strategic cooperative relationship with US-based JAMS ADR, which has contributed to the elevation of the capabilities of SCMC’s mediators and professional staff through training. The pace of integrative collaboration accelerated with the formation of a joint panel of mediators in 2018.

Mediation is cheaper, simpler, and quicker than litigation or arbitration [and] the SMC can facilitate the Belt and Road Initiative

The PRC government has been generally supportive of the SMC and contributed through its participation in the drafting of the SMC text. However, the United Nations General Assembly resolution to adopt the SMC triggered a heated debate between various authoritative bodies in China as to whether China should accede to the SMC at all. These debates centred around China’s lack of a national law on commercial mediation that sets out general standards that address mediator qualification and confidentiality; the need to amend the Civil Procedure Law to address issues such as the SMC’s by-passing of the recognition procedure mandated by the Civil Procedure Law; and the inconsistency arising from the PRC requirement to confirm settlement agreements judicially for such agreements to become enforceable.

For the PRC, the advantages of signing the SMC are clear. First, the SMC provides a process for the direct enforcement, through local courts, of cross-border settlement agreements between two parties resulting from mediation, as long as the state, where enforcement is sought, is a member. Second, mediation is cheaper, simpler, and quicker than litigation or arbitration. Third, the SMC can facilitate the Belt and Road Initiative (BRI), President Xi Jinping’s program to link China’s economy with those throughout the global South through trade and investment.

Will China’s BRI will help it become a superpower?

Mediation is unfettered by PRC arbitration’s structural and procedural limitations. Mediation does not involve any governing law, or procedural law of the arbitration seat or risks derived from any compromised independence of those delivering awards, as the credibility of mediators hinges merely on their ability as solution facilitators. Further, mediation is a flexible enough device not to be hampered by cultural and legal system differences – a key issue that has the potential to severely hamper the increase of investment, particularly in the private sphere, along the BRI.

However, the SMC presents China with significant challenges. First, there are inconsistencies between the SMC and domestic PRC law. As mentioned, there is not yet any national law in the PRC that recognises and harmonises standards in respect to commercial mediation. Second, most commercial mediation in China is either conducted by the courts or by commercial mediation centres by way of referral from the courts. There are still not many truly private sector commercial mediations that arise independently of the court system. Third, it has been difficult, to date, to convince the majority of legal professionals in China that their interests and those of their clients would be well served by using commercial mediation in advance of resorting to arbitration or litigation.

Through educating the market and the creation of a body of professional international mediators and mediation centres of international repute, China can become an international commercial mediation centre.

Non-Chinese parties are reluctant to sign on to using commercial arbitration or litigation in China. But international commercial mediation in China – now that it has overcome, by virtue of the SMC, its most obvious disadvantage compared to arbitration (ie enforceability) – has the opportunity over time to exceed the utility rates of arbitration for international disputes.

Through educating the market and the creation of a body of professional international mediators and mediation centres of international repute, China can become an international commercial mediation centre. Given the natural conservatism of Chinese state-owned enterprises, over the short term, the greatest opportunity for growth would be to tap into the market for disputes of small and medium-sized enterprises (SMEs).

The cost, time, complexity and inconvenience of arbitration has, to date, discouraged SMEs from resorting to arbitration to resolve their cross-border disputes. We expect that the absence of such impediments in cross-border mediation, with ample market exposure, will lead to a progressive increase in usage which, in due course, will place international mediation at the very centre of BRI dispute resolution strategy.

Peter H. Corne is the Managing Partner of Dorsey & Whitney’s Shanghai Office, NYU Global Adjunct Professor of Law, and Mediator of the Shanghai Commercial Mediation Center. Matthew S. Erie is an Associate Professor of Modern Chinese Studies and Associate of the Centre for Socio-Legal Studies of the University of Oxford, and Principal Investigator of the “China, Law and Development” research project, funded by the European Research Council.  

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The circular included eight pilot tasks and 122 measures to promote innovation in the service industry, and 16 measures to remove bureaucratic hurdles for new market entrants. Most importantly, it also included 26 measures to facilitate the entry of foreign service providers.

The sectors that have been prioritised in this new round of reforms are:

• Transportation
• Tourism
• Education
• Land Planning
• Industrial Design
• Healthcare
• Finance and Insurance
• Business Services

The document singles out four areas in particular: financial and insurance services, RMB internationalisation, Belt-and-Road-Initiative, and Intellectual Property Protection

Financial and Professional Services

The opening up of the financial sector is a major objective of China’s new service sector reforms. In further improving access and cross-border trade in this area, the reform aims to promote cross-border payment solutions, allow the mutual recognition of professional qualifications, improve market access for overseas professionals to the Chinese market, and promote international cooperation.

Initial reform will be rolled out in pilot areas such as the Greater Bay Area and the Yangtze River Delta. Initially, banking and insurance companies from Hong Kong and Macao will be granted priority treatment but other international firms will probably benefit as well.

Finally, the reforms also want to let foreign private equity funds get more opportunities to participate in the funding of new technology companies.

