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Belt and Road without China? It’s possible

[HONG KONG] Italy's new role in the Belt and Road Initiative has alarmed G-7 allies fearful of China's expanding reach. Give it time: This project is going to look a lot less Chinese as it unfolds.

At the moment, the heft of the funding for President Xi Jinping's global infrastructure project comes from policy banks, such as China Development Bank and the Export-Import Bank of China. The US$40 billion state-backed Silk Road Fund, and to a lesser extent, the Asia Infrastructure Investment Bank also contribute.

Global competitors may soon join the fray. Standard Chartered plc said it plans to allocate as much as US$20 billion in coming years to Belt and Road projects. That's just a drop in the bucket considering the US$1 trillion tag on Mr Xi's ambition to connect China by land and sea to cities as far-flung as Nairobi and Rotterdam. But more could be coming.

Chinese banks could use the help. The currency of the global construction industry is dollars, and Beijing doesn't have an endless supply of them. With the country heading into a current account deficit and the economy slowing down, cash isn't flowing as freely as it once did. Martin David, the Asia-Pacific head of Baker McKenzie's projects group, says the growing involvement of international banks is inevitable: "There isn't a bottomless pit of Chinese bank money."

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Chinese banks aren't the only patriots facing stiffer competition. As the funding net widens, the country's construction firms may lose their hitherto guaranteed pipeline of work. Mainland companies tend to secure waivers on foreign-worker quotas, which has enabled them to import labourers from home — a sticking point for locals in countries where projects are based. (European Commission president Jean-Claude Juncker said he doesn't object to Chinese projects "if you don't only meet Chinese workers on these construction sites but also European workers".) In contrast, multilateral banks follow strict procurement rules that forbid awarding work to preferred contractors, according to Citigroup Inc. Even Beijing-based AIIB abides by such restrictions.

For the large swath of Chinese construction and engineering giants, many of them state-owned, the overseas market is crucial — particularly as their domestic market slows. Hong Kong-traded Metallurgical Corp of China Ltd posted a whopping 167 per cent surge in overseas new orders in January and February from a year earlier; Shanghai-listed Sinoma International Engineering Co (China) made 81 per cent of its revenue in 2017 from abroad, according to China International Capital Corp.

For borrowers, a more diversified source of lending would be a good thing. The weighted average interest rate of Chinese funding for Belt and Road countries was between 3.5 per cent and 5 per cent; borrowing costs can reach as high as 6 per cent in countries like Sri Lanka and Pakistan.

The World Bank, meanwhile, tends to lend at 100 basis points to 200 basis points over Libor, according to Moody's Investors Service Inc. These exorbitant rates prompted Malaysia's prime minister, in his first few months of office, to suspend work on one of the biggest of Belt and Road projects, the US$20 billion East Coast Rail Link. US Vice-President Mike Pence referring to the programme as "a constricting belt and one-way road".

Chinese government statements indicate that 50 state-owned firms have invested or participated in almost 1,700 projects in countries along Belt and Road's path over the past three years, according to Baker McKenzie. The wider the road, the more drivers are bound to crowd in.

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