Amol Gupte, Head of ASEAN and CEO of Citi Singapore speaks to Michael McGauran of EY Asia-Pacific, about the impact and implications of the Belt Road Initiative on business and governments in ASEAN.
This article was originally published by EY on 20 October 2017.
«It has taken some time for the market to understand the scale and impact of the Belt Road Initiative (BRI), which will create an economic boost to more than 65 countries that represent 70 percent of the global population, more than half of global GDP and a quarter of all global trade,» says Michael McGauran (pictured below), EY Asia-Pacific Banking & Capital Markets Strategy Leader, and: «It is hard not to contrast the way China is asserting itself internationally with the way the U.S. appears to be withdrawing towards a more domestic policy focus – it’s also hard not to notice that the American continent is entirely absent from the BRI initiative.»
Michael McGauran, EY Asia-Pacific Banking & Capital Markets Strategy Leader
But, are Asian countries best advised to fundamentally rethink their commercial strategies and pivot towards China?
Amol Gupte: Since China adopted an open-door policy more than three decades ago, its economy has risen by almost 2,600 percent in real terms since 1980. While China is fast catching up, the U.S., which started emerging as an economic superpower some 150 years ago, remains a dominant player in the world economy. It is also worth remembering that the U.S. is not just the largest economy in the world but it is also still growing.
China’s rise, coupled with rapid digitalization and globalization in the last few decades, has brought forth a new era of global economic growth that is no longer dominated by a single major power but rather one that is multipolar in nature with several players, interacting in a highly interconnected and interdependent manner.
Against this backdrop, rather than pivoting to any one single power, it is in the interests of businesses to hold a long-term view, cultivating good relations with all powers and collaborating across different platforms to capitalize on emerging opportunities.
Michael McGauran: The BRI has been received with a wide range of reactions: from confusion to cynicism, but also genuine enthusiasm and support. What’s the right attitude for businesses and governments in ASEAN?
Amol Gupte: Countries have long recognized the importance of connectivity for economic growth. To this end, some may argue that China’s concept of BRI is not entirely new. However, BRI is much more than the sum of its parts and having China’s lead and commitment at a time when protectionist sentiments are on the rise ushers new opportunities and optimism.
My view is that BRI could potentially serve as an important engine of regional and global economic growth in the coming years. If the opportunities that arise are seized widely, BRI has the potential to reshape the global value chain, spur wealth creation and eventually, narrow the income gap.
ASEAN, which is an important cog in the wheel along the Belt and Road corridor, is strategically important to the success of the initiative, signaling opportunities for businesses and governments in the region. Infrastructure is clearly an area that will benefit from BRI. Citi Research estimates ASEAN’s annual infrastructure needs to exceed US$100 billion in the next 10 to 15 years.
BRI will help the bloc achieve its vision of a seamlessly connected ASEAN, as laid out in the ASEAN Master Plan for Connectivity 2025 (AMPC). Both plans are highly convergent in their interests of developing transport connectivity, and facilitating better access for trade, capital flows, tourism and human capital exchanges.
(Source: EY)
As BRI is a mammoth project, China knows it cannot accomplish the BRI alone despite its vast capacity and resources as the world's second-largest economy. This perspective is a key reason why China is seeking cooperation across the BRI's geographical spread of over 65 countries. My advice to our clients in ASEAN is to tap on the BRI opportunity by forming strategic alliances with the right partners to navigate the many uncertainties and overcome the risks that lie ahead. At its core, the strategy should be about creating win-win situations.
In summary, BRI is set to power the wheels of long term economic growth in ASEAN and the wider region as it presents multifaceted opportunities for countries in different stages of development. There is much for companies and governments alike in this part of the world to cheer about.
Michael McGauran: The funding of BRI has been dominated so far by Chinese institutions such as China Development Bank, New Development Bank, and the Asian Infrastructure Investment Bank. Aside from intermediating capital, what is the role of commercial banks in this initiative?
Amol Gupte: Commercial banks play an important role in helping its clients and the countries realize the potential of BRI. Other than project financing, the role of commercial banks like Citi is to complement policy banks such as the Asian Infrastructure Investment Bank to support companies with BRI ambitions in the areas of trade financing, hedging, FX solutions, and the understanding of local operating and regulatory environments in BRI countries.