RMB financing

The second area of reform concerns the international use of China’s currency, the Renminbi. The Chinese government wants to reduce the economy’s dependency on the dollar and therefore supports the establishment of a RMB cross-border trade financing and refinancing service system.

The new digital RMB pilot projects will play a crucial role in this reform and the circular designates the Beijing-Tianjin-Hebei region as the pilot area to promote the use of new digital currency and financing, and cross-border payment transactions.

Belt and Road Initiative

Although initially focused on infrastructure projects, China’s ambitious Belt and Road Initiative will now also include projects that deepen the cooperation in the international trade in services.

For that purpose, pilot areas will set up so-called ‘Belt and Road’ legal service centres and commercial arbitration centres, and promote cross-border trade in finance, insurance, intellectual property, e-commerce, and transportation.

Intellectual Property

Intellectual Property protection has long been a top priority for Chinese policy makers, not least to safeguard China’s own increasingly advanced technology sector. To improve the protection of innovative patents, Chinese brands, and copyrights, China wants to establish a systematic, institutionalised, and comprehensive policy system.

In particular, China wants to expand the use of a digital copyright verification and the use of its social credit system, which, among other things, records IP infringement and aims to improve the compliance of both domestic and international producers.

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The Myth of Chinese Capitalism, by Dexter Roberts

St. Martin’s Press, March 2020

Roberts’ fascinating book paints the picture of a deeply imbalanced society, which is sometimes overlooked by foreign investors attracted by the huge appeal of half a billion middle-class consumers.

Through this detailed report, journalist Dexter Roberts shows how foreign investors often chose to ignore ordinary workers. Far from buying organic food, fast cars and fancy apartments, the lower social classes constitute around 60% of the population and earn an average of between £2 and £10 per day.

In ‘The Myth of Chinese Capitalism,’ Roberts vents their grievances. He follows the lives and hopes of workers and small entrepreneurs in poverty-stricken regions of Guizhou, and in the manufacturing heart of Guangdong Province: Dongguan.

China’s local administrative system (known as the hukou system) prohibits many workers from relocating freely within the country, and hinders social mobility, perpetuating inequality and raising workers’ dissatisfaction. Without social mobility, Roberts argues, the economic growth of the whole country is at risk.

This well-researched volume brings to life the problems migrant workers face in China today. Roberts lucidly highlights a conflict-ridden system that poses a severe challenge to the country’s forthcoming growth.

Tech Titans of China, by Rebecca A. Fannin,

Nicholas Brealey Publishing, September 2019

China’s strong entrepreneurial culture has been key to the country’s technological development in the past two decades. Its competitive spirit and inexhaustible work ethic have transformed it from a land that used to play catch-up with the US, to a country that is leapfrogging the West. In ‘Tech Titans of China,’ pioneering journalist Rebecca Fanning provides the reasons why, as one of her sources tells her, “China is going to eat Silicon Valley’s lunch.”

Fanning focuses on key players and companies in sectors extending from the sharing economy and e-commerce, to AI and social media platforms. She spent several months interviewing China’s top tech gurus – the equivalent of Steve Jobs, Jeff Bezos and Bill Gates. The book is the result of a well-conducted exploration of China’s tech ecosystem, where the author waded through tech incubators, accelerators, workshops and networking events. Fanning’s argument is that China’s disruption of the US’s leadership role in tech should prompt companies and businessmen in the US to counter it, and fast.

A must-read to understand China’s technological advancement, the book provides fundamental context on how its tech sector reached supremacy, without forgetting to cast an eye on what comes next.

In ‘Tech Titans of China,’ pioneering journalist Rebecca Fanning provides the reasons why, as one of her sources tells her, “China is going to eat Silicon Valley’s lunch.”

High-Speed Empire: Chinese Expansion and the Future of Southeast Asia, by Will Doig

Columbia Global Reports, May 2018

Travelling through China only a decade ago required ingenuity and patience, but in little more than a decade, China has built an extensive network of incredibly comfortable and convenient high-speed trains. According to Doig, Beijing’s infrastructure ambitions have helped it overcome its frontiers. And following the push of economic agreements of the Belt and Road Initiative, those ambitions continue to grow with projects such as the Pan-Asia Railway from Kunming, in China’s southwest, which spans across Singapore, Laos, Thailand and Malaysia.

Just as countries around the world welcomed the Belt and Road Initiative with caution, Southeast Asian countries are facing a dilemma. Their leaders “both yearn for and fear” Chinese investments. The choice is between allowing “the heavy hand of China” in – through Chinese investments – or defending their sovereignty.

Most of the evidence Doig provides is anecdotal – stories from interviews and experiences on his travels to the countries affected by China’s Belt and Road ambitions. These include the border town of Boten in Laos, which resembles an Asian Las Vegas; the revived Bandar Malaysia project, which is a contentious property development in Kuala Lumpur; and Singapore’s Forest City, a group of islands aimed at Chinese expat buyers. A quick, interesting read to get a deeper grasp of China’s “railroad diplomacy.”

