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Oct 2017

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China's Belt & Road Initiative: Opportunities and risks for ASEAN

Source: Asia Insurance Review | Oct 2017

The Belt & Road (B&R) Initiative, a development strategy proposed by Chinese President Xi Jinping that focuses on connectivity and cooperation – with investments of billions in railway lines, pipelines, and ports, could provide a boost for international trade, and also for insurance. Dr Shen Yiming of Marsh explores.
 
 
The land-based “Silk Road Economic Belt” and the ocean-going “Maritime Silk Road” will affect 4.4 billion people with a collective GDP contribution of US$2 trillion. The Belt & Road initiative underlines China’s push to take a larger role in the global economy, and the desire to coordinate manufacturing capacity with other countries. 
 
   At the Belt and Road Forum (BRF) in Beijing on 14-15 May 2017, President Xi pledged to funnel an additional CNY100 billion (US$14.5 billion) into the Silk Road Fund, while the China Development Bank and the Export-Import Bank will set up new lending schemes of CNY250 billion (US$36.2 billion) and CNY130 billion (US$18.8 billion) respectively. 
 
   The most obvious winners from China’s new strategic move are banks, construction companies, infrastructure investors, consultants, professional services firms, equity fund managers, and exporters.
 
   Asian companies will get more opportunities as the Chinese government, banks, and enterprises invest in B&R countries, especially for infrastructure projects. Based on the Center for China and Globalization (CCG) survey, most Chinese companies venturing into overseas markets prefer to partner with local enterprises in the host countries. By doing so, Chinese companies gain access to employees with suitable skill sets, assistance around cultural differences, and partners who are familiar with local regulations and policies.
 
Opportunities for ASEAN
The Chinese government places a strong emphasis on directing the Maritime Silk Road towards the Association of South East Asian Nations (ASEAN). Even though ASEAN is rich in resources, it lacks construction funds to develop its infrastructure and lags in levels of industrial development. Hence, strengthening infrastructure in ASEAN countries would allow these resources to be tapped into. 
 
   B&R strives to promote Chinese capital and technological investment into these ports, transport routes, and other infrastructure in order to improve resource distribution, market integration, and allow for better facilitation of trade and investment within ASEAN.
 
Malaysia and Singapore will benefit from B&R
In high-speed rail, China has now taken its expertise global. B&R will see it take that expertise into the rail connection between China and Southeast Asia. 
 
   On 1 November 2016, China Communication Construction Company (CCCC) signed a business contract with Malaysia Rail Link for a railway project on the east coast of Peninsula Malaysia, with a contract value of some MYR46 billion (US$10.8 billion). This is the largest overseas project signed by CCCC, as well as the largest economic and trade cooperation project between the two countries.
 
   Singapore will also benefit from the initiative by attracting businesses to operate out of this trading and investment hub and tap on growth opportunities in the Asian region. The island-state has also established itself as the second leading offshore hub for RMB trading. The country is expected to rise in prominence as the shipping and aviation hub of Southeast Asia, in addition to witnessing an increase in trade and personnel exchange across the region as a result of the construction and development of infrastructure, such as ports, airports, and other facilities.
 
   China is ASEAN’s largest trading partner, with a trading volume double the size of Japan-ASEAN trade. However, Japan’s total investment amount in ASEAN is three times larger than China’s. It is expected that China will increase its investment in the region in the next five years, to close the gap. 
 
Challenges and risks
The opportunities that the B&R initiative brings also result in some risks and challenges. B&R will pass through diverse countries spanning Africa, Asia, and Europe, exposing participating companies to political, credit, and security risks. 
 
   Numerous countries receiving Chinese financing already bear elevated debt levels and B&R will weaken their sovereign credit position further. The Fitch ratings agency rates the creditworthiness of many countries along the B&R poorly. 
 
60 countries; 4.4 billion people
B&R could benefit many classes of insurance. The more than 60 countries that are to be connected by land and sea, together with their 4.4 billion inhabitants, are for the most part developing markets with great economic potential. This could throw a new focus on both Chinese and other insurance markets concerned – particularly in the area of marine insurance. 
 
   For the insurance industry, according to Swiss Re estimates, B&R could translate to an estimated commercial insurance premium of US$10.6 billion in the Southeast Asian region till 2030. In terms of lines of insurance, this is broken down to $5.3 billion in Property, $3.9 billion in Engineering, $1.3 billion in Marine and $0.2 billion in Liability.
 
Chinese firms more aware of insurance
Chinese firms are learning quickly and their risk awareness and insurance purchase behaviour have been changing in recent years. Previously, insurance purchase was in reaction to contract requirements from foreign importers or overseas project owners. Chinese companies typically only paid attention to property loss, and lacked proactivity towards insurance purchase. As they got exposed to regulatory and compliance requirements on insurance matters in the B&R markets, Chinese firms started to gain awareness into risk and insurance issues. 
 
   For public-listed companies, a robust risk and insurance programme is part of good corporate governance. Many stakeholders in large infrastructure projects (project owners, contractors, and lenders) also require a comprehensive insurance programme covering a wide range of risks. The Chinese government, through the State-owned Assets Supervision and Administration Commission (SASAC), has also issued guidelines governing State-Owned Enterprises’ (SOEs’) overseas investments from an enterprise risk management perspective. 
 
   Previous mistakes committed in overseas investments, and lessons learnt have pushed Chinese firms to elevate their risk awareness. Today, Chinese firms and their Asian JV partners are more proactive and mature in risk management and risk transfer. They are not only protecting their assets, but also liabilities, people, and returns on investment. 
 
US$4 trillion investment from China
In conclusion, China says it will invest US$4 trillion in B&R countries (although it has not stated a timeframe for that investment), a significant proportion of which will be in infrastructure such as roads, railways, and airports. 
 
   B&R brings plenty of new opportunities to Asian companies, as well as potential risks and challenges. This is where international insurance brokers and risk advisors like Marsh are uniquely positioned to assist both Chinese and other Asian firms in the B&R markets to assess risks, and design effective and cost-efficient risk mitigation and transfer solutions. A 
 
Reasons chinese firms are attracted to invest in B&R Markets
 
Dr Shen Yiming is Senior Vice President, Head of China Client Services, Asia, at Marsh.
 
Marsh Asia is the 2016 winner for Broker of the Year at the 20th Asia Insurance Industry Awards.
 
This article is not intended to be taken as advice regarding any individual situation and should not be relied upon as such. The information contained herein is based on sources Marsh believes reliable, but we make no representation as to its accuracy.
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