As a company, we are excited by the opportunities that BRI offers as it plays to the core strengths of what Citi is about as a bank – supporting clients with their institutional and commercial banking needs in multiple jurisdictions across our unique global network.
Today, Citi conducts business in 58 of the over 65 Belt & Road countries – the most of any bank globally. Our deep roots operating in the countries along the BRI routes go back as early as 1902 across Singapore, the Philippines and China to name a few Asia Pacific BRI countries.
Michael McGauran: How do your clients perceive BRI – as opportunity or disruptive risk? How is Citi preparing its clients for BRI?
Amol Gupte: Our clients doing business in ASEAN are optimistic about the prospects of BRI and the opportunities it presents. While Chinese companies and financial institutions will likely be at the forefront, there will be immense opportunities for non-Chinese companies especially if they are able to transfer their technology know-how, products and advisory services to Chinese firms working on BRI projects
The good news is that Chinese companies already have a high degree of comfort investing into ASEAN; China’s foreign direct investment into ASEAN stood at about US$6.5 billion in 2015 and grew to over US$9 billion in 2016. The pace will only accelerate more with BRI and ASEAN stands to gain substantially.
At Citi, to support Chinese companies with ambitions to invest in ASEAN, we have set up a regional China desk based in Singapore as many of them have their regional treasury centers based here. We also have a number of established China desks across the world connecting our clients to our local network along the Belt and Road route. Just recently, we concluded a very successful Belt and Road Forum in Beijing for over 200 global clients to share our insights on BRI opportunities.
Michael McGauran: Beyond political and diplomatic engagement, how should governments in ASEAN respond?
Amol Gupte: The large scale and international nature of BRI are two sides of the same coin; it presents both opportunities and risks. The management and governance of cross-border projects can be challenging.
To this end, there is a need for governments in ASEAN to mitigate the risks by creating an open and transparent regulatory regime and setting up a clear dispute resolution mechanism. Another challenge of cross-border infrastructure projects is that cost allocation and benefit distribution tend to be asymmetrical among the countries involved. Ideally, there should be a mutually acceptable framework to share costs and benefits.
Governments in ASEAN should also look beyond the horizon as continued investments will bring in new opportunities beyond infrastructure development. In the short run, as BRI countries are mostly developing, their immediate needs will usher in significant infrastructure investments.
In the longer term, BRI will lead to greater innovation while expanding value-added manufacturing capabilities and inviting further capital flows. Trade will also have the potential to be more seamless and custom processes more streamlined.
BRI is expected to boost trade flows between China and participating countries: 26% of China’s total trade volumes are currently with Belt & Road countries, forecast to increase to 40 percent by 2025.
Michael McGauran: Singapore has taken a public stance on the BRI - Home Affairs and Law Minister K. Shanmugam recently gave a wide ranging speech indicating strong support for the initiative but also pointing out risks. What does the BRI mean to the Singapore economy and for global businesses operating from here?
Amol Gupte: Singapore’s BRI value proposition arises from a number of factors.
The city-state’s strategic location enables it to be the gateway for BRI investments from Chinese firms into ASEAN for infrastructure projects in the short term. As trade becomes more seamless due to better connectivity, the initiative would allow Singapore to capture trade flows in the long term.
At the same time, Singapore is also positioned to intermediate capital injection from ASEAN into the enormous Chinese market though government-to-government projects such as the Chongqing Connectivity Initiative, which is aimed at boosting growth in the less-developed western regions of China in support of BRI.
The Monetary Authority of Singapore Managing Director, Ravi Menon, recently shared that annual direct investment between Singapore and Chongqing stands at 22.2 billion yuan, which is up from 7.4 billion yuan five years ago. As at end 2016, through the Chongqing Connectivity Initiative project, Chongqing corporates have raised 22 billion yuan in offshore financing from Singapore-based financial institutions.
Underpinning Singapore’s unique geographical location is its strong ecosystem of financial institutions and professional services providers, an established capital market, its status as one of the largest offshore renminbi centres and the important role that it plays managing FX risks for companies.