China, Trade and Power: Why The West’s Economic Engagement Has Failed, by Stewart Paterson

London Publishing Partnership, October 2018

In his book ‘China, Trade and Power, Why the West’s Economic Engagement has Failed,’ Stewart Paterson argues that Western countries need to further put pressure on China to open up and engage in authentic political reforms rather than the “indulgent engagement attitude” that liberal economies have displayed so far when it comes to China.

Paterson considers China’s entry to the World Trade Organisation as the key turning point. By granting access to the WTO, he argues, the West hoped to trigger a political change in China. Not only did that not occur, but unfettered access to global markets also enabled China to gain a further advantage whilst playing by the rules of the liberal market.

Paterson sometimes overstates his case but it can’t be denied that China’s growth following access to the WTO has rapidly influenced the political economy in the West and rewritten the geopolitics not just of China but of the world.

The Third Revolution by Elizabeth C. Economy

Oxford University Press, May 3, 2018

If Paterson identifies China’s accession to the WTO as a defining moment, Elizabeth Economy treats the ascent to power of Xi Jinping as the key to interpreting China’s modern history.

The author details the transformative impact of Xi Jinping’s policy in China and abroad. She describes the ambitious and expansive moves President Xi is adopting overseas and the decisive approach he is implementing within the country’s borders. Underlining these traits of Xi Jinping’s policy, Economy provides an informative explanation of what she calls the “Third Revolution”.

China’s current strategy is reversing the trend towards an economic opening and an acquiescent foreign policy that had been put in motion by Deng Xiaoping’s “Second Revolution” 30 years ago.

The book spots the tensions, successes and shortcomings of President Xi’s first five years in office, and provides suggestions to Western countries on how to navigate their relationship with China in the years to come.

Economy’s study of change in the field of international policy adds a fresh insight and nuance to the encompassing narrative of China’s political transformation. Essential reading to understand where China is going in terms of domestic and international policy.

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Facing the South China Sea, Qianhai doesn’t have much room for future expansion – unless further reclamation work is done. However for now, that suits local and national officials just fine: What Qianhai is set to accomplish in the coming years under the Greater Bay Area masterplan, is all about quality rather than quantity.

The area’s official name is the Qianhai-Shenzhen-Hong Kong Modern Service Industry Cooperation Zone. The name gives a hint of what it is all about: bringing Hong Kong and Shenzhen together, step by step. This gradual process foresees what will happen in 2047, when Hong Kong will officially join the People’s Republic of China.

Qianhai’s location is symbolic, too. It sits close to the Shenzhen Bay Bridge, which connects Hong Kong to the Shekou port, the area of Shenzhen where Reform and Opening began.

Today, the area is probably the most internationalised of any in China outside of Shanghai. For starters, its entertainment district looks much like Hong Kong’s clubbing district Lan Kwai Fong.

Situated ten minutes north of Shekou, around the artificially-constructed Qianhai Bay, the special zone has no barriers or fences. On this section of reclaimed land, construction crews and office workers alike work around the clock. Thanks to them, Shenzhen has come to define China’s frenetic pace of economic development like no other.

Master planners in Beijing founded Qianhai in 2009, under the framework of the province’s Pilot Free Trade Zone initiative, which includes Nansha in Guangzhou, and Hengqin in Zhuhai.

Qianhai is geographically strategic: it acts as a bridge to Hong Kong, and as a gateway for the Belt and Road Initiative. Other than its tactical position, it is a place for further economic and legal experimentation.

Authorities have devised four main goals for the area, which will serve as:

• An innovation area for modern service industry sectors
• A cluster area for the development of modern services
• A pilot area for close cooperation between the mainland and Hong Kong
• A leading area for industry upgrades in the Pearl River Delta (Greater Bay Area)

As a pilot area, it will serve as the centre for bold, innovative change. In Qianhai, new types of courts can be set up, for instance; it is a place where special incentives can be offered to investors, both corporates and individuals; a place where the challenging influences of Hong Kong can be welcomed in, contained if necessary, and adapted to China’s needs.

Although it is still largely a construction zone, Qianhai is already getting Hong Kongers through the door. Latest available data shows that a total of 8,031 Hong Kong companies have settled in the zone, which amounts to a registered capital of RMB893.726 billion. They include financial heavyweights HSBC, Bank of East Asia, and Credit Suisse.

Latest available data shows that a total of 8,031 Hong Kong companies have settled in the zone

Most of the early movers are in financial services and logistics. Altogether they contribute around 20 percent of the GDP generated in Qianhai, and pay around 23 percent of its tax revenues. However this is nothing compared to what’s in the pipeline. By the end of 2021, Qianhai aims to have a total population of 100,000 people, including 70,000 workers, plus 30,000 inhabitants.

What took so long?

By Shenzhen’s standards, Qianhai has been a slow starter. Between 2010, when reclamation work began, and the end of last year, only 182 buildings in the area had been topped-out, half of which were ready to be fitted out. With just 1.95 million square metres of usage space, it was a far cry from the 23.8 million square metres envisaged in the masterplan. Today, Qianhai is a long way from a “new Manhattan”.

