New Silk Road

China's New Silk Road - Can large scale infrastructure development create growth and trade relations with Europe and Asia?

The Belt and Road Initiative (BRI) that connects countries along the ancient silk trading routes is shifting west into central Europe. But can large-scale infrastructure development translate to better growth and trade relationships across Eurasia? Insights spoke with region experts Agnes Vargas and Hans Krohn to find out.

Agnes Vargas
Institutionals, Regional Head
China, East Asia and Pacific

Hans Krohn
Institutionals, Regional Head,
Russia and CIS

Is the increasing interest in the Belt and Road Initiative (BRI) – and column inches devoted to it in the press – translating into material opportunities for corporates?

Agnes Vargas: Despite the attention it receives, BRI hasn’t yet reached the small- and medium-sized enterprises across central Europe, nor in Germany. One of the largest barriers is the lack of information filtering through. As an example, take Germany’s Mittelstand: owing to the country’s engineering expertise, they are certainly well-positioned to participate in many of the medium and large-scale infrastructure projects. As a matter of fact, some are already very much involved. But the truth is that gaining access to BRI projects is easier said than done. We remain positive, however. With greater transparency around the bidding process, more opportunities will arise in what could be called the “second phase” of BRI.

What does that “second phase” entail?

Hans Krohn: The first phase, which remains ongoing, is characterised by large-scale infrastructure projects – ports, bridges, railways, for example. The next phase will take advantage of the effects that connectivity brings, namely the increased ease of trading. By sea, Chinese cargo can take up to 30 days to reach central Europe; but with high-speed rail, transit times can be halved.

Agnes Vargas: And this could really encourage activity across Eurasia. For central and eastern Europe, situated at the epicentre of the BRI, the opportunities won’t only arise in the east, either: greater connectivity will spur activity and cooperation with western Europe, too. In practice, this means that financial institutions must prepare their customers to become more open to business in what hitherto may have been untapped regions.

Hans Krohn: To what extend the new infrastructure created by the BRI will deepen regional trade remains to be seen. For the time being, it is all about faster transit routes, less about enhancing regional or local trade.

Agnes Vargas: On the other side of the coin, huge infrastructure investments will go hand-in-hand with increased growth, at least in the longer term.

Do some countries stand to benefit more than others in each stage?

Hans Krohn: I would say so. One of the major beneficiaries will be Kazakhstan. The Khorgos Gateway, a rail hub and town in the Kazakh desert, has sprung up in the past few years. Similarly, Uzbekistan is benefitting from the Chinese-led construction of the country’s first railway tunnel, a 19-kilometre passage through the Qurama Mountains – central Asia's longest mountain range.

As for the second phase of development, one obvious winner is Belarus. The country is not only a hub for Europe-bound trains from China, but also a centre for enterprise. The Chinese and Belarusian governments are partnering to develop the Great Stone Industrial Park, an economic zone close to Minsk, Belarus’ capital, that aims to attract foreign and domestic investors, particularly within the IT and technology sectors – two of the country’s booming industries. The park – which extends over an area of more than 100 square kilometres - will also become home to employees, and is being built with sustainability principles in mind.

How do you think corporates can benefit from the BRI going forward?

Agnes Vargas: I think, above all, patience will be key. The opportunities are there for the German Mittelstand and its European peers, but it isn’t quite the right time – yet. As banks, we should look to empower small businesses to become more international more active in looking for partners in the BRI’s target countries. It could also be advisable to look for Chinese partners to jointly offer local solutions.

Hans Krohn: This is where Commerzbank can help. The memorandum of understanding (MOU) signed with the Industrial and Commercial Bank of China (ICBC) last July shows our intention to finance some US$5 billion worth of BRI-related projects over the next four-to-five years.

Agnes Vargas: And our “helping hand” extends beyond financing: we have both local market knowledge and a global reach, to ensure that our corporates can take full advantage of the sweeping changes the BRI induces - both in Asia and in Europe.