Against this backdrop, without a doubt, BRI is opening up significant opportunities for companies, large and small, operating in this part of the world to leverage Singapore’s strengths. In addition, the positive domino effect on the economy, although not immediate, cannot be underestimated. The Singapore government has already openly signalled its support for BRI and that should translate to better facilitation and support for companies investing into the BRI corridor.
The surge in BRI momentum is also timely. As the chairman of ASEAN in 2018, Singapore will have the opportunity to advance BRI initiatives in the region for shared economic benefits.
Michael McGauran: Much of BRI focuses on creating basic infrastructure: power generation, ports, road. Is there a role for technology to play a part in shaping BRI and the resulting opportunities?
Amol Gupte: The ancient Silk Road was a network of physical trade routes established during China's Han Dynasty. The new Silk Road connects China by land and sea to Southeast Asia, Pakistan and Central Asia, and beyond to the Middle East, Europe and Africa. Beyond physical connectivity, BRI is very much about digital connectivity.
Already, we have seen an Internet of Things (IoT) network being launched through an agreement between Xi’an Beilin District Science and Technology Bureau, Shaanxi Radio and Television Network Group and ThingPark China. Going forward, we will be seeing more and more use cases in the way technology unlocks the growth potential of BRI.
The physical and virtual connectivity that we will see develop along the BRI corridor raises many opportunities for companies, both big and small, through the supply chain linkage, bringing benefits for all stakeholders. Importantly, China’s willingness to put its money where its mouth is acts as a catalyst for other countries and companies to follow suit, thereby bringing the growth agenda to the forefront. This perspective underlies my optimism that we are going to see a new era of growth in this region and beyond.
Michael McGauran’s views on China’s BRI
In hallways around the world, the motivation for China’s Belt and Road Initiative is a matter of speculation and rumor with much time spent trying to identify a hidden agenda. But the drivers of BRI may be much more straightforward—the confusion may be down to the difference in the oriental and occidental perception of time: just because the impact of the BRI will be measured over generations, doesn’t mean the drivers are necessarily complicated.
The reasons for BRI are rational, and the opportunities and risks it creates real. The fact that some of the impact will not materialize over our lifetime shouldn’t distract. Companies should consider taking a holistic and long-term perspective:
1. Review your strategic plan: what impact will BRI have on your business? In order to take advantage of the opportunity and manage the risks, consider the following dimensions:
- Markets: how will BRI reshape the demand for your business?
- Culture: do you have the global talent to manage this opportunity?
- Risk: is your risk culture and mechanism fit for purpose?
- Social responsibility: can you align opportunity and responsibility?
- Partners: who are the institution that can enable you?
- Governance: is decision making sound and transparent?
- Capital: are your financing sources sufficient and diversified?
2. Review your network: will your customers or supply chains be reconfigured by BRI? Are they taking the right steps to capitalize on the opportunity and mitigate the risks?
3. Review your portfolio: which markets, segments and channels will grow asymmetrically as a result of BRI over the next decade—how you might reconfigure your portfolio, and invest or divest in order to position yourself optimally?
Amol Gupte is the Head of ASEAN and CEO of Citi Singapore, he is responsible for the leadership of Citi’s ASEAN markets of Singapore, Indonesia, Malaysia, Philippines, Vietnam and Thailand. As CEO for Singapore, he is responsible for all of Citi’s businesses and operations in the country. He is a 28-year Citi veteran, and has held a number of senior positions in London, New York, India and Hong Kong. Prior to moving to Singapore from Hong Kong, he was the Region Head for the Treasury and Trade Solutions business in Asia Pacific from 2012 to 2016. He holds a Master’s of Business Administration from Bombay University.
Michael McGauran leads banking and capital markets transactions across Asia-Pacific. He has 20 years of experience in strategy consulting, private equity, banking and technology in Europe, the Middle East and Asia, where he has been based for 10 years. He serves financial services clients on topics such as corporate strategy, transactions and M&A, partnerships, organization, governance, transformation, sales productivity, analytics and risk. He started his career as a banking and capital markets technology architect in London, Frankfurt, Dublin and Bangalore. He holds an MBA from INSEAD.
The views of third parties set out in this publication are not necessarily the views of the global EY organization or its member firms. Moreover, they should be seen in the context of the time they were made.