Why has it taken so long to get going? Two reasons, it seems – one governed by market forces, the other by administrative forces.

The market forces at work in Qianhai provide a fascinating glimpse of the area’s potential. Unlike many other parts of Guangdong, most of Qianhai’s land was reclaimed by companies that have a longer track record of “just getting on” with development. In Guangzhou, on the contrary, the land is mainly state-owned.

Qianhai belongs to three of the most successful commercial groups in China: China International Marine Containers Group, China Merchants Group and Shenzhen International Holdings. These groups were born in the furnace of the country’s early days of Reform and Opening. It has taken the city government longer to negotiate development plans with these three than might have been expected elsewhere.

Until 2016, the government only had around a quarter of the land in Qianhai ready for development. The Guiwan and Qianwan districts went first, with 3 million square metres of the 14 million square metres total. By the end of 2017, the city government had signed off joint ventures with the big three companies, which allowed the rest of the district to get going. Now, a drive past the area reveals a hive of activity.

The land in Qianhai held by the three largest landlords

The second factor holding back Qianhai until recently was just an administrative snafu that needed time to fix. Due to restrictions on the height of buildings, companies could not get the developable floor space they needed to make a decent return on investment.

Once the 153-metre cap was raised to 280-350 metres in 2016, however, it was all systems go. Qianhai now has a total buildable area of 23.8 million square metres. With around one-third of this under construction, it will take another 13 to 15 years to complete the district’s development – which happens to be in line with the government’s target date for the Greater Bay Area, in 2035.

What comes next?

Qianhai isn’t currently the easiest place to get to from Hong Kong. To get there, you must either drive across the Shenzhen Bay Bridge with a Cross-Boundary license, or (if you can afford it), take a seven-seater limousine. But if you are living in Shenzhen, three subways connect to the area. The ferry service running into Shekou is convenient, but not as timely as busy Hong Kong investors and executives would like. That will also change fairly soon.

The planned road network for Qianhai

Currently, the high-speed railway only passes through Futian, which is a 40-minute taxi ride away from Qianhai. But in a few years, Qianhai will have no fewer than 15 railway lines running through it. In addition to Shenzhen metro lines, these will include intercity railway lines going up the coast to Dongguan and eastwards to Huizhou. In addition, the city will be equipped with high-speed railway lines direct from Kowloon West in Hong Kong.

The Qianhai transportation hub is located in Guiwan, in the middle section of Qianhai’s crescent bay. It will soon offer airport check-in services and have an immigration control station. It plans to complete the underground section by next year. Upon full completion, the hub is expected to have a daily passenger flow of 750,000. This number doubles the current number of crossings between Macau and Zhuhai at peak periods.

Where are the opportunities?

The early construction of Qianhai has been concentrated in Quiwan, Mawan and Qianwan. Among the 40 development projects, Quiwan has 24, Mawan 8 and Qianwan 9.

The projects in Quiwan started the earliest. About two-thirds of the land in Quiwan already has projects currently under construction. The 1.1 square kilometre Quiwan financial district has been made the priority.

Quiwan has a total of 8.84 million square meter building area – about half of that will be completed and be in operation within the next three years.

The innovation hub

Another incubator in the city drawing media attention is the Qianhai Shenzhen-Hong Kong Youth Entrepreneur and Innovation Hub. What makes it different is the focus on cooperation with Hong Kong entrepreneurs.

Located in the pilot district for cooperation between mainland China and Hong Kong, the incubator was established in 2014 by the Qianhai Authority. The largest youth associations in Shenzhen and Hong Kong – the Hong Kong Federation of Youth Groups and Shenzhen Youth Federation – are jointly responsible for its operation.

“By providing discounted office space, financial support and startup training, it is designed to attract entrepreneurs aged 18 to 45, with a large proportion from Hong Kong. Up to the middle of last year, it had served 388 startups, of which 190 are from Hong Kong and Macau,” says Wang Yanxia, deputy director of Qianhai Authority. The project is now expanding to a second phase, with 19,000 sqm of floor area added to the original hub, which is expected to open by the end of this year, Wenweipo reported.

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Explain your role with AIIB

The AIIB is a multilateral development bank, which means it is like the World Bank or the European Investment Bank. It is set up by countries and the capital comes from its members. We are a relatively new institution, set up in January 2016, the first instance of a multilateral development bank set up in Beijing.

I have been involved on two levels; when I was a minister it was George Osborne (the then Chancellor of the Exchequer) and myself who were the main proponents of Britain joining the AIIB. When we were running it, it was led by the Treasury. We announced that decision in March 2015 and it was probably the last major decision that the coalition government took before the 2015 UK election. I then started working here in February 2016, just a month after the bank had started. I was the first of the vice-presidents to take up a position.

My job is to ensure the good governance of the bank. I am responsible for the relations that we have with our shareholders, which are the member countries. We started with 57 countries, but now are up to 97, an increase of 80 percent.

So I am responsible for how we deal with and work with our members, including our relations with China, bringing in new members to the bank and making sure we take decisions in the right way. I also do a lot of external representation, speaking and so on.

With so many countries, that clearly involves a lot of travel

A lot of the time I am not here. When in Beijing I spend a lot of time working on the board meetings and on overall strategy, media interviews, meetings with government officials.

One of our principles is to be a lean institution; we talk about lean, clean and green as being the core values so that means we our only office is here in Beijing. Part of ensuring we keep in close contact with members is going places; this year I have spent quite a lot of time in Europe, and we are trying to use the fact that we have our annual meeting in Luxembourg in July as an opportunity to report back to our European members and particularly to get European business more actively engaged. Now that we are building up the business there is more activity and more projects and a lot of opportunities for business in the UK and elsewhere in Europe to get involved in the projects we are financing.

We talk about lean, clean and green as being the core values

Are you getting there with the awareness? Is there more resonance internationally for the AIIB?

I think there is more interest internationally. If you go back to 2015 when we were trying to decide whether or not to join, there were quite a lot of concerns about what this AIIB was going to be, especially from the US. They said: is this being set up to undercut the World Bank? Is it going to undermine international standards? Will it be dominated by China? I think four years on, I can tell you that all of those arguments have been conclusively disproved by the way the bank is run. We work to the highest international standards, have very good governance within the bank and our projects are done in a very similar way to other international institutions. We have built close partnerships with the World Bank, with the Asian Development  Bank and others. So now today we have committed US$8 billion of finance, and are supporting 40 projects in 16 different countries. That is on a very strong upward curve, people can see that it is working.

Can you give some concrete examples of the larger projects, the impact they will have on peoples’ lives and how you institute and oversee them?

The first thing to say is the procedure we go through. When you come to us, if you are a member government or a private sector institution and ask for finance we take a look to see if your aims are broadly in line with our goals; if so, we then do a much more detailed assessment. We want to make sure projects have strong economic benefits, we don’t want to be financing any white elephants. We want to make sure that they’re financially sound, that they are bankable and that the country can afford them. We have safeguards for both environmental impact and social impact for when people have to be relocated, and we demand open procurement on an international level playing field where we have high standards of anti-corruption and so on.

To give a couple of examples, I was in Bangladesh last September. Among the things we went to see was one of the first projects we financed; a significant upgrade to the electricity transmission and distribution system in Dhaka and the surrounding area, where the effect of that project was to connect 2.5 million households to electricity that had not had it before. We went to a village and met some of the folks who had electricity. It meant that kids could study at night now because they had a lightbulb in their house, some had a fan which could cool them down in the heat of the day and some a refrigerator. We also saw that our project was helping to reduce the loss of electricity in the city. One of the things you can do to make electricity more sustainable is if you can reduce the losses. 40 per cent was being lost through weak systems, theft and so on, and they have got that down to 7 or 8 percent. From an environmental point of view that means you are making more use of the electricity you are generating. So it is making a big difference to peoples’ lives.

In the end that is the bottom line, why we focus on infrastructure. We focus on it because we know that, especially in developing countries, it makes a big impact on peoples’ lives. It creates economic growth and opportunities and today just as importantly, having the right kind of infrastructure is an important component of tackling climate change.

In Egypt we are one of the co-financiers of a massive solar power project in the Aswan areas, one of the largest solar projects in the world. It is increasing power generation in Egypt, helping sustainability and creating a lot of jobs in that area. And it’s also helping them in their ambition to become an energy hub for the region.

Team retreat in Qinhuangdao, Hebei Province 2019

Any more that you are particularly proud of, not necessarily large ones?

Around Beijing we have a project we have financed, a company called Beijing Gas. The purpose of the project is to supply gas to villages and factories around the city as part of the effort to reduce pollution. It means that the people living in those villages and working in those factories no longer have to burn coal. We know from living in Beijing the huge impact that pollution can have on health and lives and the attractiveness of the city as a place to live. That has been a very good project.

It must have been a massive change moving from Westminster to Beijing. What are the differences?

Well, people here are a lot politer than they are in parliament!

The nice thing about AIIB as we have grown up is that we have a very international staff and a very international culture. So today I think we have 230 full time professional staff from 44 different nationalities. Chinese staff make up about 25 percent and we have people from Korea, Pakistan, India, Australia, Britain, the United States and Japan.

One of the big challenges for an international institution is building the right kind of culture that blends the best of the different lifestyles and ways of thinking and makes the most of the diversity. What this means is that we have had to find ways for people to communicate openly. Diversity is a real asset if harnessed properly and I think we are starting to be able to do that here, certainly in our leadership team.

Our president Jin Liqun is an enormously impressive Chinese national and there are five vice presidents. For me that is absolutely fascinating, I had only ever lived and worked in the UK before, in British parliament and government. Of course, London is a very international city, but working in Beijing, which is a fascinating place to be, in an international environment is also very exciting. For me I have had a great chance to get to know China, to get to know India and other countries and that is a huge advantage.

You have travelled a fair bit in China

One of the nice things is coming here with family, we have been to some fascinating places on holiday. We have gone to Yunnan several times which is beautifully spectacular, we have been to Mongolia a couple of times, staying in yurts and on the plains horse riding and all that stuff. From a family point of view that is fascinating. The children learn Chinese at school – and they learn a lot faster than their father, that’s for sure. My elder daughter Issy’s Chinese is not bad and I have heard people say she speaks with a Beijing accent. She often corrects my pronunciation and tells me the right word.

I do think that to understand China you can’t just visit Beijing and Shanghai, you only get half the story by doing that. When you go to the more rural places like Yunnan or Sichuan you see a totally different face; places that are not as developed and where you can still see some of the history and different cultures within China. You need to see both sides if you want to do more than scratch the surface of this country.

Does that apply to people in business as well?

I would say do the business deal and, even if you are in Beijing, if you go a couple of hours in any direction you will see a different aspect of life to what you see in the city. I think it is important to do that. There is this great debate about whether China is a developed or developing country and the truth is that it is both.

We stay with friends at a place out by the Great Wall – and the village life out there is totally different to the city.

Where else have you been?

India, Singapore, Afghanistan, Russia, Oman, many places in Asia. The point is to spend time with members, engage with them and find out what they want from the bank. In the end the purpose of the AIIB is to support the member countries. In my previous life it was a weekly commute between London and Inverness which was enjoyable in its own way too.

The Belt and Road initiative has generated a lot of debate. Can you talk us through the AIIB’s involvement in Belt and Road projects? 

The first thing to say is, and I think it is important, is that the AIIB and Belt and Road are different. The AIIB is a multi-lateral institution set up according to law, an international treaty between the countries. It is, if you like, part of the rules-based international system, which is how the world works – or should work.

There are a lot of opportunities for business in the UK and elsewhere in Europe to get involved in the projects we are financing

The Belt and Road is an initiative of China in collaboration with lots of other partners, which has many different aspects. From our point of view, the aspect we are most interested in promotes connectivity and investment. For AIIB, when selecting our projects, we don’t look at labels like Belt and Road – we just look at the quality of the project. If you ask me how many Belt and Road projects we have done I have no idea, projects don’t come from any Chinese list, they come to us from member countries. Interestingly India, which is the second largest shareholder of AIIB, is the largest borrower from AIIB, and is not notably enthusiastic about the Belt and Road, is still very comfortable borrowing from AIIB because it is a multilateral institution which they have had a say in shaping and governing.

From my point of view, the big debate about Belt and Road is about the way projects are carried out and to what standards and how it is governed. We see a role for AIIB in the sense that we can and will only finance projects that are constructed and done according to the highest international standards, we won’t lower our standards for anyone. So if a multilateral development bank like us is involved it is a guarantee, for both the project and the citizens, that the project will be done in the right way. I think there is also increasingly an interest in how China operates; whether more of their investments can be carried out according to those standards. There is a role for AIIB in advocating and explaining what it really means to operate in that way. The more institutions who operate in that way the more potential partners we have, not just in China but among all our member countries.

There was a Belt and Road forum in May and it was striking in both the rhetoric, which is less important, and some of the substantive announcements, that these things were being taken seriously. There was a lot of talk about debt sustainability, and whether, by financing a project, debt problems are inadvertently being exasperated for countries that might already have a substantial amount of debt. That is something we evaluate carefully for every project we do. We work closely with the IMF on that. It was striking that China announced the debt sustainability framework for Belt and Road, which is pretty similar to how the IMF approach it. Over time, one hopes standards can be improved so the quality of the infrastructure that is financed in the end is better.

2018 AIIB New Year Reception

Any other thoughts on how the Belt and Road will impact the region and the world at large? 

The Belt and Road is a major initiative from China; it has many dimensions and covers a lot of aspects of how China wants to relate to neighbouring countries and the rest of the world. That includes everything from cultural connections to the harder end, the promotion of physical financial infrastructure connectivity in the region. I think the reason it is difficult to explain is that it is still evolving and covers so many different dimensions. The term Belt and Road is used pretty freely in China. If you are a business promoting a new project if you give it the Belt and Road label it doesn’t do any harm.

For a long time, China has operated under the principle of hiding their light and biding their time to paraphrase what Deng Xiaoping said at that time. Belt and Road is saying they want to get out and have more of an agenda in how they relate, in particular to neighbouring countries in Asia. Part of that is trade and economic connectivity.

When it comes to China-Britain trade, which areas are ripe for expansion?

As we know, the UK economy has many great strengths in financial services and education – universities and schools. British education has a global reputation which is well understood here in China. There is also the advanced manufacturing that goes on in the UK and pharmaceuticals; I think that in all these sectors there is a very good basis for the UK and China to deepen their relationships. As China opens up its financial services markets, which in some sectors still has a long way to go, there will be a lot of opportunities for British firms. I know that increasing their financial services connectivity is a priority for the British government.

How can businesses prepare themselves for that, what should they be doing?

I am not sure I am the best person to advise on that to be honest. The UK has some pretty good advisory services – genuinely I think the CBBC does a very good job, those kind of networks are important. There are major cultural differences between the UK and China so learning how to handle yourself in those sort of circumstances is important.

Having worked in China for three years, what do you think some of the main cultural misconceptions are?

If I reflect back on my time in the UK then I think the level of knowledge and information, not just about China but about Asia more generally, is nowhere near as high as it should be. If the UK wants to build relationships with these countries that will be important partners in the future, and ever more important globally, then it has to up its game in terms of the level of debate, the depth of the information that is shared, the amount of column inches devoted in British newspapers and so on. Really knowing what is going on in this part of the world is fundamentally important, yet the quality of the discussion is often poor.

As China opens up its financial services markets there will be a lot of opportunities for British firms

You find that the people you meet here are very welcoming. They’re open to talking about what they are doing and there is a lot of appetite for building those new connections. It’s not as if people will not be welcome in China. I think the connections we build among universities and students is also important, there are a lot of people coming to study in the UK and people get to know our way of life, our culture, how we do things, our values. In the long term that is very important.

I think it would be good to see more British students coming to study here in China as well.

It seems the ‘Britain is Great’ campaign was a real success

I was very much involved in that at the start, it started its life under what was the UK Trade and Investment department as a marketing campaign.  It would be good to see the UK creative industries have more of a presence here.

What will happen with Brexit?

I don’t think it is in my interest, or the bank’s interests, to get into Brexit speculation.

As a politician, you were very pro-European…

Yes, I was a Liberal Democrat politician for a long time and it is the most pro-European party. I voted to remain. I moved here before the referendum so I have watched it all from China.

I would have much preferred it if the UK had decided to remain in the EU. One of the arguments for Brexit was that it would create an opportunity for Britain to engage more with the rest of the world. I also passionately believe that the UK should engage more with the rest of the world. But I think the two can happen together. When I was in the government we made a real effort to deepen British ties with China, with India, and to open up new markets. That was from the perspective of a government committed to being in the EU. It seems still, even now, impossible to predict how this will eventually resolve itself.

I think there are a lot of opportunities for Britain in this part of the world. The Brexit debate absorbed so much attention from leaders and civil servants because it is the biggest change in Britain since the Second World War. Once the decision is finally made, and the terms are determined, it will take another decade for all the ramifications to work their way through. It is important to remember that, even though we must maintain enough capacity within our government and elsewhere to think about these challenges, the world is changing. Asia is growing and there are massive economic opportunities around the world; you need to make sure the system as a whole has the bandwidth to take those opportunities.

How will Brexit affect the AIIB?

I don’t think it affects us a great deal, the UK will remain a very important shareholder and member, it was the first major developed country to take part. The UK plays an important role in the bank. We just listed our inaugural dollar bond in May, we did an opening event at the London Stock Exchange.

From the bank’s point of view: not much will change.

Do you miss politics?

Of course I miss it in some ways. I was, for five years, near the top of the UK government, for ten years a Member of Parliament. For an MP, especially in a place like the Highlands of Scotland, you can make a huge difference. I used to hold surgeries where there were thousands and thousands of cases. Most of them tended to be things like people who were having trouble getting their benefits, or pensioners needing particular support or folks that would lobby you on a particular issue. Then there were the local whisky distilleries who would come and lobby on tax issues.

I was the member for Loch Ness, the Loch Ness Monster’s representative in parliament! I always felt that Loch Ness is one of these untapped resources, it is one of the best known UK landmarks around the world. Yet we don’t make as much of it as we should. When I was in government I was able to get Visit Britain more involved in promoting and marketing Loch Ness. Last year I was at the Beijing Scottish Ball and there was a little group from Visit Scotland that included a few businesses from Loch Ness. They came up to me and said that the programme I started has made a huge difference in terms of how Loch Ness is promoted and how the tourist facilities have developed.

I grew up on a small island; I left when I was eight and whilst we lived there, there was no mains electricity, just diesel generators. It was connected to the mains just before we left. When I tell friends in China that I grew up in the UK and where I lived did not have mains electricity they just don’t believe it.

On the subject of Scotland, you are a keen Scottish dancer and also a cricketer. Any success in introducing those pastimes to Beijing, or China in general?

Er, no success in evangelising with either of those! But there are opportunities to participate, which has been nice. There is a Beijing Scottish Society and they have an annual ball and a Burns night. There is chance to practise Scottish dancing. You do get a few looks when you are walking down a Beijing street dressed in the full kilt regalia, with the skiedo (ceremonial knife).

International organisations like this are making a huge difference to people in some of the poorest parts of the world

I have joined a cricket team called the Beijing Ducks. I am a left-arm bowler, these days medium pace. I played club cricket in Scotland and at university. Cricket in Scotland is developing although it is not a massive sport. There is a Beijing league, four or five teams, mainly expats, it is one of the nice things about living here in that there is an international life where you get to know people from other countries.

What about promoting Scotland’s most famous product?

I am not sure about promoting it but drinking it certainly. I think Chinese have a bit of a taste for whisky. There is a small distillery in my old constituency, they launched in Beijing and invited me along. I have been to a few of the whisky pairing dinners.

What do you miss most about Westminster?

The cut and thrust is an extraordinary experience and an important part of British life, the debates, the questions, the discussions in the tea rooms. The time I had in the Treasury and the coalition government was an extraordinary experience and I left with enormous respect for the civil servants and the people I worked with. Britain is very fortunate to have such a group of people.

The ability to bring your own ideas and values to bear in decisions that you make is an enormous privilege and not something you can replicate in any other walk of life.

Would you see yourself going back to politics in future?

I have recently extended my contract for three years, I was re-appointed, which was an honour and I was pleased to accept. Who knows what comes next? I don’t have any plans to go back into politics right now.

There are many, many ways to do good in this world, politics and government is one way but international organisations like this are making a huge difference to people in some of the poorest parts of the world. To be part of that, I feel very fortunate and being able to contribute in that way is in many ways as fulfilling as being able to do it domestically. I feel I am learning a lot about this part of the world and I am lucky to have that chance. If you are involved in setting up a new institution you want to see that set-up phase through. Always in my life I want to see the job through. To do things for the first time … it is brilliant.

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The eight judges who will lead two courts, established this year to solve disputes along the Belt and Road Initiative (BRI) have been announced. These eight judges are expected to have to deal with some significant geopolitical disputes as the BRI continues to expand.

The Supreme People’s Court in Beijing ruled that disputes arising from the BRI will be handled by two new China International Commercial Courts (CICC), previously known as the Belt and Road Courts. One, based in Shenzhen will deal with disputes along the maritime Belt, whilst the other, based in Xian, will deal with the overland Road.

Of the eight judges, all are Han Chinese, and are aged between 39 and 59 years old with two women among them. All appointees are Supreme People’s Court Judges, and all but one went to university in Beijing. Zhang Yongjia is the only judge who hasn’t studied overseas, with three of the judges having spent time studying in the UK.

Although there were considerations to make the courts sessions held in English (as they are in other international commercial courts in Dubai, Qatar, Abu Dhabi, Singapore, Amsterdam and Frankfurt), the CICC will be held in Chinese.

The number of disputes over the BRI is expected to rise over time. “Typically, we see a deal struck one year and, between two and five years later, that’s when we see disputes, so that’s when we start to see the cases come out of these transactions,” said Sarah Grimmer, secretary general of Hong Kong International Arbitration Centre (HKIAC).

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Building the Belt and Road Initiative

Throughout the world, mass globalisation has increased demand for logistical speed, paving the way for China’s trillion dollar Belt and Road Initiative (BRI), and the exciting new era that will herald.

Even before the BRI, China was investing heavily into its infrastructure though. Between 2001 and 2004, annual investment in rural roads grew by a massive 51 percent and with economic growth accelerating, logistics development remains a top priority for China’s government.

However, logistics costs are approximately twice as high in China as in Japan, Europe, and North America, driven in no small part by the country’s size and high road toll fees.

To complicate matters, there are currently no unified management regulations applicable to all modes of transportation in China. Unlike the US, Canada or other developed countries, China also has no specialised agencies established for coordinating and managing the transportation safety of dangerous goods under various modes of transportation, with each authority managing these processes separately according to their responsibilities.

The Chinese approach to business can be a significant challenge for companies unfamiliar with the territory, not only because it can be more bureaucratic in some areas, but also because they place great emphasis on relationships

Key to navigating such challenges is local knowledge of the supply chain at the planning stage. For example, factoring country road tolls into a budget plan ensures that transportation costs are accounted for, while third-party expertise is valuable in navigating case-specific challenges such as the transportation and storage of dangerous goods.

China’s economic growth and infrastructure development means there are ample opportunities for Western businesses to establish themselves in the Chinese market

China’s economic growth and infrastructure development means there are ample opportunities for Western businesses to establish themselves in the Chinese market, but businesses seeking to take the leap must also be prepared for the market’s unique challenges.

The Chinese approach to business can be a significant challenge for companies unfamiliar with the territory, not only because it can be more bureaucratic in some areas, but also because they place great emphasis on relationships and the need to engage with people upfront.

The Chinese market is heavily regulated, with different trading standards in different places, creating obstacles for international businesses more accustomed to operating under standardised accreditations such as ISO. Failure to comply with regional regulations can directly impact lead times and incur unanticipated costs, emphasising the heightened requirement for risk management when planning and implementing supply chains in China.

Setting up a supply chain in China is a complicated process but to be successful in China’s hyper-competitive market, the start up process is key. Where to store inventory? Should free trade or non-bonded zones be prioritised? How to communicate effectively and respectfully across regions with differing customs and regulations?

China’s shifting economy has created a whole range of opportunities for international business. Unipart has learnt that global companies making and selling products in China can gain huge advantages from reassessing their approach and understanding the importance of supply chain excellence; how it can introduce cost savings, create new revenue, and directly affect brand equity. Successful companies benefit from trusted and experienced partners who understand the challenges of operating in China.

For more information and case studies on Unipart’s approach to logistics, please visit their website.

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